How do we improve financial literacy to better prepare our grads for successful repayment?
Today, many students experience student loan debt and find themselves in challenging situations during repayment. To help build financial literacy through real-life repayment experience, many schools are turning to tuition payment plans and institutional loans with an in-school payment component. The in-school payments help drive successful repayment by forming good financial habits before the rest of life’s financial demands begin to trend upwards—car payments, house payments, federal student loans, etc.
Recent data shows the tremendous importance of financial literacy as we tend to spend more than we earn. Roughly only 30% of Americans maintain a household budget, and approximately 40% of adults are not able to cover a $400 emergency expense.
The above statistics highlight the need for increased financial literacy training and education. From large online public universities to smaller multi-campus brick and mortar proprietary institutions, more and more schools are rolling out financing programs to address unfunded tuition gaps, maintain competitiveness and enhance enrollment as well as cash flow and retention, while reducing attrition. These financing programs are often designed with convenient and innovative repayment mechanisms such as, interest-free payments while enrolled, manageable monthly payment amounts, and student acknowledgement and collaboration during contract origination. Additionally, some schools will offer incentives in the form of interest rate reduction, or non-cash reductions to principal for graduation, exit counseling and auto pay. Additional best practices include capping of the loan term at 6-7 years, the continual harvesting of good contact information for both immediate servicing needs and future alumni relations, and the use of a third-party servicer. We have found that offering these types of incentives and following these best practices can help generate real excitement and enthusiasm among financial aid professionals and student borrowers.
Envision a financing model with $25 in-school interest free monthly payments to encourage awareness of a school balance owed with the opportunity to pay-in-full interest free before federal loan repayment. Coupled with the generally friendly credit terms, schools and their student loan servicer partners are encouraged to provide financial literacy and budgeting information (in addition to consistent regular billing notices) to students while enrolled to help them plan and save for unexpected financial hardships or emergencies. The big picture is to help prevent more students from dropping-out due to financial concerns and in-turn assist these students in avoiding student loan default which can damage credit scores, negatively affect employment opportunities, and reduce the future availability of credit at favorable interest rates.
Lastly, schools considering offering these types of programs for all of the benefits laid out above, should be aware of the changing and demanding regulatory landscape.
Recently, many states have begun requiring a specific Student Loan Servicer License to administer these programs. While Amendments to Regulation Z in 2009 require Truth-In-Lending disclosures (Solicitation, Application & Final) as well as a Private Education Loan Self-Certification Form if your interest free payment plan extends beyond 12 months. It is also wise to ensure proper federal and state contract verbiage to ensure compliance.
While internal school departments can do a fantastic job managing in-house financing programs, many suffer as the compliance requirements and consistent need for student reminders are cumbersome, and time-consuming. Founded in 1976 and honored to service your institutional loan, payment plan and accounts receivable management needs, UNISA is your one stop cash management solution providing the tools to help your institution and students succeed. Our experience shows that conversions from in-house operations or other third-party servicers to UNISA experience a significant increase in collections and reduction in administrative fees.
Please contact Matt Chinn at firstname.lastname@example.org to strategize on how together, a school and servicer partnership can provide multiple financing vehicles promoting financial literacy, student financial wellness and best practices in Higher Ed loan servicing.