Student Loan Customer Journey: Federal Loans
While there is limited information on the decision-making process for students looking to take out federal student loans, a survey report published by NERA Economic Consulting in 2012 suggests that students in the United States consider the college counselor and the college website their top sources of information for federal student loans. It also suggests students take out federal student loans because of the more favorable features of the interest rates of federal loans. Students who are choosing a loan program from a range of federal student loan options are expected to take into account the fees, the interest rates, the repayment terms, and the options for pausing payments in case of financial difficulties, but the NERA survey suggests that many students do not have a proper understanding of these loan parameters and that their decisions were not as informed as they should be.
We commenced our search regarding the decision-making process for students looking to take out federal student loans that are serviced by lenders by looking for surveys of federal student loan borrowers, interviews of federal student loan borrowers, and students' accounts and reviews of their federal student loan experience. We scoured databases of scholarly literature as well as websites of concerned organizations such as the National Association of Student Financial Aid Administrators (NASFAA). This did not yield any useful result as we only found students' reviews of their federal student loan experience on Better Business Bureau and Best Company which did not include information on their decision-making process in the course of choosing the loans.
We also came across different articles about federal student loans, but none of them included information on the decision-making process or customer journey of students planning to get federal student loans. They only provide options, advice, or instructions. For example, personal finance company, NerdWallet offered advice and instructions on obtaining a federal student loan. The information obviously did not cover the actual decision-making process of students.
We expanded our search to include student loans in general. We hoped to find sources which discussed federal student loans in the course of providing information about student loans in general. We found a recent survey of American student loan borrowers, but the survey provided very little information with respect to the decision-making process for federal student loans.
We then decided to consider older sources. We typically use sources published within the last 24 months, but the lack of relevant information made it necessary for us to search beyond recently published sources. This strategy led us to NERA Economic Consulting's survey of student loan borrowers, which was the most relevant source we found in answering this request. Although the report was published in 2012, it is from a credible source and it contains relevant details about the decision-making process of federal student loan borrowers. We also found a 2016 survey on student loans but it only provided us with information on how information on student loans is obtained.
We determined that the loan servicers or lenders of federal loans are not chosen by the students but are assigned to them by the U.S. Department of Education. Hence, the selection of loan servicers or lenders is not part of the decision-making process of federal student loan borrowers.
SOURCES OF INFORMATION
In 2012, the sources of information of students looking to take out federal student loans only were the college counselor (58.9%), the college website (37.1%), either or both the college counselor and the college website (83.5%), the bank website (1.9%), the bank counselor (1.1%), either or both the bank website and the bank counselor (17.3%), mail solicitation (4.5%), advertising (0.9%), and others (17.5%).
In 2012, the sources of information of students looking to take out both federal and private student loans were the college counselor (60.9%), the college website (33.2%), either or both the college counselor and the college website (80.8%), the bank website (14.2%), the bank counselor (4.0%), either or both the bank website and the bank counselor (17.2%), mail solicitation (11.1%), advertising (2.8%), and others (15.9%).
As far as marketing or advertising was concerned, students looking to take out both federal and private student loans learned about their options through the following methods: private student loan materials provided by school (54.5%), mail solicitation (40.8%), email messages (30.8%), online advertisements (29.2%), newspaper or magazine advertisements (11.0%), phone marketers (9.2%), text messages (1.3%), and others (16.3%).
In 2016, 85.11% of students obtained information on student loan from their parents. In March 2019, 22% of students stated that their school offered them a range of loan options.
In 2012, many borrowers were aware that fixed or low interest rates were more desirable than variable or high interest rates, so interest rates may have been a decision criterion for choosing a loan program among available federal student loan options.
Students selecting a loan program from a range of federal student loans are expected to consider the fees, the interest rates, the repayment terms, and the options for pausing payments in case of financial difficulties, but there were experiences in 2012 which indicate that many federal student loan borrowers had a poor understanding of these issues and that their decisions were not informed decisions at all.
In 2012, the features of the interest rates of federal loans, including either or both lower and fixed interest rates was the most commonly cited reason some borrowers took out federal student loans only. Around 40% of borrowers who took out only federal loans did so for the above reason.
The easy availability of federal loans was another frequent reason some borrowers took out federal student loans only. Federal loans were usually offered by their school authorities in the course of filling out the Free Application for Student Financial Aid (FAFSA). The borrowing process is streamlined by the FAFSA through the school of the borrower.