Your Money: Families need to brush up on student loan literacy

NEW YORK (Reuters) - For Americans worried about the escalating price of a college education, here’s good news: Tuition for the typical family barely budged in the past year, following years of out-of-control U.S. tuition inflation.

FILE PHOTO: A graduating student waits to cross the street before Commencement Exercises at the Massachusetts Institute of Technology (MIT) in Cambridge, Massachusetts, U.S., June 7, 2019. REUTERS/Brian Snyder/File Photo

The typical American family with a child in college paid an average of $26,226 for the 2018-19 academic year, nearly the same as the year before, according to the latest “How America Pays for College” survey from lender Sallie Mae.

However, college affordability is still a challenge as Americans have gaps in their financial literacy.

To apply for any federal student loans, state grants and work-study programs and institutional aid, families are required to fill the Free Application for Federal Student Aid online. While many do, only 77% of those surveyed click “submit,” Sallie Mae found.

“It should be 100%,” said Martha Holler, a senior vice president at Sallie Mae.

At private colleges, even high-income families can qualify for tuition breaks, but they would never know unless they fill out the form.

“Even if you are making a pretty good living, you could qualify,” said Roger Young, a senior financial planner for T. Rowe Price.

Charlie Javice, chief executive of Frank, a platform which helps students finance education, said fewer families are filing the FAFSA, based on her review of government data.

“That is not a good trend,” said Javice, who blames a lack of resources in high schools and from federal and state agencies to provide better and more timely information.


Sallie Mae’s report highlights how families have to pull from different sources to pay for college. For the last school year, the largest chunk came from scholarships and grants at institutions, followed closely by parent income and savings.

Students also contribute cash, while both parents and students borrow. A tiny 2% typically comes from relatives and friends.

Colleges present the whole package, including loans, in the financial award letter they send to accepted students. Signing up for federal loans is typically a one-click process. Sallie Mae found that two-thirds of families took whatever was offered, while a quarter accepted part and rejected part.

One confusing aspect is that college expenses may go up after the first year, and not just because tuition rises.

“When we counsel people on understanding award letters, we talk about understanding the fine print,” which may say some funding lasts only a year, Holler noted.

Students also may not understand how much the loans can add up to after several years and what the potential payments may be once they graduate.

Exit counseling upon graduation may not amount to much more than just a self-help module. “You go to the financial aid website, you do some cursory read-through and then you hit ‘next,’” said Robert Farrington, founder and CEO of

Most students end up defaulting to a 10-year repayment plan, then balk at the high monthly payments and seek other options, of which there are about 150 permutations, said Farrington.

Sallie Mae’s average repayment length is 7.5 years, but some end up with longer terms, Holler said. Borrowers later run into the next trap: still paying off their own student loans when their kids are applying to college.


The surest way to avoid loan problems is to have more money for college upfront. Sallie Mae’s study found that only 19% had bothered to apply for community scholarships.

Farrington sees similar disinterest in his yearly $2,500 scholarship to honor a “side hustlin’ student” doing everything possible to earn money. Despite national listings on all the relevant databases, the contest only gets about 120 entries. Farrington said he has to toss most of them because applicants do not follow the directions.

Last year’s winner created memes online to sell along with other merchandise. The year before that, Farrington awarded a young woman who got paid to sing the national anthem at local events.

“Yes, it takes time and work,” Farrington said, but if you are trying to pay for school, “you should either be working or applying for scholarships.”

Editing by Lauren Young and Richard Chang