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Indiana University used this one weird trick to cut student debt

Libby Nelson is Vox's policy editor, leading coverage of how government action and inaction shape American life. Libby has more than a decade of policy journalism experience, including at Inside Higher Ed and Politico. She joined Vox in 2014.

Students are graduating with more debt than ever before: about $33,000 for the average four-year college graduate with loans in the class of 2014. Indiana University, though, found a simple way to get students to borrow less: telling them how much they already owe when they're taking out loans for the next academic year.

The university, where the average senior with loans graduated with nearly $29,000 in debt in 2012, began sending students letters each year telling them how much they'd already borrowed, what their interest rates were, and what their monthly payment would be after graduation.

And in response, students seem to have borrowed less. It's too early to tell how much the behavior of individual borrowers changed, but in aggregate, students at IU took 11 percent less in federal loans during the 2013-'14 school year.

Indiana is celebrating this as a success. The experiment indicates how little many students know about what their financial obligations will be after graduation. But it's not clear whether IU's solution gets at the root of the student debt problem: Are students really borrowing more than they need, or are there other factors driving high debt?

Why student loan borrowers often don't know their monthly payment

If you're taking out an auto loan or a mortgage, you already know what your monthly payment will be. If you're paying your credit card bill, there's a box on the statement telling you how long it will take to pay off the debt if you make only the monthly minimums. But student loans often don't come with such clear-cut information attached.

That's because student debt doesn't accumulate all at once; it piles up in installments, year after year, often with different interest rates. And financial aid can be confusing. Students can borrow different types of federal loans, or combine federal loans with private loans from banks. All this can make it difficult to tell how much you'll owe and what your payments will be.

Indiana tried to fix that with a one-page summary of what students owe so far, what kinds of loans they've taken out, and what their interest rate is.

Indiana University's student debt letters.

(Indiana University)

After the letters were sent, students started asking for more help to manage their student loan debt, James Kennedy, an associate vice president at IU, told a congressional committee in June. And the average debt for graduating seniors with loans dropped slightly between 2012 and 2013, from $28,769 to $27,619, even as average debts were increasing nationwide.

Why are students borrowing so much?

Some economists are concerned that student loan debt is making it harder for recent college graduates to buy houses and cars, as well as lessening the amount of money they have to spend and boost the economy. The Indiana University experience suggests that some students changed their behavior once they realized how much they were borrowing.

But experts disagree about whether students who borrow more money than they really need is a widespread problem, or whether outside factors — like higher tuition prices — have made borrowing large amounts a true necessity.

Some colleges argue that they don't have enough control over how much debt their students are taking on, and that this means some students are able to borrow more than they really need. Colleges can't change how much groups of students are allowed to borrow — so, for example, a student living at home can take on just as much debt as a student living in the dorms.

The professional organization for college financial aid officials, the National Association of Student Financial Aid Administrators, recommends that colleges should be allowed to set lower loan limits for some students, such as students attending less than full time. Sen. Lamar Alexander, the Tennessee Republican who chairs the Senate education committee, agreed, saying in May that some students borrow too much and that he's looking into legislation that would allow colleges to limit it.

Some researchers aren't so sure this is necessary. "It’s hard to convincingly argue that overborrowing for an undergraduate degree is truly an epidemic," wrote Robert Kelchen, an assistant professor of higher education at Seton Hall University who studies financial aid.

If anything, he said, his research suggests that students aren't always borrowing enough. About one-third of colleges underestimate the cost of living for their students by more than $3,000, and students can't borrow more than colleges say they'll need.

That can seem counterintuitive in a time of concern about students with tens of thousands of dollars' worth of debt. But the most important factor for being able to pay back student loans is graduating from college. And for some students, taking out more loans means they'll have to work fewer hours and have more time to devote to their studies.

Indiana's letter, and students' response, suggests that at least some students feel they could be more mindful about their borrowing. But going too far to discourage students from taking on debt could have unintended consequences of its own.