LOAN COUNSELING CONUNDRUMS

Student loan debt is the hot topic in the news media in recent months.  Most of the articles touching on this subject focus on the amounts students borrow, with an indication that such borrowing is out of control.  Indeed, amounts that students borrow during their academic career are rising¹.  Student loan indebtedness is something about which to be cautious (as is any type of debt!).  But, beyond the increase in student loan debt is a perhaps more subtle set of concerns.  These less evident issues relate to the student debt topic from at least two perspectives.  They create the loan counseling conundrums.

Conundrum #1

Traditionally, student financial aid professionals have touted caution when providing student loan counseling.  Yet, advice toward caution has often been softened or negated by the offsetting promotions made by either the same financial aid professionals, admissions counselors, or other interested parties.  The counteracting assertions made are that student loan debt is “good debt” because it is obtained with the goal of investing in the student’s future increased earning power.  Thus, students face the first loan counseling conundrum.

Students are cautioned to borrow conservatively and wisely, while at the same time they are being told student loans are to be utilized for educational pursuits.  Certainly, research has shown over the years that individuals with higher levels of education, as a norm, generate higher levels of income².  Even so, students must use caution and examine their own abilities, goals, and determination in light of the economic conditions into which they will be entering the workforce when they consider borrowing for attainment of a certain academic credential.  This is true whether it is a student considering a career as a hair stylist, a medical assistant, or an attorney!  So, the first conundrum is shared by all parties, the potential student loan borrower, the financial aid professional, and admissions counselors.

Each party involved in the promotion, discussion, and decision about borrowing must do so with a longer outlook than the immediate tuition payment deadline.  The school professionals in financial aid and admissions must utilize a discerning and fiducially responsible view for not only their employer, but also for the student when considering the projected level of indebtedness in relation to their likely income.  Financial aid administrators do have a tool available.  It allows them to decline approving loan amounts requested.  But, this tool is seldom—to the point of, almost never—utilized.  This is perhaps due to a couple of reasons.  First, hardly anyone likes to tell someone he or she will not be able to receive funds.  Secondly, the financial aid professional will generally feel pressure from admissions and/or their administration to do nothing that will deter a student from being able to obtain resources to pay for attending their school.  So, the conundrum resurfaces in determining what is right.  Does the financial aid administrator simply inform the student of the amounts available to borrow and provide sample repayment schedules, leaving the decision to the student?  Or, does the financial aid administrator do everything possible to get yet another student the resources to matriculate, irrespective of debt loads?  While it is understood that schools need to “make the numbers” in regard to enrollment (revenue) goals, it would be wise for school professionals and administration to have dialog regarding fiduciary responsibility to the student, as well as to the school.  There must be balance.  What will be the impact of strongly encouraging students to take out loans if they are not aware of the effects of borrowing excessive amounts?  Will the school’s cohort default rate (CDR), or its loan repayment rate (LRR) and debt to earnings (D/E) rate be such that it impacts the school negatively under the new gainful employment (GE) regulations?   In what type of circumstances might the financial aid administrator decline processing a loan, or decline the full amount requested?  This is something that should be brought from the bottom of the toolbox to ensure familiarity with the option and when to use it.

But, we must not forget the student’s perspective.  The potential student borrower should be encouraged to do due diligence before blindly accepting his or her financial aid “award” offer displayed on the “award letter.”  (It is interesting that the profession of financial aid typically calls an offer of a financial aid “package” that includes a loan an “award.”  What does the word, “award,” connote?  This is perhaps a thought for another day.)

Decades ago in the early stages of the modern era of student financial assistance, potential student loan borrowers of the precursor to today’s Federal Direct Student Loans met with a bank officer to discuss the terms of the loan and acknowledge the understanding of the loan and repayment responsibilities.  Perhaps it was because it was done in a bank with the bank’s loan officer, the reality of the loan consequences seemed to be internalized more readily.  In today’s low touch, high tech environment much of the actual counseling is relegated to federally mandated—and provided—material online.  It is not uncommon for present day potential borrowers’ experience to be void of any actual dialog and personal discussion about student loans and the responsibilities and ramifications of such.  This exacerbates the conundrum from the student’s perspective.  The student eagerly receives the award notification detailing the loans that show the student can “afford” going to school, but not fully being aware of what the consequences are upon graduation.  Although the federally mandated requirement to complete entrance counseling is met, has full understanding taken place as to the obligations and expectations?  How many comments have been heard that indicate students were not aware they had taken out loans, nor how much they had borrowed upon program completion?  Do the students still see that “good debt” as a positive thing as they are looking for work that offers an income adequate to repay that debt?

Conundrum #2

It is without question that loan counseling, and especially entrance counseling, is an important part of the student loan process.  And, the topic is talked about in political circles.  It even surfaces in communiqués from the U.S. Department of Education (ED).  In the last 10 years, ED has communicated important information about the content of student loan entrance counseling approximately five times.  Most recently, on April 6, 2015, a Dear Colleague Letter (DCL), GEN-15-06, was released.  The majority of the letter was presented in a question and answer (Q&A) format.  The purpose of the DCL was to remind “institutions of ways that they can help students and their families make informed decisions about taking out student loans.”  This resource provided clarifying information that re-emphasized points where schools may have been inadvertently acting out of compliance with regulations.

As financial aid administrators are aware, and student loan borrowers quickly become aware, a Direct Loan (DL) may not be disbursed to a first time borrower until after the student completes entrance loan counseling.  Indeed, schools likely take this role of loan counseling very seriously.  This is so much the case that some schools desire to ensure students remain aware they are borrowing money that they have a student complete entrance counseling before the first disbursement of each year’s loan.  In like manner, entrance counseling has been seen by some schools as so important to students’ financial literacy and awareness that they require the entrance counseling for students who were prior student loan recipients at previous institutions.

Initially schools may have thought that this DCL gave credence to deterring unnecessary student borrowing.  The letter does give indication that schools may provide additional information beyond what ED has provided in its online entrance counseling.  This, however, must be limited to what is “reasonable as to time, effort, and relevance to the student’s borrowing decision and may not be administered in a manner that unreasonably impedes a student’s ability to borrow.”  So, it is OK to provide more information and require more student participation, but there has to be caution as to how much more and what the impact will be on the student.  In fact, ED is quite clear in the questions and answers provided that there are significant limitations to what a school can do to re-emphasize the seriousness and realities of borrowing.  While schools are expected to inform students of their rights and responsibilities, ED appears to also expect that the school will not do anything to significantly dissuade students from borrowing if there is the calculated eligibility for them to be able to borrow.  Although schools are to keep CDRs low, they may not do anything such as have an institutional policy that requires students to revisit ED’s entrance counseling Web site in a subsequent year and again complete the information they were required to complete before their first disbursement of their first loan.  (And, this is an interesting prohibition when ED itself requires initial and annual subsequent counseling before each year’s disbursement in the TEACH Grant program.)  Similarly, for students who previously borrowed for attendance at another school, the new school may not require the student to again complete the entrance counseling since they have already done so once.  The set of Q&As does suggest a number of options for increasing financial literacy or awareness about student loans, debt management, etc.  However, each suggestion is restricted with the same “may not unreasonably impede a student’s ability to borrow” or that it has to be “reasonable as to time, effort, and relevance to the student’s borrowing decision” phraseology.

Therefore, again, the conundrum for financial aid professionals is accented.  Schools are to do all things possible to ensure students are aware of the amounts and terms of loans, as well as the consequences of borrowing.  But, on the other hand, a school may not have basic institutional policies (which in some cases are similar to what ED has for other programs) that help reinforce the realities of what a student is borrowing and its impact.  A school may offer additional information, but not in a restrictive manner.  Schools must read this DCL carefully to ensure that the school’s previous efforts, well-intentioned though they may be, do not cause unintended compliance findings.

Curbing the Conundrums

The necessity of loan counseling is a given.  But, the conundrums related to it need attention.  With an understanding that there may be some challenges in the requirements to provide loan counseling, it is worthwhile to reflect on how to curb the associated conundrums.  Following are some points for consideration applicable to each conundrum.

●  Curtailing Conundrum #1

• Research (again) the job market demand and starting salaries for the jobs for which you are training students.  Armed with such data allows you to speak accurately to a student’s need for information to legitimately decide if the indebtedness they incur is worthwhile from their perspective.  Such data also informs the school of any adjustments that may be necessary in curriculum or programs.  One source that a school may utilize is the Bureau of Labor Statistics’ (BLS) Occupational Outlook Handbook.  It is available online at https://www.bls.gov/ooh/.
• Network in your local job market to determine current job and wage/salary trends.  Correlate that data with your research from the BLS’s Occupational Outlook Handbook.  Plan for adjustments as necessary.
• Review and become familiar with the option in the financial aid administrator’s toolkit that allows one to refuse to approve a loan (or approve a lower loan amount) based upon exceptional circumstances.
  • The decision must be made on a case-by-case basis, not by class or category of student.
  • The reason must be documented.
  • The action must not constitute a pattern or practice that would be considered discriminatory.
  • The decision must be given in writing to the borrower.
  • The financial aid administrator may not make it a practice to limit loans to only the amount necessary for direct costs charged by the school.

See the 2015-2016 Federal Student Aid Handbook, Application and Verification Guide, page AVG-123 and Volume 3, page 3-90, for more information.

●  Controlling Conundrum #2

• Ensure familiarity with the entrance and exit counseling requirements specified in regulations in 34 CFR 668.304 and highlighted in the 2014-2015 Federal Student Aid Handbook, Volume 2, pages 2-118 through 2-121.
• Explore the intricacies of the guidance detailed in the Q&As of DCL GEN-15-06.  Although there are restrictions placed upon certain activities as it relates to timing, many useful options are highlighted for sharing additional financial information with students.
• Review your institutional policies and current practices in light of the guidance in the DCL referenced above.  Ensure school policy and practice is in agreement with ED guidance.
• Although it cannot be a requirement that a student repeat entrance counseling (whether a continuing student or a student entering with a prior loan from another school), you could consider having it as an item on a “checklist” of things to do in preparation for the upcoming first disbursements of the award year.  (Again, it cannot be an item to prevent payment if not accomplished, but it can be on a “to do” checklist for all borrowers if that is your institutional decision.)  Simply having it on a checklist will cause some students to complete the information.  Any student who completes it is one more that has their loan information re-emphasized.
  • Review the new Opportunities to Improve the Financial Capability and Financial Well-being of Postsecondary Students report announced by ED on July 7, 2015.  The report was produced by the U.S. Department of the Treasury on behalf of the Financial Literacy and Education Commission.  (ED is a member of this commission as well.)  The report, as described, contains information on the following key topics:
    • Policies and resources to help students make decisions on college choice and financing;
    • Tools for navigating the college search and decision-making process;
    • Tools for navigating postsecondary education financing and repayment;
    • Financial decisions facing currently enrolled students and recent graduates;
    • Institutional efforts to improve the financial capability of enrolled students;
    • Recommendations and next steps for higher education institutions
    • Review the MyMoney.gov Web site for useful financial information to share with students.
    • Consider additional financial literacy training (budgeting, debt management, etc.) for students during orientation or during an introductory course at the beginning of their academic program.

Financial aid administrators deal with an intricate, life-influencing subject on a daily basis.  The work of these professionals affects students significantly as it impacts students’ ability to meet their financial needs.  The regulations and expectations of the school and ED generate an ongoing tension by keeping these key personnel in between the proverbial rock and a hard place.  They must emphasize caution in borrowing, but also highlight student loans as a good investment.  Dealing with the conundrums discussed above are ones that present challenges, but are ones which the adept professionals in the industry have learned to navigate quite well.

 

¹Does College Matter?  Federal Reserve Bank of San Francisco – 2014 Annual Report; page 5.

²Federal Reserve Bulletin, Volume 100, No. 4; September 2014; page 21.

___________________________________________________________________________________________________________

The above article is presented for informational and educational purposes only and should not be considered to be giving legal advice.