A Common Sense Approach to Student Debt and Benchmarking Affordability

Debt Management shutterstock_570997471.jpgWinter may be a few months off, but the snowball that is student loan debt continues to grow with no indication that the problem is going to go away anytime soon. With the aggregate cost of tuition, room, board, and fees continuing to rise many schools have begun to take a proactive approach in assisting students and their families to better understand and properly manage that accumulated debt.

 While there has been some momentum made at the secondary school level to teach and encourage basic financial literacy, colleges and universities have only just begun to pursue this approach. Michael A. McRobbie, writing for The Chronicle of Higher Education explores some of these programs in his article Fixing Student Debt: A Common-Sense Approach.

McRobbie begins with Indiana University’s commitment, “*to establish some simple programs to raise awareness about the risk of excessive borrowing and help students make informed decisions about money before, during, and after college.” To address the issue of awareness, IU introduced an annual letter detailing the amount of debt owed and the time it would to take repay it. The letter also includes the estimated monthly payments a student would be expected to make following graduation.

IU’s simple commonsense solution proved to be so effective that there’s now a bill before Congress to amend the Higher Education Act of 1965.  H.R.1429 - LEADS Act of 2017 will, “require institutions of higher education to provide students with annual estimates of student loan borrowing costs” making the annual letter a nationwide requirement for any college or university accepting federal aid.

Secondly, Indiana U introduced a financial-wellness program known as MoneySmarts U that includes:

  • A basic online introduction to money management
  • Calculators to assist with budgeting and managing loan repayment
  • Peer coaching to reinforce money management and financial literacy
  • Supplemental podcasts focusing on different financial literacy topics

The MoneySmarts U concept is catching on as a result of a new partnership with Steve Dunn (known to some as Pete the Planner) whose 2015 summit brought schools together from across the country to discuss student financial wellness.

Results: IU’s efforts seem to be paying off.

  • Borrowing has been reduced by close to $100 million in four years
  • 45% of all bachelors degree recipients graduate with no student loan debt at all
  • 80% of IU students now graduate with a balance below the national average

The Midwest appears to be a hotbed of innovation with Ohio State, University of Wisconsin at Madison, Cuyahoga Community College and the University of Oklahoma following IU’s lead and focusing on new approaches to college affordability and financial literacy.

The question of affordability

With so many variables to be considered, one of the issues being hotly debated across the country is establishing a benchmark definition of affordability. One such measure was created by the Lumina Foundation back in 2015 as part of their Goal 2025, “**that 60% of Americans hold degrees, certificates or other high-quality postsecondary credentials by 2025.”

The Foundation believes that students and their families should be able to afford a college education without taking on debt. But, by emphasizing, “***how affordable college SHOULD be” this model ignores the actual net cost of an education. The Rule of 10 has three components:

  1. 10 Years of what a student or their family can reasonablysave
  2. 10% of a families discretionary income for a limited period
  3. 10 hours per week of the student earnings over four years at minimum wage.

 In Choice and Student Debt, Paul Fain, writing for Inside Higher ED, describes how the Rule of 10 might work.

“****For example, a single working adult student with no children should expect to pay $6,460 in total for a degree, under the benchmark. But an upper-income family of four might be able to contribute $51,500, with any college students in the family chipping in another $3,625 per year.” The question is will either of these amounts pay for the kind of college education that these students desire.

The gap

The problem is that a price based approach doesn’t include the true cost of a degree.  Fain argues the Rule of 10 confuses cost with value. With its liquidity based approach, the Lumina Foundation sees education spending as consumption versus the value of an education reflected in potential future earnings. This price-based benchmark will always show a lower-cost education to be more affordable than a cost option. By leaving out the actual sticker price of enrollment and focusing only on what students and their families can pay out-of- pocket, the Rule of 10 only covers 60% of the true cost of college leaving a gap of 40% that needs to come from somewhere. The question then is, should affordability be based on just attaining a college degree or is higher education meant to be the ticket to upward social mobility?

While students and their families may want to pay less, they continue to want more from their education. Such aspirations will continue to require taking on a certain amount of debt. Let’s hope that a greater awareness of the impact of borrowing and a solid grounding in financial literacy can help students borrow only what they need and get the true value of their education in future earnings.



*Fixing Student Debt: A Common-Sense Approach

** Goal 2025 - The Lumina Foundation

***The Rule of 10 -The New Model - The Lumina Foundation

**** Choice and Student Debt by Paul Fain

Additional Resources:

H.R.1429 - LEADS Act of 2017 - To amend the Higher Education Act of 1965 to require institutions of higher education to provide students with annual estimates of student loan borrowing costs.

IU's MoneySmarts partners with Pete the Planner to help students make smart financial decisions

The Affordability Conundrum: Value, Price, and Choice Higher Education by Beth Akers. Kim Dancy and Jason Delisle 

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