High schoolers think student loans are risky, and they’re forgoing billions of dollars in aid

Many borrowers across the nation are eagerly awaiting more details about President Joe Biden’s hotly debated plan for student loan forgiveness. While such a plan could help millions of people, it won’t help current high school students, many of whom will need to take out loans to pay for college but are at the mercy of a financial aid system that feels dauntingly complex and potentially high risk.

Education technology provider EverFi surveyed over 18,000 students who took an online course about financing higher education. In a pre-course survey, more than one-third of students said they would describe federal student loans as risky; that number jumped to 40% among Black and Latino students.

For many students, financial aid is the only way to afford a college degree. But students are apprehensive, the risks they perceive can be real and pernicious, and their high schools are struggling to support them: Only about 15% of students surveyed said that they had talked to an adult at their school about paying for college.

Kim Cook, CEO of the National College Attainment Network (NCAN), attributes this partially to the flood of pandemic-related issues that schools must address, including student mental health needs, housing and food insecurity, and massive learning loss. She acknowledges that schools are operating in a difficult context but fears that if they don’t prioritize the work of helping students figure out how to pay for college, it could have far-reaching consequences.

“School districts are triaging,” Cook said. “There are a lot of fires to deal with at the district level. But [if college access and affordability work is deprioritized] there are long-term implications for students personally, for their communities, for their families, and—it’s probably not too bold to say—for our country and its preparedness to have an educated workforce.”

Financial aid is a necessity for many students; NCAN reports that only 41% of community colleges and 23% of public four-year institutions are affordable for the average low-income student who has received a Pell Grant—and yet the systems surrounding it are complex. If students and their families lack the knowledge and support to navigate those systems, they can face very real dangers.

“For many kids, it’s the first time in their lives that they have access to money, and they don’t have a sense of the interest that accrues,” said Richard Fossey, professor emeritus at the University of Louisiana at Lafayette. “They borrow as much as they’re allowed to borrow. We have many student apartments that are touted as luxury housing. This looks great to kids. It has a swimming pool and nice appliances, but they’re paying rent with borrowed money.”

Because colleges and universities have an incentive to expand their enrollment pipeline and fill seats, Fossey fears that some may market more aggressively toward low-income students who will need to borrow large sums of money to cover costs, especially at elite colleges. In some cases, the cost of attendance at these institutions balloons beyond the amount covered by a student’s financial aid package, and parents may fill the gap with a PLUS (parent loan for undergraduate students), an unsubsidized federal loan issued directly to parents that accrues interest while a student is in college. Fossey has seen these loans wreak havoc for some students and families.

“I think the parent PLUS loan program should be abolished right now,” Fossey said. “You can hardly ever discharge them in bankruptcy, and a lot of parents don’t understand that [they’re] liable [for the loan]. I’ve heard people say, ‘I thought my kid was going to pay this off.’”

Michele Streeter, associate director of policy and advocacy at the Institute for College Access and Success, notes that although federal student loans are generally the safest of all financial aid options, students can still be faced with unexpected and ruinous consequences if they default on their student loan payments. These could include having a driver’s license or professional license revoked or having wages garnished.

“There’s a weird tension, because [the federal student loan program] is an access program, but it’s also a credit program,” Streeter said. “If you default on your federal student loans, it can derail your entire life.”

Though there are theoretically protections in place to prevent borrowers from defaulting on their federal student loans, Streeter sees that many of those protections aren’t functioning properly. She offers the example of income-driven repayment (IDR) plans, in which borrowers’ monthly payments should be set at a level that is affordable given their income and other expenses. In some cases, the formula used to calculate monthly payments under an IDR plan is flawed and doesn’t account for other forms of debt a student is holding. Or monthly payments may be so low that they don’t cover the accruing interest on a loan, leading the balance to grow even as a borrower makes payments.

Given the complexities and potential risks that come with student loans, it’s understandable that students—especially those who are the first generation in their families to attend college—might shy away from seeking financial aid. Unfortunately, this means that students are forgoing not only loans but also grants that would not need to be repaid. According to a recent NCAN report, $3.75 billion in Pell Grant funding went unclaimed in 2021.

Marilyn Dement, assistant director of graduate studies at the University of Houston Downtown, wrote a recent dissertation on factors that affect community college students’ decisions to apply for financial aid. Many students she worked with were averse to loans and planned to take fewer classes so that they could work more hours to finance their degree.

“First-generation students might not understand the difference between a grant and a loan,” Dement said. “I try to explain that you’re qualified for financial aid, and you could have received grants that would have been better than working. But students didn’t have a guiding hand to help them through it.”

Dement laments that when students forgo financial aid in favor of working, it may mean that they don’t earn a degree.

“The longer it takes to finish out school, the more risk that you’re not going to finish the degree,” she said. “Life happens. Something will come up. A car will break down or a parent has lost income so [a student] needs to [drop out of school] to work more.”

Many of the students Dement spoke to said that their high school wasn’t helpful in navigating the financial aid system, but some states are trying to change that. In 2018, Louisiana became the first state to require completion of the Free Application for Federal Student Aid (FAFSA) as a high school graduation requirement.

Tireka Cobb, field outreach services director for the Louisiana Office of Student Financial Assistance (LOFSA), notes that this mandate has never kept a student from graduating—students can also fulfill the requirement by applying to a state scholarship program or submitting an opt-out form—but it has led Louisiana to be one of the top states for FAFSA completion every year since its inception.

Though the FAFSA is only one piece of the financial aid puzzle, it’s an important one: Submitting the FAFSA is a student’s first step in qualifying for federal grants and loans to pay for college. That’s why LOFSA focuses much of their efforts on initiatives that support FAFSA completion, including identifying students who have errors on their FAFSA and reaching out to help, coordinating district-wide FAFSA completion events, and hosting workshops for students and families on financial literacy and the financial aid process. LOFSA also offers training and support to schools and counselors across the state.

“This can’t be on one person at the school,” Cobb said. “It’s a team effort, from front-office staff, to parent organizations, to counseling staff. It’s not just about completing the FAFSA [as a graduation requirement], but we help connect the dots about why you’re completing the FAFSA and what difference it will make for you in terms of funding for college.”

Summit Everest, a public high school in California, has embraced this mentality and offers students robust support in planning for their financial future. Students meet daily in small groups and weekly one-on-ones with a mentor teacher who supports them throughout the college application and decision process. Mentors help students decipher their financial aid award letters and understand the various types of aid available to them. The school also hosts workshops about financial aid and supports students to create an in-depth financial plan based on the future career they plan to have.

Daniel Torres Aguilar, a current senior at Summit Everest, will be the first generation in his family to attend college when he matriculates at Harvey Mudd College this fall. Like many students, Torres Aguilar is wary of student debt and didn’t want to take out loans to finance his college education.

“I was worried about financial aid, and my goal was to never take out loans,” Torres Aguilar said. “[My family and I] don’t have the luxury to take out a loan and pay a high interest rate.”

Fortunately, because Torres Aguilar and his family have a strong understanding of the financial aid process, he was able to spot and correct an error in his financial aid package. The college’s revised financial aid offer, along with a local scholarship that Torres Aguilar received for exemplary community service, will cover the full cost of attendance.

Though schools like Summit Everest are coming up with innovative ways to help students navigate the complexities of financing a college education, relying on individual schools and states won’t solve the larger problems in the federal student loan system.

The Biden administration recently announced fixes to the IDR and Public Service Loan Forgiveness programs that aim to cancel federal student loan debt for eligible borrowers and fix long-standing flaws in the administration of these programs, but Streeter worries that the measures don’t go far enough and are flawed in their implementation.

For example, in some cases, a borrower must take several steps to be eligible for loan forgiveness rather than having their debt automatically canceled. Though this may seem like a small bureaucratic hurdle that is easily cleared, Streeter argues that it’s problematic because the borrowers most in need of student loan relief are also likely to be the most overwhelmed and therefore the least likely to engage with the system and take the necessary steps.

“[The Biden administration] has been doing a lot [to alleviate student debt], and we should applaud them for that,” Streeter said. “But there needs to be more done. It goes back to the resource question. A lot of people are working really hard at [the office of Federal Student Aid], but there aren’t enough staff and money to do all of it.”

Streeter likens the current federal student loan program to a Frankensteinian behemoth: Pieces have been layered on and changed by different administrations over time, resulting in an incredibly complex system that is desperately in need of reform.

“We haven’t invested in college affordability on the front end, so the federal student loan program is trying to do the work of all the college affordability [initiatives that haven’t been implemented],” Streeter said. “It was never intended to bear that weight. People don’t have enough money to pay for college, and that’s not right. [We need] a whole new system that accounts for the reality of families’ circumstances.”