A Teachable Moment: Creating Educated Consumers via Education Debt Management

When New York Attorney General Andrew Cuomo launched an investigation into the relationship between education lenders and college financial aid offices, many were rightfully outraged that the questionable actions of a few painted an entire profession with a broad stroke of improper behavior. Yet one unexpected consequence of the investigation has already become clear: The role of the student loan borrower as a consumer with choices and rights has been illuminated.

Too often, we look upon the student loan borrower as merely a grateful recipient of aid, potentially interchangeable with the recipient of other government entitlements. Yet in reality, student loan borrowers receive loans that must be repaid, not an entitlement. The United States has a costly higher education system, and we have made a decision as a country to help students and families finance it with debt. Now we must take responsibility for that policy decision and help students manage that debt.

Education loan borrowers undertake a long-term relationship with their lender, whether a private or government entity, as they repay the loan over periods lasting up to 30 years. In this long-term relationship, student loan borrowers have at least the same needs as other users of consumer debt products, such as mortgages, car loans, and credit cards. In fact, for most student loan borrowers, this is their first encounter with taking on consumer debt and their inaugural opportunity to impact their credit reports for better or worse. It’s a milestone moment in their lives. And as the events of the sub-prime lending crisis demonstrate, our nation’s need for educated financial consumers has never been more pressing.

For that reason, it is vital to recognize the education loan borrower’s right to, and need for, education loan management. Our society and government should take advantage of student loan borrowing as a teachable moment where borrowers can and must learn debt management skills. Borrowers’ financial futures will be shaped by the attitudes—such as treating debt responsibly and borrowing wisely—and skills—such as budgeting carefully and planning for their financial future—that they learn in this initial exposure to loans.

We must refocus the priorities of our federal college loan program to best address the consumer education debt management needs of students and families. An example of this need for refocusing can be found in the most recent “Performance and Accountability Report” for the Department of Education. The report points out that, with respect to the federal student loan programs, the Department judges its success by (1) the direct administrative unit cost for origination and disbursement of student aid, and (2) the recovery rate on Direct and FFELP defaulted loans. The report notes that the Department was successful in exceeding its recovery rate goals last year primarily because of the economic stimulus payments sent to taxpayers—meaning the stimulus checks of defaulted borrowers were seized by the government.

However, a healthier benchmark for success of our federal education loan program would seem to be how well borrowers are handling their loan payments—without ever having to get to the point of tax offset and wage garnishment. Success should be measured by our ability to prepare student loan borrowers for their responsibilities, and their resulting ability to keep their loans in good standing.

In our present economic situation, we as a society should be searching for ways to prevent the next big credit crisis. Providing the rising generation with comprehensive financial literacy and dependable debt management tools surely is an excellent start.

The student loan consumer would be far better off if student loan service providers competed for business on the basis of their education debt management services. In a plan put forth by Paul Combe, president and CEO of American Student Assistance (ASA), students would gain that choice by deciding between private and public sources for their education loans. In this vision, private and public lenders would vie to answer students’ debt management needs in order to thrive and, indeed, survive in the student loan marketplace.

In the meantime, a vital first step for the higher education community and government should be to mandate education debt management as a basic right for all education loan borrowers. We should take advantage of the rising groundswell of support for federal aid reform and repurpose the college loan program so it better meets the needs of today’s higher education consumer. ASA believes we must get our priorities straight and help students and parents manage the debt that comes with the U.S. higher education system—before this teachable moment goes to waste.

Posted by Shelley Saunders on February 06, 2009 at 04:15 PM EST

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