Indiana University has successfully cut down student loan debt by implementing a fairly simple policy.
The university found that students borrowed significantly less for the upcoming academic year when they were told how much they already owe from previous years. This suggests that in addition to higher tuition costs, in some cases, students may be borrowing more than they actually need.
In 2012, the seven-campus Indiana University system began sending debt letters to students each year. The letters gave each student an overview of all federal and private loans processed by the university, clearly stating the amount of money they have borrowed so far, what the interest rates were, and what the estimated monthly payment would be after graduation.
"The annual debt letter has been well received and has resulted in many student inquiries about managing student loan debt," James Kennedy, Vice President for Student Services, told the Senate HELP Committee.
In response to the letters, IU students took out 11 percent, or $31 million, less in federal Stafford loans during the 2013-14 school year, according to data from the Department of Education.
Student borrowing decreased only 2 percent nationally among four-year public schools.
Natalie Cahill, a rising senior at IU, told Bloomberg that after receiving the letter she began searching for more scholarships and decided to use earnings from her summer job to help cover costs.
“When you take out loans for the year, you just see a smaller number than the grand total,” says Cahill, who has taken out about $22,600 in loans. “Seeing the letter definitely put things into perspective.”
Federal law only requires colleges to provide counseling to borrowers at the beginning and end of their studies, leaving many students to borrow without full understanding of the consequences.
IU began sending the debt letters in an effort to increase students’ “loan literacy.” The university also started offering a personal finance course and peer-to-peer financial aid advising on all seven of its campuses.
The experiment at IU seems to support the recently introduced “Know Before You Go” act, which would provide students with greater access to information about the amount of debt tied to different degrees and programs before they enroll.