COMMENTARY | As noted by The Huffington Post, a recent study by an organization called the Young Invincibles found that 65 percent of students did not understand the type of loan they had taken out or the terms of repayment. Published on March 21, 2012, the study surveyed 6,500 graduate-level and undergraduate students who had taken out some amount of student loans. The results are troubling to loan officials who worry that loan repayment may continue to be a problem for recent college graduates who are having trouble finding jobs.
Loans are boring and confusing
Some of this is understandable, just from a standpoint of human behavior. Arguably, everyone knows that you are supposed to "read the fine print," but young students will not necessarily take the time to read language that is potentially boring or difficult to understand. Loan documents are written in such a way that the organization is covered legally. Creating easy to understand language is not necessarily the priority. Granted, this is typically an essential feature of fine print that is created to document all the aspects of legal compliance.
Large loan amounts are hard to grasp
Even if students grasp that they are borrowing a large amount of money, there is the reality that loans can be difficult to understand in general. This also applies to mortgages, which are theoretically taken out by responsible adults who will take the time to read the fine print. In addition, the size of loan can be difficult to grasp. Let's assume a student takes out a $40,000 loan. Do they really know how that monthly payment will impact their day-to-day budget when they graduate? If they took out a $50-$60,000 loan, would they really know the difference in terms of future financing when they graduate?
Students have a sense of optimism
As someone who teaches college students, I can tell you that it is not uncommon for students to have a strong sense of optimism about their future. Most of the time, that is a positive trait. Perhaps some of this optimism stems from a general lack of experience, or a sense of denial. When you take out a loan, you do so with the assumption that things will work out in the future. The college student may believe that they will get a high-paying job, pay off their loans in a few short years and then start acquiring all the material possessions that are part of the American Dream. Unfortunately, America is about buy now and pay later, which means that we as a country do not have a great track record of managing or understanding our consumer debt.
Do college students really not understand their loans? Or are they just naively optimistic to the point where they believe they do not have to figure out all the fine print? Regardless of the reason, thousands of students are now facing the cold, hard reality that they should have done a bit more reading of the fine print.
The author teaches at the college level and prior to entering the classroom he spent many years in higher education administration. On occasion he also enjoys the pure entertainment of substitute teaching at the high school and middle school levels.