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.