Should colleges and the Department of Education re-think how they present students loan and earnings data?
Part three in a 3-part series originally presented as a report written for the Manhattan Institute
This is the third and final part in a series of ideas proposed in a report that I wrote for the Manhattan Institute last year around how small shifts in the way cost and pricing data gets conveyed to students and families can produce better enrollment and completion outcomes. (You can find Part 1 and Part 2 here)
In this piece, I propose that we can help students and families make better decisions around college affordability by taking current data around debt and earnings and just repackage it in ways that are more understandable given how they think about paying for other things in their lives.
A big hiccup with the education cost and future earnings data that’s put up to help students make good college choice decisions is that they’re almost exclusively presented in weird, annualized terms that just make no sense to the students and families reading them. For example, if prospective in-state students at Florida State University look at the College Scorecard they will see that the current price is between $10,000 and $20,000 per year, depending roughly on their family’s income. They will also see that on average, a graduate of Florida State earns about $46,000 annually after 10 years.
Is that good or bad deal?
The numbers may be accurate, but they’re not very insightful. While $46,000 can seem like a lot of money, nobody’s getting cut a one-time check for the whole amount. Instead it gets doled out in monthly increments, which, in turn, are used to pay expenses that also conveniently tend to be billed monthly.
To answer the question though, a $46,000 annual gross salary translates into roughly $3,200 per month after taxes, which would sound fine — if you lived in Buffalo, New York. But in Miami, where the average rent for an apartment is about $1,700 per month, maybe not.
Anyone who has ever bought a car from a dealership knows just how important monthly budgeting is to figuring out if anything is affordable. In fact, car salesmen are experts at helping consumers turn the cringe of a $30,000 or $40,000 loan into a reasonable monthly payment.
Indeed, from mortgages to auto loans — the largest debts most people are ever likely to take on — the process actually starts by determining how much one can reasonably afford on a monthly basis.
Yet in education, we again seem to do everything in the opposite way. Whether it’s the Department of Education’s College Scorecard or most colleges’ aid notification letters, students get presented numbers like an annual cost of $10,000 rather than a financing option for say $103 a month or that extremely uninformative $46,000 a year salary I mentioned earlier.
These numbers aren’t being put up for bragging rights; they get published because we think people need to know them to make good choices. Giving the people the right information in the wrong way ends up being a big miss when you consider that the half the purpose of an aid award letter or a school information fact sheet is to help folks know whether the degree program they’re pursuing is affordable to begin with.
An easy fix
Financial aid award letters, net price calculators, and the College Scorecard could all provide upfront information in ways that make it easier for students and families to make better budgeting decisions long-term.
It should start with the College Scorecard. First, earnings data ought to be repackaged. Let students and parents know up front how much, after taxes, they can expect to take home on a monthly basis. Sure tax withholding amounts change under different scenarios, but this is just about giving people rough guidelines for shopping purposes, and it would be no different than any of the dozens of free paycheck take-home estimators offered by financial institutions online today already.
Second, the Scorecard needs to change how it presents loan repayment data. Right now, it shows average monthly payment for a given student loan amount under the standard 10-year repayment plan even though millions of borrowers today are enrolled in income-driven repayment (IDR) plans that result in lower monthly payment options. If determining affordability is the goal, why present the higher monthly payment instead of the lower one?
Third, the Scorecard should package these two numbers together. Put the typical monthly student loan IDR payment against the typical monthly earnings number and present future loan burden as a percent of future earnings. If helping consumers make informed decisions is actually the end-game then this ratio is about as good as it gets for knowing, at least in the short run, what a program or school’s ROI looks like.
In the case of school aid award notifications (financial aid award letters) these too could, at the minimum convey estimates of borrowing in terms of typical monthly payments. They could also help borrowers further by including projected future monthly earnings information based on students’ programs of study. Net price calculators can be mandated — through a future reauthorization of the Higher Education Act — to copy this structure and basically ensure that the consumer shopping experience consistently provides data in ways that are more reflective of how students and parents think about financing in every other aspect of their lives.
The benefits to all of this are fairly obvious. Repackaging data into more friendly and familiar terms simply makes it easier for students to weigh costs against benefits, which lets them develop a better sense of any program’s return on investment.
An estimated $48,000 annual salary will always be less useful to a prospective student than an estimated monthly take-home pay of $3,200 is. A family learning they may have to take on an additional $14,000 in PLUS or private loans will almost invariably experience far more angst about taking on debt then a family that’s told that the cost of covering the gap is instead a $175-per-month loan payment for the next 10 years.
Pragmatically, most of the changes proposed here are very simple to implement. In the case of the College Scorecard, the only new data being proposed is a typical student loan payment based on income-driven repayment plans but the Department has this information. Take-home income would be as much an estimate as any annual number already being provided and if precision truly matters it would be easy to just embed a take-home pay calculator that let students customize based on their state or other unique expenses. For the rest, we are talking straightforward manipulation of numbers that are already being presented anyway.