There's something broken in America's financial aid system

FILE - In this May 20, 2013 file photo, graduates pose for photographs during commencement at Yale University in New Haven, Conn. There's still plenty of pomp and circumstance, inspiring words from lofty speakers and tossing tassels, but today's college graduation ceremonies include many a contemporary twist. In 1984, according to some estimates, only half of graduates had debt from college loans, averaging about $2,000. Now, two-thirds of recent bachelor's degree recipients have outstanding student loans, with an average debt of about $27,000, according to a Pew Research Center report. (AP Photo/Jessica Hill, File)
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FILE - In this May 20, 2013 file photo, graduates pose for photographs during commencement at Yale University in New Haven, Conn. There's still plenty of pomp and circumstance, inspiring words from lofty speakers and tossing tassels, but today's college graduation ceremonies include many a contemporary twist. In 1984, according to some estimates, only half of graduates had debt from college loans, averaging about $2,000. Now, two-thirds of recent bachelor's degree recipients have outstanding student loans, with an average debt of about $27,000, according to a Pew Research Center report. (AP Photo/Jessica Hill, File)

One need only see the tally for America’s student debt load — $1.2 trillion at last count, with an average $29,400 per college graduate — to realize something is badly broken in our financial aid system.

What’s more difficult is deciding who or what is most at fault.

Most 17- and 18-year-olds aren't typically savvy enough to understand the implications of taking on thousands of dollars in loans. So shouldn't parents know better than to allow their kids to be saddled with decades' worth of debt burdens? Maybe, but adults who came of age at a time when it was actually possible to work one’s way through school without debt may be as ill-prepared to navigate today's landscape as their kids are. Since 1978, tuition has soared by more than 1,120% while the average family’s wages barely budged.

“It is that gap that has opened up between real wages and real costs of school that is now being filled increasingly with debt,” says Barmak Nassirian, a director at the American Association of State Colleges and Universities (AASCU).

The last lines of defense between teens and decades of debt are generally college financial aid offices. And even President Obama admits they’re falling short.

“Universities don’t always counsel students very well on student debt,” he said during a live student debt chat on Tuesday.

It’s not for lack of trying. Financial aid offices are required by law to make students undergo entrance counseling before they can receive financial aid. Any student who takes out federal subsidized, unsubsidized, Parent PLUS or Perkins loans has to complete either online or in-person counseling before they can get funds.

“I can guarantee that students are doing entrance counseling because schools face program reviews and audits all the time,” says Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators (NASFAA).

What loan counseling? 

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Source: NERA Economic Counseling

Source: NERA Economic Counseling

But somewhere along the way, the counseling endeavor has fallen short. In a 2012 report by NERA Economic Consulting and the Young Invincibles, a youth advocacy group, 13,000 college students who carried $75,000 or more in student loans — placing them in the top 5% of student debtors in the U.S. — were asked whether they remembered receiving counseling.  More than 40% said no.

Draeger wasn’t too surprised by the report’s findings.

“The timing of entrance counseling is not great,” he says. “You’re doing it at the same time as you’re moving on to campus, enrolling in classes, buying books. There’s a lot going on competing for a student’s attention.”

Despite the fact that entrance counseling can be offered in-person, it’s not a requirement. Sending students a link to complete their counseling online fulfills the minimum requirement for colleges. And while some schools manage to go above and beyond that minimum, the majority of public institutions don’t have the personnel bandwidth or budget to administer a 30-minute session to each student individually. Over the last three decades, per capita state support for public higher education has declined by 30%, according to the AASCU.

“Handholding obviously costs a lot of money and candidly speaking, it comes second to teaching,” Nassirian says. “Universities are not there to help out people fill out forms. They’re there to teach. Of course they should, but when money is tight, providing platinum services sometimes comes second to providing classrooms.”

In 2010, the NASFAA asked financial aid offices across the country what they would cut first when faced with budget cuts. The overwhelming response (90%) was one-on-one counseling with students. Part of the reason the student debt load has ballooned so quickly is that more and more students are applying for loans, further hindering aid offices' ability to deliver individual counseling.

Brieonna Jonson, 22, a senior at a private liberal arts college in Atlanta, says she will graduate this year with $90,000 in debt.

“As a first-generation college student, we as a family were learning to navigate this world of increasing college cost,” she says. “I did not receive any counseling about my loans other than what was required on the loan website.”

Had she had an individual session with a financial aid officer, she “definitely would have taken less loans and probably transferred, which I think expensive private schools recognize, thus the lack of financial aid counseling,” she says.

The benefits of one-on-one counseling from an objective source (i.e., not a parent) can’t be overstated.  Robert M. Presley, 29, a healthcare attorney from West Palm Beach, Fla., needed to borrow $65,000 in loans to complete his law degree in 2006. A counselor from his financial aid office set aside 30 minutes to walk him through his options.

“After speaking with the student loan office [and] listening to the counselor explain the private and government loans available to me, I opted for government loans,” says Presley. “They explained the pitfalls and payment structure, and how much debt I would be incurring.”

Loan counseling comes up short

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Source: NERA Economic Counseling

Source: NERA Economic Counseling

Further weakening the effectiveness of entrance counseling is the fact that students are only required to complete it once, at the beginning of freshman year. Some schools offer it year-round, but Draeger says there are regulations that prevent schools from placing too many requirements on students before they can access federal financial aid.

“Schools can’t require students to jump through hoops every year to get these federal dollars,” he says. “It leaves schools in a weird place and also leaves students saying they don’t remember ever receiving counseling."

If students do take the initiative and get a one-on-one session with a counselor, it isn’t exactly the same as meeting with a trained financial advisor, says Nassirian, who was formerly the executive director of the American Association of Collegiate Registrars. Most counselors are knowledgeable about regulatory compliance and big data on loans, but they're not certified financial planners or advisors, he says.

When East Hartford, Conn., student Sharae Gresham enrolled at a public university in 2008, she went to the financial aid office for help figuring out how to cover tuition after she had maxed out her federal loans.

Despite the fact that private loans come with few flexible repayment options and interest rates that can hit double-digits, “I always received the same advice from every financial advisor," she says. "To apply for another private loan."

Universities are faced with another hurdle in helping students keep their debt down: part-time students are still allowed to borrow at a full-time student rate, whether they need the extra cash or not, and this can lead to over-borrowing. At present, there are very few ways a school can curtail that type of over-borrowing, says Draeger, and it’s a difficult fix to write into law. 

"There’s a built-in conflict of interest in the system"

Not all higher institutions are failing on the loan counseling front. For-profit universities are famously dedicated to offering low-income students all the handholding they need to secure enough funding to attend their schools. They're also notorious for having some of the most expensive tuition rates in the country and lending practices that rival subprime mortgage lenders.

With their high profit margins, for-profit schools can afford the type of one-on-one counseling to facilitate the financial aid process for students that many public nonprofit schools can’t. “There’s a built-in conflict of interest in the system when the party that cashes the check is also the front-end advisor for whether you should borrow or not,” Nassirian says.

The average annual tuition at a for-profit institution is $15,130 — nearly twice the cost of public four-year institutions.

A staggering 96% of students enrolled at four-year private and for-profit colleges take out student loans, versus 57% of those enrolled at four-year private nonprofit schools and 48% at public schools, according to a report by ProPublica.

Because they graduate with much more student debt than typical nonprofit college graduates, for-profit students are far more likely to default on their student loans, with default rates of 22%, compared to 13% at public institutions, 

Change may be on the way soon. The Dept. of Education is in the midst of considering a new regulation that would withhold federal aid programs from for-profit colleges and universities where students graduated with inordinate amounts of debt and low employment rates. The “gainful employment rule” would require these schools to prove that students’ average debt load is not greater than 30% of their discretionary earnings or 12% of their total earnings after graduation.

While the nation seems to be in agreement that it’s facing an unprecedented student debt crisis, the jury is still out on how exactly to fix it. If we’re looking to universities and colleges to pick up the slack, it’s clear that we may be waiting a while yet.

“I don’t feel like we’ve cracked the nut on how we help students who most need help with student loans before they need it,” Draeger says. “We don’t know the best timing. We don’t know what works.”

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