Student Loans – A Primer – Part 1

In our last blog we introduced Jason and his friends and told the story of how they had come to their senior year in college and realized they did not know how much money they had borrowed to attend college. They also didn’t know the interest rates or even when they would have to begin repaying the loans. They appeared to lack any understanding of personal finance. Put another way, they were largely financially illiterate. At the end of this blog, you’ll find links to some resources to help you increase your financial literacy. We will have more about financial literacy in future blogs, but now we would like to give you some basic knowledge about student loans.

Federal student loans are complicated, and the language you use to describe them only adds to the difficulty. Student loans consist of two types: direct subsidized loans and direct unsubsidized loans. The amounts the student can borrow under these loans are limited and the fees and interest to be paid are often not understood by the borrower. These loans are from the federal government. Then there are “private loans” which are obtained from banks, credit unions and other private lending companies. The interest rates for federal loans are lower than the interest rates for private loans, and there are also federal programs for loan forgiveness. Yet 7.9% of the outstanding student loan debt is from private loan borrowing.

If federal loans are less expensive and have other benefits, why would you take a private loan? It’s because you need more money than the federal government allows you to borrow. Private lenders offer different loan rates and different loan obligations, requiring the lender to have a better understanding of how loans work.  Private loans also almost always require a cosigner.

Cosigning a loan is serious business, and it’s important for both the borrower and the cosigner to understand the obligations cosigning a loan entails.

A cosigner, typically a parent, guardian or other family member, becomes legally responsible to pay the loan payments if the student loan borrower is unable do so. Typically, the cosigner is trying to help the borrower and does not think about the consequences of cosigning. Even if the borrower always makes the loan payments, the cosigner could be under that obligation for the entire term of the repayment, 10 years or more.

Also, a cosigner’s credit rating could be adversely affected when required to report the cosigned obligation on an application to lease an apartment or on a loan application to, for example, buy a car.

The financially literate borrower understands the obligation he or she is asking a cosigner to take on. Consider this before making the request, and you should inform the possible cosigner of what the obligation entails. In this case, being financially literate could save you an embarrassing circumstance with someone who cares about you should that person be denied a loan because of the cosigner obligation or because you become unable to make the loan payments.


For more information on cosigning a loan, go to https://www.consumer.ftc.gov/articles/0215-co-signing-loan

Improving your financial literacy is something you can do by yourself or, better yet, suggest that it be a family project. Everyone will benefit from it. There are many free resources on line. The resources listed below are ones we believe would be very helpful to consider using.

Next Gen Personal Finance https://nextgenpersonalfinance.org  This is an excellent source of personal finance information and tutorials for students and parents. I suggest you start here.

University of Wisconsin financial Literacy Center https://www.uww.edu/adminaffairs/finance/financial-literacy/financial-resources  This link will take you to basic, helpful information on key financial literacy topics.

Financial Literacy and Education Commission of the United States Treasury Dept. Go to https://www.mymoney.gov/  for links to information for students and teachers.

National Endowment for Financial Education https://www.nefe.org/  NEFE offers two financial education websites, CashCourse ( https://www.cashcourse.org/ ) and Smart About Money ( https://www.smartaboutmoney.org/ ). However, both of these websites will be discontinued effective July 31, 2021. CashCourse is also offered through the Northwestern University Financial Wellness office https://www.northwestern.edu/financial-wellness/money-101/cashcourse.html  and may still be available after July 31.

Also, go directly to CashCourse at https://www.cashcourse.org/  CashCourse® is a free, online financial education resource designed specifically for college and university students offered by the National Endowment for Financial Education. This interactive online money management tool provides answers and resources to help you make smart choices with your money.

Khan Academy https://www.khanacademy.org/  provides a wide array of courses. Scroll to the bottom of the page and click on Life Skills. This takes you to a page on Personal Finance and another page on College Admissions.Investopedia https://www.investopedia.com/terms/p/personalfinance.asp This link will connect you to 10 pages of personal finance information.


Student Loans — Don’t Be Like Jason and His Friends

Jason and a couple of friends were sitting around one evening in the fall of their senior year in college when one them said something about his student loan. That led to them all talking about their loans and they realized that none of them knew exactly how much they owed or what the interest rate was or when they would have to start repaying the loan.

They had all laughed off the student loan talk, but later that evening the talk haunted Jason, and he began to worry. Why didn’t he know how much he had borrowed? Why didn’t he know the interest rate or when he would have to begin repaying the loan?

There’s a reason Jason and his friends didn’t have answers that night. They were all lacking in financial literacy. Simply put, to be literate in something is to be knowledgeable and competent in the subject. Here, the subject is finance, that is, money, credit cards, loans, etc. Jason and his friends were simply not knowledgeable about money.

Financial literacy is probably the most important subject that isn’t taught to high school students. Students are taught to be literate, that is competent, in algebra and French and science, but most students won’t need to be competent in these subjects in order to make important decisions in their lives. This is not the case with financial literacy. Whether you are rich or poor or somewhere in between, you will have to make money decisions throughout your life. Starting in your senior year of high school, you will have to decide what you’re going to do after high school and how you’re going to pay for it.

Unfortunately, too many students are like Jason and his friends – clueless about money matters. And often parents are not informed enough themselves to provide the guidance they need.

A 2017 study by Inceptia, “Loan Summaries: Nudging Students Towards Smart Borrowing,” found that 94% of the students surveyed do not understand their loan repayment terms and 65% reported that the loan process was confusing.

Moreover, the American Institute of Certified Public Accountants found while nearly all college students they surveyed ranked personal financial management as a skill that was extremely important only 23% of those surveyed actively sought out information to improve their financial habits.

Parents, too, wanting to help their children, often assume debt they cannot afford. CNBC reports, “According to Experian borrowers age 35 to 49 increased their direct loan debt by $45.9 billion last year. Much of this new debt is reportedly from 800,000 parents who borrowed Parent PLUS loans to help send their kids to college.”

Since most students going to college or some other postsecondary education will have to borrow money to pay for it, they need to start looking for answers to questions such as these:

  • How much money should you borrow?
  • Should you save money before borrowing?
  • Should the cost of postsecondary education be part of deciding where to go for college or career training?
  • What are the extra and sometimes unexpected costs of everyday living?

The federal formula that determines the “cost of attending” does not include costs like clothing, transportation, entertainment, unexpected costs like a car repair, etc.

Students who have a reasonable amount of financial literacy, and their parents, will recognize these and other important considerations early in the planning for postsecondary education. They would also consider a host of other matters which we will discuss in our next post.

Financial Literacy – Don’t leave home without it!

Verbal literacy and math literacy are common enough terms when talking about education. But financial literacy is a term you’re likely much less familiar with. That is not your fault. After all, it is not taught in most schools across the country and, when it is, it is more often than not just one unit in a larger course.

The Council for Economic Education’s 2020 Survey of the States recently issued its biennial report and noted that while more teaching of personal finance was being done, only 21 states require high school students to take a course in personal finance.

Forty-five states require that personal finance be “Included in the K-12 Standards,” but only 37 states require the standards to be implemented by their school districts. Pennsylvania requires study of personal finance to be included in K-12 standards and requires the standards to be implemented in school districts but does not require school districts to offer a high school course in personal finance and does not require personal finance study to be integrated into another course. Nor does Pennsylvania require any standardized testing of personal finance knowledge.

If that sounds confusing, you are not alone. My inference is that the idea of educating students in personal finance is applauded but that putting the idea into action is too much trouble. In the end, students are the losers.

And why are students the losers? Simply because before they even graduate from high school, whether they plan on attending college or pursuing some alternative, students will be confronted by important and consequential personal finance decisions. And so will their parents. The fact is that too many have insufficient knowledge to make these types of choices.

Annually, TIAA Institute in conjunction with George Washington University conducts a study to assess financial literacy among U.S. adults. Its 2020 report found that many Americans lack the necessary personal finance knowledge to make sound financial decisions, with just 52% of the US adults surveyed answering the Personal Finance Index questions correctly.

For students who are just three or four years away from high school graduation, financial literacy will soon be a necessity which they are likely unprepared for. Whether going to college or entering the workforce, students will have to make financial choices about which colleges to apply to or which training schools, boot camps or apprenticeship programs to apply to. With this comes the question of how to pay for your choice. Of course, their parents have been thinking about (dreading?) this as well.

Ask any parent what the most confusing and difficult part of the college application process is and they will tell you it is financial aid. It begins with filling out the FAFSA, continues through trying to understand the financial aid package colleges are offering their child and, finally, deciding which is the best offer.

The 2020 Survey of the States notes that research shows that personal finance education encourages more prudent financial behaviors and points to research by Montana State University professors Carly Urban, Ph.D. and Christiana Stoddard, Ph.D. Their research compared incoming freshman at four-year institutions from states with personal finance graduation requirements to students in states without a mandate.

Dr. Stoddard said, “We found that in states with mandated finance graduation requirements for high school, more college students make better borrowing decisions, including applying for and receiving federal aid and grants, while simultaneously decreasing credit card balances.”

The evidence is clear. Each of us, students and parents, should take steps to become more knowledgeable about personal finance. There are very good resources available online for free. Good sources of information include:

MoneySmarts  https://moneysmarts.iu.edu/index.html  is a website of the University of Indiana Office of Financial Literacy providing a wealth of information and practical personal finance

LemonadeDay.org https://lemonadeday.org is a website that focuses on entrepreneurship and teaching financial literacy as part of the process

Khan Academy https://www.khanacademy.org/  provides a wide array of courses, including offerings on personal finance focused on Gen Z and courses on paying for college

Financial Literacy and Education Commission of the United States Treasury Dept. Go to https://www.mymoney.gov/  for links to information for students and teachers.

These and other websites you can find will enable you to increase your personal financial literacy and may even motivate you to lobby for a course in financial literacy in your school district.