Understanding Students' Loan/Debt Experience

Abstract

This research aims to understand students' decision-making process in taking out federal and/or private loans to finance college. The study conducted interviews with seven graduate and undergraduate students with loans and used phenomenology as the method of inquiry. The analysis is based on the theory of bounded rationality. Findings included the following: a) Students apply to Federal Direct Loans to finance their college program with limited knowledge and resources from institutions, loan servicing contractors and their family. b) Students show minimum concern about payback plans and mainly focus on schools. c) The phenomenon of procrastination and partial naivete of students is situated in the larger social context whereby student loan servicing contractors are unable to provide standard customer service. d) There is a culture of avoidance in talking about and directly dealing with student loans/debts among students. These findings suggest that higher education institutions should enhance financial education, career counseling and provide intervention to improve the financial literacy of students; student loan servicing companies need enhance their communication with student loan borrowers. Specifically, more consultation for first generation students and students from minority backgrounds can help them better manage their personal finances.