COLUMBIA, Mo. –Experts are concerned that college students are making ill-informed student loan decisions with potentially negative consequences to themselves and the economy. As a result, universities are trying to ‘think outside the box’ to find ways to reduce undergraduate borrowing and help assist students in making better financial choices. At the University of Missouri, initiatives within the financial aid office, backed by new research from the Truman School of Public Affairs, are showing that establishing relationships, more than merely providing information, is important when helping students make better financial decisions.
“Financial aid experts have long been trying to determine the best interventions to help students better understand their debt and change borrowing behaviors,” said Nick Prewett, director of MU’s Financial Aid office. “Research from the Truman School of Public Affairs shows information alone is not sufficient to change borrowing behaviors. To be successful, our office focuses on building personal relationships with students through one-on-one counseling and outreach.”
Prewett points to the “proactive” philosophy of the MU Financial Aid office as an explanation of why MU’s average debt load of $21,000 is less than the national average debt of $30,000. One intervention being used is the practice of sending debt letters to all student borrowers; these letters include information about debt accrued, estimated monthly payment and remaining borrowing eligibility.
Rajeev Darolia, assistant professor of public affairs, partnered with the MU Financial Aid office to test the role information from a debt letter plays in borrowing decisions. Using financial aid records, the experiment identified non-graduating undergraduate students who had obtained student loans during their time at MU. Half of the group were randomly assigned to receive the official letter, while the other half did not.
Darolia found that the letter, in isolation, did not have an overall effect on borrowing. While there was no difference in borrowing, one important outcome was noted—students who received the letter came to the financial aid office at a much higher rate than those who did not.
“Results from the study indicate that information alone, without other supports, is likely not enough to systematically change financial aid decisions,” Darolia said. “What is also needed is the ability to sit down with somebody and really go into detail about the implications of student loans and have that information available in many different ways.”
In addition to sending debt letters, which are now distributed to all MU students with student loans, MU’s Financial Aid office also:
- Calls students who are at risk of borrowing an excessive amount;
- Assigns a specific counselor for every MU student;
- Communicates with students and parents via social media about student loans, work study opportunities and scholarships; Connects students with one-on-one exit counseling provided by the Mizzou Office for Financial Success
Darolia’s paper “An Experiment on Information Use in College Student Loan Decisions,” recently was published by the Federal Reserve Bank of Philadelphia Research Department. Darolia is a visiting scholar for the payment cards center at the Federal Reserve Bank of Philadelphia.
Editor’s note: A step-by-step checklist is one example of how the MU Financial aid office works with students to help them understand their student loans.