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Student Loans: Know Before You Owe

By Raj Date
Special Advisor to the Secretary of the Treasury for the Consumer Financial Protection Bureau

It’s college application season and students around the country are busy filling out forms for college. As they send off their applications, many worry not just about getting into the right school, but also about paying for it once they do.

For many students today, the dream of going to college can only be realized by borrowing money… lots of money. The problem is that far too often, students are signing on the dotted line for loans they don’t fully understand.

The Consumer Financial Protection Bureau (CFPB), established last year by the Dodd-Frank Wall Street Reform and Consumer Protection Act, wants to help students and their families better understand their loan options. It’s time to create a student loan market where costs and risks are clear.

The price of college is soaring. The average total cost of tuition, room, board, and fees for an in-state student at a public four-year college is $17,000 this year, according to the College Board. At private non-profit colleges, the average total cost this year is about $39,000. Although most students pay less than the published rates, the fact is that college costs a lot of money.

Many students are covering these rising tuition costs by taking on more debt. Seniors who graduated in the last school year, and who borrowed money to pay for college, ended up with about $22,000 in debt for a public college and $28,000 in debt for a private college.

We are still recovering from the worst financial crisis since the Great Depression. While a college education is a gateway to better job prospects — and student loans are a helpful tool for students to make that happen — taking on giant sums of student debt can be risky. Upon graduation, too many people face either underemployment or unemployment. Not surprisingly, some recent graduates are defaulting on their loans, and others can’t afford to move out of their parents’ homes.

The problems with student loans start from the moment financial aid information arrives from colleges. Prospective students often receive large packages of documents with unfamiliar acronyms and baffling language. The offers often neglect to inform students of their true debt burden — even the basics like principal, interest, and monthly payments are not clear. Adding to the confusion is the different vocabulary used by different schools. Comparing one award to another becomes a difficult code-breaking challenge.

This is why the CFPB is assisting the Department of Education with creating a “financial aid shopping sheet” that colleges could use to improve information for students and their families. The draft shopping sheet is posted on the CFPB website, where we’re inviting comments from students, families, and other stakeholders. It includes estimated monthly payments after leaving school and helpful school-related information such as graduation rates. And, importantly, it allows students to compare an offer from one school to an offer from another school by standardizing the language and terms. This is one of our “Know Before You Owe” initiatives — a series of projects that the CFPB pioneered first in the all-too-confusing world of mortgages.

In these tough economic times, the stakes have never been higher for students and their families to clearly understand the costs and risks of student loans. Having a simple, one-page financial aid shopping sheet would help students compare offers and make the choice that’s right for them.

For those Americans who are already out of college and are struggling to pay back their student loans, the CFPB wants to make sure they too have useful information about their repayment options. So we recently released the Student Debt Repayment Assistant, an online tool for graduates and others struggling with student loan debt. It points borrowers in the right direction on how to tackle federal and private loan obligations and provides information on deferments, income-based repayment, and much more.

Higher education can be a critical part of the American dream. A more transparent student lending marketplace can help all Americans better pursue that dream.

This article originally appeared in THE HUFFINGTON POST under the title Student Loans: Know Before You Owe .