Colleges, universities, banks and the government should all take cue from Tidewater Community College, in Virginia. Beginning next fall, the two-year college will require students to complete two budget worksheets in order to be eligible for student loans. According to USA Today, the school’s federal loan applicants will need to accurately describe their financial situation before and after graduation and explain how they’ll realistically be able to pay back those loans and meet the monthly payment requirements upon graduation. Talk about a reality check.
What’s more, Tidewater’s financial aid office stresses loan repayments should not surpass 15% of one’s take home pay. (I’m a little more conservative and think student loans shouldn’t exceed more than 10% of one’s monthly budget. See my calculations here.)
[Related article: Student Loans: How Much to Borrow?]
Tidewater’s move makes a great deal of sense. If I want an auto loan, the dealer requires a good bit of paperwork. A mortgage? Forget it. You need to provide DNA samples on top of mounds of documents. (Not really. But having just gone through the process, it wouldn’t surprise me if lenders went to that extreme. You still need to produce three years’ worth of financial statements).
I’ve traveled to many campuses across the country and met with thousands of students and educators over the past few years. One thing is certain: students are in the dark about how much they’re borrowing, what the interest rates on their loans are and how to manage them when they graduate. Ask a student walking on campus anywhere in this country if they understand how much they’ll owe each month when they graduate and I sadly doubt he or she will be able to tell you.
Why then shouldn’t we hold prospective students seeking education loans to some kind of accountability, to require them to understand their potential loan obligations and to do at least some math before applying for financial aid? Tidewater is but part of a very small group of colleges—mainly community colleges—that are putting students through this financial test and I hope it will spread like wildfire to all institutions—private, public, online, two-year, four-year, you name it.
What’s the worst that could happen?
[Resource: Get your free Credit Report Card]
Image: billaday, via Flickr.com