Thursday, September 20, 2012

A Need For Basic Finance Education

source: kimkardashian.celebuzz.com
Last week my Twitter and Facebook friends read my comment about how apparently college students know the exact number of days Kim Kardashian was married but don't know their student loan interest rate. This statistic came from a video created by iGrad where they conduct "A Financial Literacy Experiment". A very eye-opening six minutes. Other interesting facts that came out of this video include:
  • Less than 40% of students interviewed knew what a "student loan default" meant
  • 80% of students knew how long Kim Kardashian was married (72 days in case you were wondering)
  • 85% of students did not know their credit score
  • Over 90% of students knew Justin Bieber is dating Selena Gomez
With the uproar about skyrocketing college costs and total outstanding student loan debts exceeding the monumental trillion dollar mark, there has been a cry for change from many Americans. Ideas ranging from debt forgiveness to "pay-as-you-earn" plans to re-structuring the way education is provided have been thrown out to attempt to ease this growing crisis.

But let's not forget our responsibility to ourselves to try to understand exactly what we're getting into when we decide (or need) to use student loans to earn a college degree. Maybe we should attempt to change the status quo by expecting our kids (or ourselves) to know what it means to default on a student loan. Is it too much to ask that a student know the interest rates on their loans and credit cards, and also be able to explain the difference between a subsidized and unsubsidized loan? I think not. Do you think their financial choices might change for the better if they had this knowledge? I hope the answer is yes but I honestly can't say for sure. Regardless of the outcome, I don't see a downside to becoming more financially literate.

I am a good example of what not to do. I ended up with $50,000 in undergraduate loans, $30,000 in graduate school loans and six or seven different credit cards during that same time frame. I would have been one of the students in the video who couldn't answer any of the financial questions. All I knew was that the only way I could attend college (at least in my naive little world) was to take out these loans. Could I have attended college without loans? Probably not. Were there better financial options that I could have used? Most definitely.

When you take out a loan your are essentially borrowing against future income. Let's say you take out $50,000 in student loans and get a job out of college making $40,000 per year. In essence you have already leveraged (paid out in a way) three years of take home pay (assuming a 4% fixed rate 20 year loan compounded monthly and take home pay equaling 65% of gross salary). And it just gets worse as your student loan balance goes up.

So where is the disconnect in terms of basic finance education? Are parents unaware of the effect of owing large amounts of student loans after graduating? Or should students be held responsible for figuring out how all of this student loan stuff works? Regardless, we owe it to our future selves to realize that if we over-leverage our future income there is no happy ending to this story

Stay tuned,





Do you think a lack of basic finance education is a contributing factor to the student loan madness occurring these days?
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