Washington, D.C. — U.S. Senators Joe Donnelly (D-IN) and Tim Scott (R-SC) introduced this week the Empowering Student Borrowers Act, bipartisan legislation that aims to improve the financial literacy of college students and ensure that student borrowers have access to the best tools and information to make responsible borrowing decisions.
Donnelly said, “A college education is important for many Hoosiers to secure good-paying jobs in today’s economy, and student loans help enable thousands of these Hoosiers access to a quality college education that would otherwise be out-of-reach. We need to take steps to better inform student borrowers and empower them to make the best decisions for their financial situation. As Indiana University has shown, for example, we can do that by ensuring students have a clear understanding of their borrowing obligations, which makes the process more transparent. This legislation is a first step in improving the financial literacy of student borrowers, promoting the best practices used by colleges and universities to assist students as they make financial decisions related to their loans and to raise awareness about their borrowing obligations.”
Scott said, “Financial literacy is incredibly important for families across America, and especially for those families and students who will be taking out student loans in order to further their education,” Scott said. “By developing best practices to empower students and their families when making decisions regarding their finances, we can help reduce loan debt and ensure more folks have the opportunity to reach their educational goals.”
James Kennedy, associate vice president for university student services and systems at Indiana University (IU), said, “Indiana University applauds Sen. Donnelly for his efforts to promote best practices and increased transparency among higher education institutions so that they, in turn, can help their students better understand and manage student debt and other financial aspects of attending college.
“As our recent experience at Indiana University has shown, knowledge truly is power when it comes to financial literacy and providing even basic information to students can have a dramatically positive effect on the level of student borrowing, as we have seen at IU.”
The Empowering Student Borrowers Act would require the Department of Education to establish and maintain best practices for colleges and universities on useful methods to teach financial literacy skills and provide information to assist students when making financial decisions related to student borrowing.
Best practices for teaching college students financial literacy and providing them with necessary information would include:
- Methods to ensure that students have a clear sense of their total borrowing obligations, including monthly payments and repayment options;
- The most effective ways to engage students in financial literacy education, including how often and when to communicate with students;
- Information on how to target different student populations, including part-time students and first-time students; and
- Ways to clearly communicate the importance of graduating when it comes to the ability of students to repay and fulfill their loan obligation.
Indiana University began sending letters, primarily by email, to student borrowers at each of its seven campuses during the 2012-2013 academic year. The letter briefly summarized what their monthly student loan re-payment would be after graduation and how much they would owe. The idea behind the letter is to provide information to student borrowers before they take on additional debt for the upcoming academic year and to encourage students to utilize academic and financial planning resources while completing their degree. The number of IU undergraduates who took out federal loans the following year dropped by 11 percent— outpacing the national average of two percent — and the amount they borrowed decreased by $31 million.
Approximately 985,000 Hoosiers have federal student loans according to a June 2014 report released by the White House Domestic Policy Council and Council on Economic Advisors. A Brookings Institution study released in December 2014 found that about half of college freshmen in the U.S. seriously underestimated how much student debt they have, and less than one-third provided an accurate estimate within a reasonable margin of error. The study found that students’ perceptions of their debt matter in making good financial decisions and that students with a greater understanding of their level of borrowing may be more vigilant about the amount of money they choose to borrow.
