Finding solutions to the student debt crisis is not an easy task. However, finding solutions to one’s own financial situation can be more manageable. Recent studies have shown that a part of the student debt situation derives from a lack of financial literacy among high school and college students. This problem can result in debt that can tickle over into the lives of other family members and even senior citizens.
What is meant by ‘financial illiteracy’ and how can prospective or current college students help themselves lessen the burden of college debt by becoming more knowledgeable about their finances?
Financial Illiteracy Defined
Imagine just after mastering the alphabet and the basic rhyming vocabulary of children’s books, you were to go off to college. Chances are good that you would struggle to read college level textbooks and that there would be some disastrous results. You most likely would not understand a large portion of the course content, including information and directions. You would probably feel lost and discouraged. You might even give up. There would also be rippling effects on those around you: classmates, instructors, family members, and others. The resulting financial problems may even follow you throughout your life. This is what financial illiteracy is like.
A New Approach Financial Planning owner Tom Roberts concisely explained the signs of financial illiteracy:
• Failing to start a savings and investment plan for future needs and goals [such as education].
• Lacking awareness about the benefits of compounding interest on savings [and/or debt].
• Missing the connection between one’s credit score and its effect on interest rates, loan offers, employment opportunities, and other such fiscal considerations.
• Misusing accounts while ignoring the effects of resulting fees and penalties (e.g., overdraft fees for checking accounts).
• Not setting a budget and/or not sticking to it consistently enough for it to result in benefits. (15 May, 2012)
If this describes you, you are not alone. Roberts points out that only about 3% of Americans graduate from high school having taken any sort of course related to financial literacy. Although I am one of the lucky ones—forced to take a course in personal economics as a high school senior—I did not take the class seriously. I remember my friends and I thinking our minimum wage, part-time jobs would provide us with plenty of money for the future.
We were in good company in our unblissful state of money management, and this problem was already escalating prior to the recent recession, mortgage crisis, and student loan bubble.
Money Myths and Misunderstandings
According to MSN Money expert Liz Weston, there are six main financial myths and misunderstandings that contribute to college debt:
• “Saving for college will hurt my child’s chances of getting financial aid.” (Reality: If you can save, you should.)
• “College costs too much.” (Reality: Not attending could cost you a lot more.)
• “A public school will be cheaper than a private college.” (Reality: Budget cuts and crowded campuses mean it could take you years longer to complete a degree at a public school.)
• “There’s no point in filling out a financial-aid application, because we aren’t needy enough.” (Reality: There may be more money available than realized because of other contributing factors, such as more than one child in college at the same time.)
• “Borrowing for an education is a bad idea.” (Reality: “Even in today’s lousy economy, college graduates have half the unemployment rate of high school grads, and on average will earn far more over their lifetimes.” However, be moderate with the amount of money borrowed to assist with college. )
• “A college degree always pays off.” (Reality: Students should consider a major wisely by focusing on high demand fields and perhaps minoring in those that tend to yield less income. Also, avoid some of the mistakes listed above.) (3 November, 2011)
Both Roberts and Weston suggest that parents need to model good money management strategies for their children so that when they become students, they will not fall into some of the bad financial habits and misconceptions listed above.
Solutions
Prospective college students and their parents can take more proactive steps, too. Just as college students typically participate in orientations, first-year student activities, and/or developmental courses to brush up on core skills like reading, writing, and math, so too should they pursue options to learn about financial literacy and specific ways they can avoid or lessen the amount of student debt incurred.
Citibank provides an excellent list of the “Top Ten Ways to Graduate with Less Debt” . Also, see my previous post, “How to Wipe Out Student Debt Quickly,” for tips on how to prevent and reduce the amount needed for college. Finally, Roberts suggests “check[ing] out Junior Achievement (JA.org), Money Smart from the FDIC, National Endowment for Financial Education (NEFE.org), The Mint (TheMint.org) or your local bank for programs and resources” (15 May, 2012).
The bottom line is that tough times require solutions that involve sacrifice and effort. Lessening the impact of student debt also involves individuals taking charge of their own financial situation and goals. It is possible to reduce the cost of college by becoming more financially literate. If you have additional ideas or solutions, please share them with the rest of us in the comments area below.
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