When Americans hit a new high of $1.7 trillion in student loans in May, according to the Federal Reserve, three bills proposed in April by a group of US senators to simplify the financial aid process for students come at the perfect time.
Minnesota Democratic Senator Tina Smith and Iowa Republican Senator Chuck Grassley and Joni Ernst reintroduced the Understanding the True Cost of College Act and the Net Price Calculator Improvement Act while debuting the Know Before You Owe Federal Student Loan Act.
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These bills should be passed to counter the lack of financial literacy and crushing student debt in the US. These accounts will inform young people about their loan options and consequences through standardized information, guidance and accurate payment calculations. These elements are an integral part of informed decisions about their financial future.
The first account Understanding the true costs of college law, will increase financial literacy by helping students understand the terms they agree to when applying for loans through a simplified, standardized format.
The secretary of education is required by law to work with colleges, families and students to communicate information as clearly as possible to borrowers. For example, certain disclosures in a school’s financial aid offering will be required, including options to borrow less or more than recommended with a link to and an explanation of the U.S. Department of Education’s Loan Simulator Repayment Calculator.
All this, according to the proposal, must be stated “in a consumer-friendly way that is simple and understandable”. This includes certain language to be used in relation to loans, such as clear use of the word “loan” and explicit labeling of federally subsidized and unsubsidized loans.
Young people in the U.S are largely financially illiterate. The FINRA. of 2018 National study on financial capacity 30,000 participants asked five questions about everyday aspects of economics and finance, such as the effects of base interest rates and inflation. Only 17%, or 552, of the 3,250 18- to 34-year-olds surveyed were able to answer the majority of the questions correctly.
With simplified language and explanations, college students and their families will better understand how taking out a loan can affect their financial future, making more informed decisions regarding their financial situation.
The proposed bills will also make university more accessible to students from low-income families.
Financial literacy is highly correlated with income, with individuals in the highest income quartile scoring an average of 27% higher financial literacy than the lowest income quartile in a study by the Federal Reserve Bank of St. Louis.
This is not surprising, as income is strongly correlated with higher education. With low incomes and low financial literacy, many families assume that they simply cannot afford college.
The second bill, the Net Price Calculator Improvement Act will change the Higher Education Act of 1965 to improve the net price calculator, which shows students their tuition costs after financial aid that does not have to be repaid, such as scholarships, tuition waivers or grants from the school.
By looking at net price rather than general education, students from low-income families can discover that schools they thought were too expensive are within reach.
The What You Need to Know Before Owing the Federal Student Loan Act, the third bill, will improve federal loan counseling by requiring loan counseling and educational modules for every student borrowing federal loans.
Together, these bills will empower students from low-income families to take control of their financial future by providing them with easily accessible and readable resources to educate them on practical loan choices.
USF has already completed some of these steps. Students getting a direct loan for the first time should follow admission advice regarding the loan. All USF freshmen are also required to complete a financial wellness module before the semester begins. The module provides financial resources to students through the Office of Financial Aid.
The proposed legislation must be supported by the people and our representatives. The Cost of College Act never materialized when it was first introduced in 2017, a flaw that needs to be changed this time around. All accounts have also been in limbo in a committee for the past two months. They must be immediately prioritized and passed on when students return to school and must begin to make financial choices to pay for them.
Financial illiteracy and student debt are at record highs in America. By making student loan information and options more accessible to students and their families, young people are better equipped to take charge of their financial future, rather than falling victim to financial ignorance.
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