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Students Lack Understanding of Loans: Study

Bloomberg Businessweek on March 21, 2012

Almost two-thirds of U.S. student- loan borrowers misunderstood or were surprised by aspects of their loans or the student-loan process, a study shows.

About 20 percent of the respondents in an online survey said the amount of their monthly payments was unexpected, according to the study released today by Young Invincibles, a nonprofit group in Washington that represents the interests of 18-to-34 year-olds. The respondents had an average of $76,000 in student debt.

More students are borrowing to pay for college and graduate school, and taking out greater amounts as tuition costs climb faster than the rate of inflation. Outstanding student-loan debt reached $867 billion in the fourth quarter, according to the Federal Reserve Bank of New York. With caps on the amounts that undergraduates can take in federal loans, many also borrow from private lenders.

There are many indebted graduates whose assumptions about how they would deal with their loans after college proved inaccurate, wrote Healey Whitsett, the studys author and a senior analyst in Philadelphia at NERA Economic Consulting. As students borrow from multiple lenders, this fragmentation may make it more difficult for them to understand the implications of their student-loan decisions.

While 13,451 participated in the survey conducted between Dec. 22, 2011 and Jan. 31, 2012, the results are based on 6,654 respondents who completed a bachelors, graduate or professional degree after 2000 and reported taking out loans — federal, private or both.

Long-Term Burden

Two-thirds of students who graduated from college in 2010 and took out loans had an average of $25,250 in debt, up 5 percent from the previous year, according to a November report by the Project on Student Debt, an Oakland-based nonprofit organization.

In the Young Invincibles study, more than two-thirds of respondents with private loans said they didnt understand the main differences between those loans and their federal student- aid options.

Marjorie Gelin Goodwin, 37, one of the respondents, said she owes about $107,000 in federal loans and about $15,000 in private loans for college and graduate school. She is in forbearance on her federal loans, meaning she isnt making payments. She didnt understand that her private loans would have a variable rate that could fluctuate so greatly, she said in an interview.

I was surprised by how much my student-loan payments would take away from my income, said Goodwin, who works at a nonprofit organization in San Francisco. Ill be retired and still paying my student loans at the rate Im going.

Eight percent of respondents in the survey said they strongly agreed and 26 percent agreed that they would be able to pay off all their federal and private student loans.

Also published on Bloomberg and SFGate