Students and Financial Literacy

Students and Financial Literacy

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2017-09-23

 

There is a huge gap in financial literacy among American students. With the push for American students to go to college and keep pace with the rising cost of higher education, the financial literacy gap leads many students to make painful early mistakes and financial blunders.

The sad truth is, when college students make poor financial choices, these problems can often follow them throughout their lives, unless they make some serious habit-breaking changes.

Once of the biggest gaps that graduates face has to do with student loans. What many students fail to see in a big-picture frame is that a student loan is actually a loan on their future income. 

Students borrow way more than they will ever be able to repay later in life. And unfortunately, many students fall into the too-poor-for-college, too-rich-for-financial-aid scenario. However, making poor financial choices has more to do with a lack of education in basic financial concepts.

Students need to make sure they understand what it will take to repay the student loan debt they will be taking on. They need to realize that the choices they make to take on debt early in life could have a profound effect on their lives after college. For example, taking on too much in student loan debt could hurt their credit scores all the way to preventing them from getting certain types of jobs, purchasing a home, and so on. Without the basics of financial literacy, this is a problem that many will continue to face.

Having said that, could a simple letter in the mail have a major impact on student debt? It would seem so. Indiana University officials are saying that they have effectively reduced student borrowing by as much as 18% since 2012. That was when the university began sending out annual letters to students, informing them of their total loan debt and estimated future payments. This was part of an effort to boost financial literacy among students. 

This trend was noticed by the powers that be, and inspired by IU, the state of Indiana started requiring all colleges that accept state aid to send out similar annual letters. Nebraska followed suit soon after. Representative Casey Cox (Indiana - R) says he gets phone calls from officials in other states interested in adopting the policy. In fact, U.S. Senator Joe Donnelly (Indiana - D) has proposed requiring the Department of Education to keep a list of financial literacy best practices, including student loan letters as described above. 

The student debt problem has reached epic proportions. The class of 2015 was named by The Wall Street Journal as the “most indebted class ever.” With more and more students in need of financial aid to afford their college tuitions, having them well informed when it comes to debt will no doubt change their borrowing habits for the better. 

But the letters were only one part of a bigger push for financial literacy. The program included counseling for students, a podcast, and a new website with quizzes and calculators. The university also adjusted their financial aid process to make it easier for students to “say no to loans.”

The bottom line is that financial education has proved itself in its value to the public, and this has once again borne true in the case of these students. Less debt is better than more. More financial knowledge is better than less. You would be hard-pressed to find a sensible argument against these statements.

 

 

 

IMPORTANT DISCLOSURES

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. 

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. 

Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC

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516.829.8374 X 232
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