What Happens When You Warn Students About Their Loan Debt?

By Glen Casey

An article recently released by the Pew Charitable Trusts examines a new loan reduction initiative at Indiana University (IU). After sending letters to students’ homes with their borrowing rates and expected future monthly payments, the university has seen student borrowing decrease by 18 percent since 2012. However, they lack hard evidence that the effort is fully attributed to the letters home as the letter campaign is part of a broader initiative aimed at increasing student’s financial literacy by providing additional counseling, releasing a financial podcast on money management and launching a new website that offers quizzes and calculators for student use.

Key findings from the report are as follows:

• According to a 2014 Brookings Institute survey cited in the article, over 25% of first-year college students with federal student loans did not know their loans came from the federal government.
  • About 50% of these students had no idea they were borrowing money to pay for college and that they would be expected to repay the money.
• Research shows that students say no to loans when they are told how much they’re borrowing and how loans could affect them in the future. IU has revised their financial aid procedures to make it easier for students to say “no” to loans.
• Other states have followed Indiana’s lead with this initiative. For example, Montana State University students with high debt who received letters encouraging them to seek counseling borrowed an average of $1,360 (about 30%) less the following semester.
• A possible downside of this effort, and one that needs additional research, is that these letters might deter students from taking out any loans or “under borrowing” and as a consequence find themselves unable to fully finance their education.