Q: How can students avoid graduating with an overwhelming debt burden?
A: A new school year is underway and a fresh crop of students has started a new chapter on college campuses across the country. In our 21st century economy, it's widely considered a smart move to pursue higher education or vocational training as the next generation looks to secure financial independence and self-sufficiency.
Many studies report that college graduates significantly improve their lifetime earning potential by earning an advanced degree. However, reading the fine print of those studies also shows a disparate range of earning potential based on one’s field of study, as an example. So, considering the substantial student debt burden a growing percentage of graduates struggles to repay — the U.S. Department of Education’s student loan portfolio exceeds $1 trillion — it’s important policymakers examine the federal government’s lending practices and the borrowing behavior of college-bound students.
Specific steps can be taken to encourage financial literacy and teach students to become smarter, savvier borrowers. The federal government has a responsibility to the taxpaying public and to student borrowers to ensure that students understand their income to debt ratio, as an example.
My bipartisan legislation, the Know Before You Owe Federal Student Loan Act, would strengthen loan counseling requirements and establish a more transparent process in which institutions of higher education take steps to help student borrowers graduate with less debt hanging over their heads. Apart from my legislation, colleges should take care to keep tuition and living expenses as low as possible to avoid putting pressure on students to borrow more than they can afford.
Q: How would your bill address staggering student debt in America?
A: As a fiscal conservative, I share the tight-fisted views of hard-working Iowans who agree that Washington can't tax, spend or borrow its way to prosperity. Borrowing beyond one's means or potential ability to repay puts future prosperity at risk.
A sensible rule of thumb for student borrowers is not to take on more debt than what is necessary to pay for college. A University of Iowa estimate suggests about 40 percent of the average $25,000 student loan debt exceeds what is needed to pay tuition, room and board. That means a student borrower graduates with an extra $10,000 debt burden.
That makes it even harder to stretch a paycheck to pay other monthly bills, such as rent, insurance and utilities. And let’s be clear. The federal government shouldn’t lend more than is necessary and underwrite lifestyle extras that aren’t necessary to earn a college education.
Student borrowers need to come to grips with the size and scope of their debt burden. That’s why my bill would upgrade the student loan counseling provision into an annual requirement, not just for first-time borrowers. It also would require colleges to furnish an estimate of a student’s projected debt to income ratio that forecasts a repayment schedule with the starting wages in their particular field of study; inform student borrowers how not graduating on time would add significantly to their debt burden; and to counsel them against the risks of over-borrowing.
Again, students need to understand they do not need to borrow the maximum amount for which they are eligible. Finally, my bill would require that students receive regular statements about their loan while they are still in school, not just when they must start repaying.
Regular reminders about one’s repayment responsibilities will help promote mindful borrowing, as opposed to an out of sight, out of mind debt burden. Knowing what you owe, before you go to college, will help make the next generation of students smarter borrowers and better financial stewards.
These are invaluable lifetime lessons that will pay it forward for years to come.