How Colleges Can Make Student Debt Feel ‘More Real’ to Borrowers Before They Graduate

In 2012 all campuses in the Indiana University system began sending students — new and returning, undergraduate and graduate — a letter projecting how much debt they were on track to graduate with and what their monthly payments would be. After that, the system saw year-over-year drop in borrowing. This month the State of Indiana enacted a law that will require all colleges whose students can receive its state financial aid to send a similar disclosure. The Chronicle spoke with Phil Schuman, director of financial literacy for the system, about how the debt letter works. The following transcript has been edited and condensed.

Q. Why did the system start sending the debt letter?

A. In a lot of cases, students borrow money, they’re 18 years old, they don’t know what the ramifications are. The debt letter provides them with an update of: You’ve borrowed this money, you’re going to have to pay this back after you graduate. It’s reactive in that it’s providing them an update of where they’re at, but it’s also proactive in that they can start thinking about whether or not they want to take out more money for the next semester or if they can find an alternative.

Q. Did you worry that students who got the letter, especially new ones, might change their minds about enrolling?

A. We want to make sure that we’re providing the most accurate information. If it turns them away, in my opinion, it’s unfortunate — but it’s preventing them from making a huge financial mistake that could cost them more dearly down the road. But from the feedback that we’ve gotten, students and parents appreciate seeing these numbers. It helps them figure out what they’re going to do to make sure their students get through college. It seems to be less about, Well, we’ve borrowed this much money, now we need to back away from being in college.

Q. Tell me more about the feedback you’ve gotten.

A. This is all anecdotal, but students do appreciate seeing those numbers on a piece of paper. For some reason, just having that in their hands makes it more real.

Q. What was the letter’s impact on borrowing levels?

A. In the first year of implementation, between the 2012-13 academic year and the 2013-14 academic year, systemwide student-loan borrowing went down 12.4 percent, or $31 million. That is just an amazing number to see. Because at least what it means is that people were starting to be proactive about their borrowing.

Q. Did it vary by campus?

A. The greatest drop that we had in student-loan debt between 2012 and 2013 was IU-Northwest. So we’re talking Gary, Ind., there, which is a historically low-income area. All of our campuses did well. Bloomington, the main campus, it dropped, but it didn’t drop nearly as much as up at Northwest or South Bend. But you’ve got students coming in with, on average, higher incomes. Maybe up at Northwest they were borrowing more than they needed to, and now all of a sudden they’re scaling back because they realized they didn’t need as much as they were offered. Certainly that is where our educational programming comes in, too.

Q. The payments shown in the letter are based on standard repayment, though other repayment options are mentioned lower down. I understand that showing all the repayment options would be a lot, but not all of your borrowers will have to make payments as large as what you’re showing them. Why did you decide to organize it that way?

A. This is going to be my personal opinion on it; I don’t know why the university chose to go that route. If you provide students with all of the numbers, a lot more students are going to be like, I’d rather pay $33 than $150 a month. You’re putting them in a position where they’re going to extend the loan repayment, which means they’re going to be paying more interest, which means they’re going to be paying a lot more over the life of the loan. If they understand the standard repayment plan is the one they should be focused on, then they’re going to put themselves in a better financial shape down the road. But we still provide the link to the other repayment plans in case something else comes up.

Q. What kind of conversations do you have with students about how much debt is reasonable?

A. There’s a rule of thumb out there that says you should never borrow more than your expected first year salary is. What a responsible rate is for a business student is completely different than what it’s going to be for social work. Sadly, we always pick on social-work students because they have historically low salary levels.

Everybody’s up in arms about tuition and fees and all that increasing every year. But when students look at those cost-of-attendance numbers, room and board, personal expenses, transportation, books, and supplies make up about 60 percent. Those costs are things that students can control to some extent. For the social-work students, we’ll advocate to them: Find the cheapest housing that’s safe and comfortable.

Our goal is not to make students millionaires when they graduate. That’s not what personal finance is about. As a higher-ed institution, our job is doing everything we possibly can so that when they walk out the door, they have that social-work degree, and they can work in that field. The amount of debt that they have, we don’t want it to dictate whether or not they can do that.

Q. The state just passed a law requiring all the colleges where students receive state financial aid to provide a disclosure similar to IU’s. How did that materialize, and what do you think of it?

A. Our government-relations team has been touting the debt letter, and we’ve gotten a lot of attention. Some of the representatives in the state caught wind of that and thought it was a good idea. I think it’s a wonderful thing for them to do, but I hope that people don’t see Indiana University like, Hey, they put this debt letter in, and their borrowing went down significantly, we need to put this debt letter in, and the same things will happen. That won’t be the case. It’s not just the debt letter; it’s all the personal-finance education that we’re providing on the other side. If you’re just providing one debt-letter number, it may do a little bit, but it’s not going to do enough to really make a dent.

Beckie Supiano writes about college affordability, the job market for new graduates, and professional schools, among other things. Follow her on Twitter @becksup, or drop her a line at beckie.supiano@chronicle.com.