My wireless carrier recently sent me a text message:
You used 19767713 KB of 12634112 3G/4G data. Overage is 0.05/MB. Usage resets 12/08/2011.
That week, I spoke to a student who was applying to nursing school and was offered a package of loans. She was clearly informed of the total loan amounts and the interest rates, but not what the total monthly payments would be.
Simultaneously, I was reading an article in Rolling Stone about the Occupy movement, and this really resonated with me:
"There's no better symbol of the gloom and psychological repression of modern America than the banking system, a huge heartless machine that attaches itself to you at an early age, and from which there is no escape. You fail to receive a few past-due notices about a $19 payment you missed on that TV you bought at Circuit City, and next thing you know a collector has filed a judgment against you for $3,000 in fees and interest. "
Finally, I was reading Walter Isaacson's biography of Steve Jobs. Regardless of whether you agreed with him or not, Steve Jobs was passionate about Apple's products and committed to continuously improving them. He cared about how people used them.
What do these threads have in common?
Well, I appreciated that my wireless carrier was proactively notifying me of my data usage. But they did not really put much effort into actually communicating what I need to know. Even in 160 characters, they could have done much better than:
You used 19767713 KB of 12634112 3G/4G data.
First, I could not tell whether the first number was larger or smaller than the second. Can you?
That's because they used KB and no commas to parse the numbers into millions or billions or whatever.
They could have saved characters and increased the clarity of the message if they had converted to GB, and mentioned that the second number was my monthly cap:
You used 19.77 GB of your 12.63 GB cap on 3G/4G data.
Now I can see the first number is bigger than the second.
Then they told me the penalty was 0.05/MB. Notice how they use the unit MB, when in fact they quoted usage in KB, and I really want to know in GB. I would suggest "Overage is $50/GB"
Now this all begs the question: why are they waiting until AFTER I exceed the cap to notify me?
If they cared about their product and service, they would know that I would appreciate a warning, say, at the 10 GB mark (out of 12) because at that time I could adjust my data usage and avoid fees.
Instead, I got on the phone with them to try to get them to reverse a $300+ overage fee. (All this data use related to the fact that I had accidentally backed up a movie file over my mobile hotspot connection.) They "adjusted" my bill based on the fact that I have been a mobile subscriber with this carrier since 1997. I wonder if others would have parsed the text message the way I did, noticed an overage, and called promptly. Calling promptly to contest it was big, because the company had not actually generated my bill yet, and so could still "adjust" things on the data level without having to make adjustments to the actual bill. A less informed consumer might have been stuck with the $300+ tab, and fees, penalties, and ultimately a collection agency.
The relevance to student debt is that apparently we are entering a student debt bubble similar to the mortgage bubble. A common cause of all these problems is that companies are not communicating numbers clearly to a public that is not terribly numerate (literate in the use of numbers.) My student had not yet translated the loans and interest rates into monthly payments over a defined term - which is how you really can make sense of payments.
Based on my coaching, she inquired and calculated and I heard back from her:
"The Stafford loan I received for 5,500 per semester is a little confusing for me. The rate is 3.4% for loans between 2011-2012, and 6.8% for loans between 2012-2013, and the term is 10 years. In either case, an origination fee of .5% is deducted from each disbursement- I've looked this up and it seems it's an extra fee added on for each monthly payment. I can defer this payment up to 6 months after graduation. I used an online financial aid calculator for the loan. I calculated each at their separate rates- so that'd be $5,500 at 3.4% for ten years (plus the fee), plus $16,500 at 6.8% for ten years, and that came to a total of $245.24."
She did the same for other loans, all with different rates and terms (Perkins, Unsubsidized) and came up with
"In total, my monthly payments would be around $328.41 per month."
That's now comprehensible because you can relate it to a monthly take-home on your paycheck, and to expenses such as a car payment or rent. Notice how we went from how the loan is quoted per semester at variable interest rates (because her school term spanned two rate periods), to one monthly payment for ten years.
My student had not really paid a lot of attention to the amount of debt her parents were going to take on. So I pointed out that she should really be helping her parents make sure the debt was affordable for them. They might lose their jobs or pension and she might end up having to carry their portion of the loan or otherwise supporting them in their old age!
"I calculated my parents loan payment- it would be about $965.56 per month, the rate is 7.9% over ten years with a 2.5% origination fee."
These are large monthly payments for a middle class family. The investment in a nursing career might well be worthwhile, but regardless, it's important to translate the blizzard of numbers from the university, into a set of total monthly payments.
Most human beings are blessed with huge, flexible brains capable of learning the basics of discounted cash flow calculations, including compounding interest. I'd like to see companies and universities putting their collective minds to work on simplifying debt communication; and of course students and families should take on the task of educating themselves to the monthly payment and other implications of the bargains they are striking. I try to approach such tasks as puzzles. It can be fun and confidence building for anyone to brush off our math skills and figure out the details. For anyone who knows what I do in my day job (medical decision making), it should be obvious that all of this applies equally to interpreting the statistics we may hear about risks and benefits of treatments. We are blessed to live in an age where some internet research, or consulting a librarian or consumer/health advocate can usually generate better understanding at low cost.
Occupy your mind, and your wallet (and body) will thank you.