It should be obvious that student loans are not really financial aid. Yet, colleges and policymakers often refer to student loans as though they are a form of financial aid. Student loans may make it possible for some families to pay the college bills. But, student loans do not cut college costs or make college more affordable.
Student loans are education financing, not financial aid. Student loans are loans, just like credit cards, auto loans and home mortgages. Each has special features customized to the needs of borrowers, but they are still borrowed money.
When a college claims that student loans are financial aid, it is like a car dealership claiming that a new car is free because you can finance the purchase with a zero down, zero interest auto loan. This is patently ludicrous, yet colleges persist in promoting the mythology that student loans are financial aid.
Student Loans Are Not Charity
Let’s stop the fiction of characterizing student loans as financial aid. Loans are not charity.
Like all loans, student loans must be repaid, usually with interest. The interest increases the cost of the debt. Most lenders make a profit off of the interest, since the interest paid by borrowers exceeds the lender’s cost of funds.
Just because a student loan is offered by the college, don’t assume that it is a form of charity. Colleges are not tax exempt because of a charitable mission, but because of an education mission. Most 4-year colleges do not have a charitable purpose as part of their official charter or mission statement. A few community colleges identify affordability as a goal, but most do not.
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Student Loans Do Not Make College More Affordable
Some colleges claim that student loans make college more affordable, in that student loans provide cash-flow assistance, allowing the family to pay the college bills. But, this does not reduce the net price, which would make the cost more affordable. Rather, it just spreads the costs out over time.
Colleges promote student loans because it serves the colleges’ financial interests, not because it is in the students’ best interests. Without student loans, most students would not be able to pay the college bills, just like most families would not be able to buy a home without a mortgage.
Student loans cost a college a lot less than grants. Every dollar of a grant costs the college a dollar, but every dollar of a student loan costs the student about two dollars by the time the debt is repaid, with no cost to the college.
Even if student loan debt were a form of financial aid, colleges have no basis for asserting that student loans make college more affordable, because few, if any, colleges track whether their alumni are graduating with affordable debt.
Student loan debt is excessive if the total student loan debt at graduation exceeds the borrower’s annual income. When total student loan debt exceeds annual income, the borrower will struggle to repay the debt over a 10-year repayment term.
Student loan debt is good debt, to the extent that it is an investment in the student’s future. But, too much of a good thing can hurt you.
Some colleges point to a low cohort default rate as evidence that their students are graduating with affordable debt. The cohort default rate, which is prone to manipulation, reports the percentage of borrowers entering repayment who default by the end of the second following federal fiscal year. The cohort default rate does not measure whether borrowers graduate with a reasonable amount of debt that they can afford to repay in a reasonable amount of time.
Borrowers who are delinquent or in a deferment or forbearance are struggling financially, yet they don’t factor into the cohort default rate. Borrowers who are in graduated repayment, extended repayment or income-driven repayment cannot afford to repay their student loans under a standard 10-year repayment term, yet their financial challenges aren’t measured by the cohort default rate. Defaults on private student loans and parent loans are not factored into the cohort default rate.
Student Loans Are Almost Unavoidable
Among students in Bachelor’s degree programs, more than two-thirds graduate with student loan debt (68.9%), based on data from the 2015-2016 National Postsecondary Student Aid Study (NPSAS:16).
Of those who filed the Free Application for Federal Student Aid (FAFSA), 84.7% graduated with student loan debt. Student and parent loans represent nearly half (45.4%) of the financial aid packages of these students.
Many Financial Aid Award Letters Are Misleading
Many financial aid award letters and notifications blur the distinction between grants and loans.
Grants and scholarships are gift aid, which is money to pay for college that does not need to be repaid or earned through work. Student loans are not free money.
Financial aid award letters often list grants and loans together, without distinguishing between them. Loans are listed without markers that identify them as loans, such as the interest rate, monthly loan payment or total payments.
How is a family to know that a cryptic abbreviation, such as L or LN, signifies a loan? Some loans are identified by a name that doesn’t even include the word “loan” or an acronym. Most students do not have any experience with debt.
Many colleges see the financial aid award letter as a type of marketing, not counseling. The purpose from their perspective is to explain how the student can pay the college bills even when the college costs are unaffordable, even with financial aid.
Some award letters subtract the loans from the college costs, as though they reduce the college costs. When families look at the bottom-line cost, they do not realize that the financial aid award letter includes debt, often a considerable amount of debt. Families need to know how much they are really going to have to pay for college, not a fictitious net cost.
The net cost subtracts the entire financial aid package, including student loans, from the college’s cost of attendance. It treats student loans as though they reduce college costs. This is in contrast with the net price, which subtracts just the gift aid from the cost of attendance. The net price is the amount of money the student and their family will have to pay from savings, income and loans to cover the college costs.
Some colleges underestimate some of the allowances in the cost of attendance, such as textbooks and transportation costs. Others list just the direct costs like tuition and fees, which are paid to the college, and exclude indirect costs like textbooks and transportation, which are paid to third parties. Some colleges zero out the room and board costs for students who live at home with their parents, even though the income protection allowance is reduced by several thousand dollars per college student. These practices contribute to hidden costs that increase the amount the family must pay, leading to more debt.
Is it any wonder that more students are graduating each year with more student loan debt than they can afford to repay? Students who drop out of college are even more likely to struggle to repay their student loans, since they have the debt but not the degree that can help them repay the debt. Total outstanding student loan debt continues to grow every year.
Increasing awareness of student loan debt is the first step in exercising restraint in borrowing.
Colleges Do Not Really Meet Full Need
Some colleges claim to meet the full demonstrated financial need of their students.
Almost all colleges that claim to meet full need rely on student loans to cover part of financial need. Even at colleges with “no loans” financial aid policies, most colleges redefine financial need by using their own financial aid formula instead of the federal need analysis methodology. A summer work expectation or minimum student contribution is used to reduce financial need. Their students must still borrow, just not as much as at other colleges.
Most colleges do not meet full demonstrated financial need, leaving the student with unmet need. This gap between financial need and financial aid contributes to increased borrowing. The average unmet need at 4-year colleges has grown from $7,000 per year in 1999-2000 to almost $15,000 per year in 2015-2016. Even if one counts student loans as meeting financial need, unmet need is still more than $10,000 per year.
See also: Checklist for Reducing Student Loan Debt
False Distinctions between Different Types of Debt
Some colleges distinguish between need-based loans and non-need-based loans, such as subsidized and unsubsidized loans. They count subsidized loans as part of the financial aid package because eligibility is based on financial need.
Subsidized loans do not cut college costs. The federal government pays the interest on a subsidized loan during the in-school and grace periods. But, a zero interest rate for a short period of time does not transform a loan into a grant.
Students do not repay subsidized and unsubsidized loans until after graduation, so the difference between the two types of loans only affects the cost of the loans after graduation, not the likelihood that the student will graduate.
There are cheaper loans and there are more expensive loans, but a loan is a loan is a loan. You still have to repay the debt.
Packaging Parent PLUS Loans
Some colleges go further and do what’s called packaging PLUS. This practice includes Federal Parent PLUS loans, which are not based on financial need, in the financial aid package.
Packaging PLUS is misleading when the Federal Parent PLUS loan is characterized as cutting college costs or when it is not clearly identified as a loan.
Some people criticize packaging PLUS because eligibility for the Federal Parent PLUS loan is not based on financial need. But, the real problem is that the Federal Parent PLUS loan is a loan, just like subsidized loans, not that it is a non-need-based loan.
One of the most egregious practices involves using the Federal Parent PLUS loan to set the net cost at zero. The Federal Parent PLUS loan can cover all remaining college costs after subtracting financial aid. Setting the net cost at zero fools some families into believing they are getting a free ride, when in fact they will end up with tens of thousands of dollars of additional debt at graduation, sometimes even six-figure student loan and parent loan debt.
Even more egregious are financial aid award letters that package a Federal Parent PLUS loan amount that falls slightly short of the remaining costs, yielding a net cost figure that seems reasonable. Such award letters are clearly intended to deceive families. At least with a zero net cost, the family might question whether the deal is as good as it seems. But, with a net cost of a random figure like $2,787, $4,821 or $7,213, the family might be fooled into thinking that they can stretch to afford the college. They do not realize that the award letter involves a significant amount of debt in addition to the net cost. They also do not realize that this is just a single year’s costs.
There is no guarantee that the parents will qualify for the Federal Parent PLUS loan. Eligibility for the Federal Parent PLUS loan depends on a credit approval process. Some parents will not be approved. If the parents do not qualify for the Federal Parent PLUS loan, it can cause problems when the award letter assumes that they will qualify, leaving a shortfall in funding to pay for college. Financial aid award letters should reflect what the student has actually been awarded, not what they might be eligible for.
Even if the parents are approved for a Federal Parent PLUS loan, that’s not the end of their troubles. The Federal Parent PLUS loan does not have an annual loan limit, other than the college’s annual cost of attendance minus other aid, and does not have an aggregate loan limit. This can cause the parents to borrow more than they can afford to repay. They may not understand the consequences of borrowing too much.
See also: Complete Guide to Parent Loans
Net Tuition Is a Fiction
Let’s also stop the fiction of referring to net tuition instead of net price.
Net price is the difference between total college costs and gift aid. College costs include tuition, fees, room and board, books, supplies, equipment, transportation and miscellaneous expenses. Gift aid includes grants, scholarships and other money that does not need to be repaid or earned through work. A higher net price contributes to higher debt.
Net tuition instead subtracts the gift aid from just tuition and fees, ignoring the other costs.
Some pundits argue that room and board and other living costs are expenses that the family would have to pay anyway and so can be ignored. That’s completely bogus. Room and board are an incremental cost that is paid to the college if the student is living in college housing, not to the family’s landlord or home mortgage lender. You can’t waive a magic wand and make these costs disappear.
Room and board adds $10,000 to $20,000 a year to college costs. That’s real money, much more than the cost of living at home. Textbooks and transportation add thousands more to college costs.
Moreover, the amount of financial aid a student receives is based on the full cost of attendance, not just tuition, so it is misleading to treat the financial aid as an offset to just tuition.
Misrepresenting the net cost of a college education contributes to increases in student debt.
Income-Share Agreements Are Just Another Form of Debt
But, income-share agreements are just another form of debt. The monthly payment is a fixed percentage of income instead of a fixed dollar amount.
The lenders that offer income-share agreements expect to earn a profit. In fact, income-share agreements are often priced to yield more profit than private student loans. Some income-share agreements are usurious for some borrowers because they do not cap the total payments at a reasonable multiple of the total amount of funding provided to the borrower.
Student Loans Hurt Borrowers
Financial aid is supposed to help students. But, student loans come with a lot of negative consequences. Student loans bury many borrowers in more debt than they can afford to repay. If a source of funding hurts students, it isn’t student financial aid.
Defaulting on a student loan can cause a borrower to have their wages garnished, income tax refunds intercepted, and Social Security disability and retirement benefits reduced. Student loan defaults can prevent renewal of a professional license, thereby preventing the borrower from earning a living. Borrowers who are in default on a federal student loan may find it more difficult to get a job. They can’t enlist in the U.S. Armed Forces. Student loan defaults can make it more difficult to rent an apartment or qualify for a home mortgage.
The horror of a student loan default never ends because student loans are almost impossible to discharge in bankruptcy.
See also: Complete Guide to Loan Forgiveness
Honesty is the Best Policy
Colleges that are honest with their students and their families, so that they know what to expect, have lower average debt at graduation. They also have higher admissions yield and lower summer melt, so more students accept the offer of admission and arrive on campus in the fall.
It does the family and the college no good when an award letter is misleading, as the student will either be forced to drop out or transfer when they run out of money. Otherwise, the student will end up graduating with more debt than they can reasonably afford to repay.
There are also several practical steps that students can take to reduce student loan debt, such as comparing colleges based on the net price, focusing on free money first, understanding your student loans, cutting college costs, borrowing smart and repaying smart.