Every year, thousands of high school graduates receive individually prepared financial aid packets from colleges, heralding an array of options that includes scholarships, grants and loans.
However, packaging loans in a financial aid packet is misleading, say both Alan Collinge, founder of Student Loan Justice and Michael Brown, research analyst for LendEDU, a company that recently ranked Delaware as the third-highest state in the country for student debt.
“The term financial aid is funny. A lot of it is a temporary Band-Aid, and you're going to have to pay for the stitches,” Brown said. “It's deceiving. I think there's a lack of knowledge by students and parents.”
Collinge is more direct.
“This is not financial aid. Student loans are more vicious than any other loan you can get. If you have to borrow money for college, my first piece of advice is don't get a federal student loan. Those are the nastiest, most vicious types of lending instruments – maybe on Earth – but certainly in the country, no doubt about it,” he said.
While interests rates are low compared to private loans, he said, fees and penalties for missed or defaulted federal loans are harsher.
Shana Payne, director of the Higher Education Office for the Delaware Department of Education, disagress with the idea it is deceptive to wrap student loans into financial aid packages. She said there is not enough scholarship money to cover the cost of college, and it is rare for a student to get a full scholarship. Most families don't have the cash or savings to pay for college, either.
“Loans are financial aid. That is a very common and valid way for schools to be able to help students address their need,” she said. “Whenever students are learning about the different pieces of financial aid, that's an important piece for them to understand.”
Payne said she reviews financial award letters regularly, and they clearly mark what is a loan.
“All colleges across the country utilize loans to be able to help students pay for school. It's not that the school is lying or trying to cheat students or deceive them; they are just utilizing all of the resources available to be able to afford the cost,” she said.
Payne said Delaware provides about $3 million a year in financial aid programs, and the state offers initiatives to help students access financial aid.
Last year, she said, Delaware ranked fourth in the nation for the number of students completing FAFSA forms. “We are making a concerted effort to make sure every student has the resources they need and information to be able to access the financial aid they need to reduce the cost of college,” she said.
Based on current interest rates, federal loans offer lower interest rates than private loans, and more favorable terms. Interest rates for undergraduate private education loans are as high as 14.46 percent, compared to a federal undergraduate student direct loan interest rate of 5.05 percent. Subsidized federal loans also cover interest for the loan until a student graduates, unlike unsubsidized loans or private loans which accrue interest immediately. Some federal loans also offer repayment options for students struggling to pay back their debt. But penalties are high for defaulting, and loans may not be clear about balance and interest amounts that remain even if a student is making payments.
Many borrowers are barraged with phone calls from unscrupulous companies offering refinancing plans.
Brown said reputable lenders never reach out to borrowers.
“If you get a phone call or email from someone asking to refinance a student loan, hang up. Never, ever entertain them. They are almost 100 percent scams,” he said. “Anyone who's reaching out to you is a scam.”
FAFSA failing students
Any student seeking financial aid must fill out a Free Application for Federal Student Aid. A series of questions determines a student's financial need, and the form determines an expected family contribution – the amount of money a family is led to believe will be their out-of-pocket cost.
But colleges are routinely asking families to pay more than what FAFSA has calculated, resulting for many in sticker shock. “It's certainly out of whack,” said Cody Hounanian, program director for Student Debt Crisis.
Just because FAFSA says a family contribution should be 'x' amount of dollars, doesn't mean a college will agree and give the student enough financial aid to cover remaining expenses.
“The expected family contribution is not the reality for many, many people. The way that loans are distributed – and the fact the many borrowers feel like that's the only route they have – makes those loans turn into funny money at some point,” he said. “I can see how schools don't take some of these benchmarks seriously, especially when there's a high expectation that borrowers will be able to source some sort of funding to help bridge the gap.”
Brown, a 2016 University of Delaware graduate, left school with $30,000 in student loans and now has $20,000. A program offered by his employer has helped pay down a chunk of his debt, he said.
Brown said he remembers entering college and not knowing anything about the loans he took out.
“Once I graduated it was almost dumped on me,” he said. “I think there could be more of a dialogue between parents, students and the higher education system in terms of understanding what you're getting into, understanding what you're going to need to do, and what it's going to look like once you graduate from college. There is definitely a knowledge gap there.”
No bankruptcy for students
Hounanian said his group is lobbying Congress to make changes – mostly focusing on bankruptcy laws that for the past four decades have gradually removed student loans from bankruptcy protection. In 1992, a statute of limitations was taken away from student loans, meaning they can no longer be dismissed after a certain time period. By 1998, Congress passed a law preventing federal student loans from being discharged by bankruptcy, and a 2005 law extended to private student loans. In 2010, the federal government took control of federal student loans, ending guaranteed federal student loans offered through commercial banks, although still allowing them to process those loans.
It's a mess that the federal government needs to fix, Collinge said.
“This is really a problem that Congress has failed to deal with,” he said. “They have been grossly negligent. This has to change because the numbers are too threatening now. It's even more sinister than the home mortgage crisis.”
While acknowledging student debt and rising college costs are concerns, Delaware's congressional delegation offered no specifics on what is being done to fix them.
Delaware Sen. Chris Coons said federal funding has increased for Pell Grants and other funding for low-income students. He did not specifically comment on whether anything was being done for middle-income earners who make too much to qualify for those programs and who are left with huge college bills.
“More needs to be done, and I will continue to work with my colleagues in Congress, colleges and universities, and all stakeholders to increase access and affordability for students in Delaware and across the country,” he said.
Delaware Rep. Lisa Blunt Rochester, also a Democrat, echoed those concerns.
“Student loan debt is one component of the college affordability puzzle, and we need a multifaceted approach to improve financial literacy for students, address soaring tuition costs at universities, and hold bad and predatory actors accountable,” she said. “We have a $1.5 trillion student loan crisis that impacts millions of American families and makes it harder for graduates to purchase a home and save for their retirement.”
Until serious lending changes are made, however, Brown said he expects nothing will change in the world of college lending.
“The cost of college goes up every year, and as long as that happens, student loans are going to be in pretty high demand,” Brown said. “Student loans are creating a pretty big industry.”
But it's a business with a serious downside and nothing to be proud of, says Collinge.
“It's a really dirty business, and the colleges should be ashamed of themselves,” he said.
Editor's note: This is Part 2 of a series The Cost of Higher Education which began in the Friday, Jan. 11 edition.
Student debt rankings by state
Top 200 highest-ranking public colleges
1. Grambling State University, $47,162
2. Penn State Shenango, $45,746
3. Penn State Hazleton, $45,703
30. Delaware State University, $36,812
59. University of Delaware, $34,144
Top 200 lowest-ranking public colleges
1. University of North Texas at Dallas, $6,927
2. Pennsylvania College of Technology, $7,218
3. Florida Agricultural and Mechanical University, $7,454
4. Ramapo College of New Jersey, $10,082
5. Dixie State University, $12,201
Overall top 250 highest debt
1. The New School College of Performing Arts, $77,353
2. Parsons School of Design, $70,361
3. New York School of Interior Design, $65,401
4. Eugene Lang College of Liberal Arts, $62,290
166. Delaware State University, $36,812
Overall top 250 lowest debt
1. Bethel College, $5,633
2. University of the Incarnate Word, $6,271
3. University of North Texas at Dallas, $6,927
9. Princeton University, $9,005
18. Yale University, $13,050
Source: LendEDU based on 2017 data