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College Debt

Tricked into taking on debt?

Have Americans been tricked into using college debt? It sounds crazy, but many individuals would say it happened to them.

When President Biden proclaimed in 2022 that he was going to forgive $10,000 of college debt for qualifying individuals, the reaction was strong on both sides. Those who already paid for college wondered why they were not receiving a gift. Those who had debt were thrilled with the prospect of loan forgiveness.

Since I was among parents who started saving for my children's college education when they were very young, I admit that my first thought was I had missed the boat on this one. Why had I denied my children the vacations we could have had while putting money into their college savings?

However, since I worked in higher education for more than two decades, I knew there was more to this story than was revealed on most television news broadcasts.

How did it happen that college indebtedness surpassed credit card debt in America? How did this indebtedness become something that needed relief?

Each year students in all sectors, public and private colleges and universities, receive award letters. The deception begins in the use of the term "award". In most settings, an award is something exciting, like winning a prize. However in the award letters students receive, the letter may contain the gift of debt. Comingled with scholarships, students are also informed of grants and other federal "awards" that must be repaid.

The problem of comingling items that are scholarships with items that are debt is that many students are not able to discern the difference. Within some families you have a legacy of college attendance. Within others, you have students who will be the first in their family to attend college. Without a knowledgeable parent to guide them, some students accept the amount they are awarded without understanding which are future obligations and which are true gifts.

Here is an example of the applicable section of an award letter:

In this example, as in many, the college combines the "awards" and the "debt obligations" together and calls them all "Financial Aid". They even go so far as to say the expected net cost for a student to attend would be $9,950. However, that is very, very misleading. In this example, the Federal Pell Grant, Fed SEOG Grant and College Grant are free money. The other elements all have to be repaid. The student is receiving true awards totaling $11,550. The student and the student's parents will be using debt to finance $19,700. They must pay $9,950 now to be enrolled for the upcoming year. Therefore, the total cost of attendance for the student is $29,650 (9,950 + 19,700 of debt). In addition, there will be interest payments on the $19,700.

Granted, using debt to finance higher education is something many individuals plan to do. They are grateful for the access to the funds and intend to pursue a career that will make repayment possible. My objection is for those who do not understand that they are incurring debt.

I believe that many of those saddled with debt today were not fully aware of the debt load they were incurring. Colleges and universities do not have an incentive to make their letters more transparent when their competitors are issuing equally fuzzy letters.

This is one of the reasons I am now more sympathetic to the plight of those who incurred steep levels of debt pursuing higher education.

Fortunately, two Congress members have introduced legislation to improve the clarity of award letters. Representative Virginia Foxx (R-NC) and Representative Lisa McClain (R-MI) proposed rules that would make letters more transparent and easier to compare.

What about you? Did you clearly understand award letters you or your children received when attending college? Do you think reform is needed so that the public better understands what they are undertaking when enrolling in college? Did any of the information in this article surprise you? Please leave comments so we can all grow in our knowledge of this complex matter.

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