If you’ve picked up a newspaper in the last five years you’ve no doubt seen concerning headlines detailing the plight of college students and recent grads that are drowning in the massive amount of student loan debt they’ve accumulated.
With the national student loan debt having reached $1.1 trillion, and the average student walking away with a diploma and $26,000 in debt, these shocking numbers are hard to ignore.
Who’s to blame?
Critics blame the ever-increasing costs of college tuition and related expenses for the country’s massive student loan debt, and while there is indeed validity in this argument, the exorbitant price tag on higher education is only a piece of the puzzle. If you dig a little further, you’ll find the problem has much deeper roots: Students in the U.S. are severely deficient in even the most basic financial literacy. This deficiency hinders them from understanding what they’re getting into when they take out loans, and what their options are when they have to pay them back, further compounding their financial burden even after they leave school.
The many incoming and returning college students who are unprepared to successfully manage their finances reflect a continuing trend of financial illiteracy in our nation’s youth that has been consistent over the past decade. A recent report by USA today evidenced this literacy problem with shocking statistics:
“The Treasury Department and Department of Education have teamed the past three years to assess financial literacy in U.S. high schools, and the results haven’t been pretty: the average score of almost 76,900 students in 2010 was 70%,” USA Today reports. “Last year’s testing of about 84,000 students and this years of about 80,000 students were both a point lower: 69%… A biennial survey by Jumpstart Coalition for Personal Financial Literacy, conducted from 1997 to 2008, showed high school seniors doing even worse. In 1997, the average score on a 31-question financial literacy exam given as part of the survey was 57.3%. In 2008, the average score was at its lowest ever, 48.3%.”
How does financial literacy directly contribute to the student loan debt problem? When a financially burdened student does not fully understand or is not fully aware of the different repayment options available they will sometimes just terminate payments. After nine months of this, the student defaults on their loans. Defaulted loans can negatively impact credit scores, a financial no-no that can do significant damage far into the future; it can lead to wage garnishments; and if left unresolved for long enough, it can minify Social Security checks.
And these defaults are happening a lot.
Between financial hardship and misunderstanding of the repayment process, more than 7 million borrowers are in default on a federal or private student loan, as reported by the Consumer Financial Protection Bureau. In 2012, the Federal Reserve Bank of New York reported that the proportion of delinquent student loan debt had surpassed that of credit card balances, nationally. Further, an Education Sector study published in 2013 reports that student loan default rates have actually surpassed graduation rates at more than 500 American colleges and universities.
The financial mentality that students have developed where their confusion leads to inaction and/or denial has far-reaching repercussions that extend way beyond their student loan debt and into every aspect of their financial well-being.
This issue and the implications of these numbers becomes increasingly significant when placed within the context of the environment that young adults now face after graduation: a competitive job market, rising personal debt, and a complex, credit-dependent world economy that puts huge pressures on students and graduates to plan and manage their financial future. The big picture repercussions of the nation’s financial literacy deficiency are reflected in correlating statistics found in the 20-29 year old demographic:
$26,000: Average student loan debt for class of 2013 (CNN Money 2013)
$35,200: Average amount of college-related debt for class of 2013 (Fidelity survey of 750 college graduates)
$45,000: Average debt for those 20-29; includes everything from cars to credit cards to student loans to mortgages (PNC financial independence survey, March)
$1,800: Average credit card debt for those 20-29 (PNC financial independence survey, March 2013)
12.4%: Unemployment rate for those 18-29, well above the national rate of 8.2%; (BLS data, March 2013)
4: States that require at least a one-semester course in personal finance for high school graduation (Council for Economic Education, 2013)
13: States that require a high school course in personal finance (Council for Economic Education, 2013)
60%: 18- to 34 year-olds not keeping a budget (NFCC financial literacy survey, 2012)
81%: College students who underestimate how long it will take to pay off a credit card balance. (Council for Economic Education, 2013)
30%: Amount of income the average 18-24 year puts towards debt repayment (Council for Economic Education, 2013)
What can be done?
Experts say teaching students about what their repayment options are before they take out loans can help reduce debt.
“It comes back to a financial literacy issue and making sure students understand what they’re getting into, how much they’re borrowing and understanding there are different options for them at the end,” says Megan McClean, director of policy and federal relations at the National Association of Student Financial Aid Administrators.
President Barack Obama pledged in a speech in August that the Department of Education will reach out to struggling borrowers by encouraging them to enroll in income-based repayment plans. Of the millions of federal loan borrowers currently in repayment, roughly 10 percent are enrolled in one of these plans, according to the Consumer Financial Protection Bureau. When you compare the 10 percent enrollment rate to the number of students going into default, it is clear that these programs are hardly being used to their full advantage, and that is due to the simple fact that students just don’t know about them. It’s imperative that borrowers are getting valuable and up-to-date information about repayment options before they get to the point where they find themselves defaulting. The key is letting students know that these plans exist.
But default rates are only a small part of the financial illiteracy equation. Financial education should start much before the college level, extend much further than the immediate post-graduate level, and cover a much wider base of information than just student loan topics. The level of knowledge needed to understand the principles of student loans, debt, and borrowing evolve from much simpler financial concepts that can be easily introduced, taught and learned at the K-12 level. And according to a Bank of America sponsored poll from Harris Interactive last month, a nearly unanimous 99% of adults now agree that personal finance should be taught in high school.
Several states—including Tennessee, Virginia, Missouri and Utah—have mandated that financial education be included in K-12 curriculum, but in the states where this education is mandated, less than 20 percent of teachers feel competent enough to teach the material, indicating the financial illiteracy issue is not just a student problem.
Shannon Schuyler is the corporate responsibility leader at PricewaterhouseCoopers (PwC), an accounting firm that promotes financial literacy among K-12 students and teachers. Through her company, Schuyler tries to spread the message of the importance of financial literacy and emphasize how it can help individuals lead better lives in the future. If students understand the financial playing field before choosing a college, they might have a better grasp of the consequences of massive amounts of debt and the effect it can have on their life down the road, like where they are able to live, what type of lifestyle they are able to afford, and even how soon they can get married or start a family.
Again, the numbers can back this up. American Student Assistance, a non-profit organization, conducted a recent survey with shocking results. Nearly three-quarters of students said they’ve put off saving for retirement because of student debt; 43 percent said they’ve delayed starting a family and 27 percent said they found it difficult to buy daily necessities because of loan payments; and close to 70 percent said they were confused about the different loan repayment options.
Financial literacy proponents and experts, Schuyler among them, are confident in the idea that educating students sooner about the cost of college, how much they need to borrow, how to repay loans and what their future earnings may look like could help solve this problem.
Now, more than ever, it is important to encourage financial literacy by empowering our nations’ students with the educational tools and resources necessary to strengthen their understanding of proper money management habits and prepare them for a successful future of financial health.
This post was provided by Rob LaBreche, founder and CEO of iGrad, who was a guest on College Smart Radio “Tackling the Runaway Costs of College” on October 19th, 2013. Listen to this broadcast on YouTube here.
Photo Credit: Chris Potter