Many indebted students are clueless about loans

A surprisingly high number of students don't know how much they are borrowing to attend college, according to a new report from the Brookings Institution. Some students aren't even aware that they've borrowed any money at all.

In nationally representative data on student loans, more than half of freshmen who were surveyed seriously underestimated what they owed. What's more, less than one in three first-year students came up with a debt amount within a reasonable margin of error. The students did poorly even though they were asked for debt estimates within large ranges such as $5,000 to $9,999.

Twenty-eight percent of students didn't realize that they had taken out federal student loans, and 14 percent erroneously thought that they had no debt.

"The problem with the lack of financial savvy among enrolled college students," the report noted, "is that the consequences of their decisions come as a surprise to them once it's too late."

The Brookings researchers asked freshmen attending an unnamed, selective public university in the Northeast that attracts a large proportion of affluent students about their debt and the cost of their schooling. It then compared the responses with administrative records that showed what they actually borrowed and how much they actually paid.

The think tank also looked at federal loan data for first-year students across the country and compared that with what surveyed undergrads thought they had borrowed.

Affluent students are less aware

The researchers did not find a strong relationship between a family's ability to pay for college, as measured by the federal financial aid formula, and the accuracy of debt estimates. Affluent students, however, were less likely to be aware that they had student debt.

The Brookings researchers theorized that the affluent students' parents may have made the decision for the teenagers to borrow. These parents might have intended to pay back the obligation, or they may have simply felt that the students would be able to handle the debt. Federal loans for students offer better terms and rates than federal loans for parents.

With such a large percentage of students unfamiliar with what they borrowed, it's no surprise that so many borrowers end up defaulting on their loans. According to a 2014 Federal Reserve report, nearly one in three borrowers in repayment are at least 90 days late with their payments.

Failing to understand the price they're paying for college can hurt more than just the student borrowers, according to Beth Akers, a fellow at the Brookings Institution. "If students are unable to adequately judge quality and are insensitive to or unaware of price, then the mechanism that ensures good value will fail to function, resulting in symptoms like tuition inflation and the continued presence of institutions that do not provide value. In this light, students' misinformation about price should be of tremendous concern to policymakers."

Sharing the blame

Students aren't the only ones who can be faulted for not understanding the level of their college debt. Colleges and lenders should be focusing their efforts on making students more responsible borrowers, which would include meaningful counseling each time students take out a loan.

Problems can start from the very beginning when students receive their financial aid letters. "Students may not realize that the loans in their financial aid package are loans, partly because financial aid award letters blur the distinction between grants and loans," noted Mark Kantrowitz, the publisher of Edvisor, a student information website.

However, students and graduates do have an easy way to keep track of their federal college loans. Students can access all of them by visiting the National Student Loan Data System.