by Andrew Wu
Federal student loan payments resumed last October after a 3-year pause during the COVID-19 pandemic. Five months prior, the national COVID-19 emergency ended and Congress passed legislation preventing additional extensions of payment pause, and student loan interest resumed in September 2023. Undersecretary of Education James Kvaal wrote a blog post that an unprecedented challenge was presented with more than 28 million borrowers returning to repayment. He said most had already made their first payments, while others would need more time and might be confused or overwhelmed about their options -- and supporting them would be a top priority.
The bottom line is that students need to understand the terms of their loans and the options available to them for repayment. Institutions can -- and have a duty to -- fill this gap.
Students Overwhelmingly Lack Financial Literacy
Human capital theory (HCT) provides a foundation that is essential in understanding why specific programs are necessary in meeting the challenges of future student debt management. As it relates to education, HCT proposes that education increases the productivity and earnings of individuals; therefore, education is an investment. Attending college is seen as a long-term investment in human capital because it generally provides individuals with economic benefits and impacts positive economic growth for society.
In fact, this investment is crucial for students -- their development of human capital is considered improving productive capacities, which includes possessing knowledge, skills, and talents. Ideally, when students decide to attend college, they take on the responsibility to investigate and understand all possible benefits with regard to taking on student loan debt. They should recognize the positive outcomes of the short- and long-term cost benefit of student loans: an education first, then earnings from a career that allows the ability to repay loans. Yet, there is alarmingly little financial education provided by institutions to help fulfill the financial wellness expectations described in HCT.
In order to comprehensively apply HCT to the benefit of college graduates with federal loan debt, a dedicated financial literacy department needs to be required for all institutions that process federal financial aid. Research on financial wellness by the Department of Education reported that close to 75% of students were stressed by their finances in general and over 50% of students worry about having enough to pay for school.
In addition, many students had never taken a personal finance class or workshop while in college. With federal student loan debt totaling over $1 billion and many students having little or no experience managing their day-to-day costs and finances, there has never been a more appropriate time in higher education to create financial literacy programs that will meet both the needs of students and institutions. While attending a recent career fair for new college graduates, it was surprising to learn of the overwhelming lack in knowledge of income-based payment plan options that are available to students with federal student loan debt.
Having more than a decade's experience leading college financial aid departments and spearheading several initiatives to increase students' financial literacy, I can share some of the best practices I have seen benefit both students and institutions.
How Colleges Can Help
An effective financial literacy program involves establishing a dedicated unit to teach and partner with students throughout their college careers and beyond. To start, institutions may want to create and host a mandatory group or individual financial literacy meeting for incoming first-year students on techniques for managing costs of attendance, financial aid loans, and personal finances. Each subsequent year, it is helpful to host mandatory ongoing financial literacy and wellness seminars held specifically for each college year cohort. Finally, prior to graduation, a dedicated senior-year debt management seminar, with a focus on debt repayment strategies, can help prepare all potential graduates who have federal student loan debt.
The most unique, innovative, and student-service-centered aspect that I have seen from newly formed financial literacy departments is continued assistance to students in their first year following graduation (at no cost to them). It is common for graduates to pay for the services of financial advisors or consultants to help manage their financial planning and wellness. Alternatively, some financial literacy departments provide this valuable service and consulting as part of the continuing student experience lifecycle.
Staff can continuously review and advise graduates on their loan repayment plan, making recommendations if they feel a change in repayment plan is the best fit.
Last but not least, the financial literacy staff may benefit from being trained and licensed to advise on important financial decisions on life events such as home mortgages, managing family finances, and continued financial wellness education.
Final Words
Institutions need to consider their ethical and educational duty to extend their mission of educating students post-graduation. Not only does it benefit the institution in areas such as managing Cohort Default Rate (CDR) performance, but it also promotes a stronger connection with the student population and helps generate continuing student service satisfaction. Financial literacy departments are valuable investments for all colleges and universities to consider in order to provide their students and graduates with an organized and systematic roadmap for managing student loan debt.
This article is republished from HigherEdJobs® under a Creative Commons license.