Preventing Student Debt Problems Begins With Financial Literacy Education
For ages, the American dream has been built on obtaining a quality education, earning a credential from a degree-awarding entity and then starting a life full of wealth and opportunity. Or at least that was the dream bestowed upon America’s new dominating workforce: millennials.
Born between 1981 and 1996, during a pop culture boom of multi-million dollar music videos, millennials grew up inundated with a barrage of doctored images of success and sayings like, “It takes money to make money.” These were the messages that influenced their decisions to pay exorbitant tuition prices when choosing their academic and career pathways, ultimately leading many underprepared and fiscally ignorant souls to secure student loans in an effort to reach economic mobility.
The large levels of student debt amassed by many millennials has several causes, including increasing tuition costs and a lack of loan regulation. However, insufficient financial literacy is also partly to blame. Absent from many K-12 curriculums, policymakers and educators should prioritize efforts to teach students of all ages how to wisely manage their personal resources, especially when it comes to spending on education. Furthermore, delaying financial literacy education until students enter college can be and has proven disastrous.
Student Debt Soars
During the first wave of millennials entering college between 1997 and 2007, fall enrollment for degree-granting postsecondary institutions increased 26 percent. As college enrollments increased, so did tuition rates. Prices for undergraduate tuition, fees, and room and board at public institutions rose 31 percent between 2007-2008 and 2017–2018, while prices at private nonprofit institutions rose 23 percent, after adjustment for inflation, according to the U.S. Department of Education.
Yet even those increases can’t account fully for how the U.S. set a new record high for student debt in 2020, surpassing $1.7 trillion for the first time. In the 10 years following the end of the Great Recession in 2009, student loan debt increased nearly 130 percent, according to a recent report published by the Board of Governors of the Federal Reserve System. As for the share of student debt millennials have amassed, as of the fourth quarter of 2020, 14 million student loan borrowers between the ages of 25 and 34 accounted for $472.6 billion in student debt. Older millennials were pooled with members of Gen X (now ages 35 to 49), accounting for $466.7 billion in student loan debt within the same quarter.
Facing economic and societal realities not experienced before their generation, including what President-elect Joe Biden called a “K-shaped” economy, millennials have borne the brunt of the wild, Wild West of student loan regulations—or the lack thereof.
Acknowledging the damage done, the U.S Department of Education in 2019 finalized regulations to protect student borrowers, hold higher education institutions more accountable, and ultimately save taxpayers $11.1 billion over 10 years. Consequently, students born after the millennial generation (Generation Z) will experience a much tamer higher education funding reality, one that is more ethical and regulated and less predatory.
Still, more must be done. According to U.S. News & World Report, college graduates from the class of 2019 borrowed $30,062 on average, accounting for $6,300 more than borrowers from the class of 2009. This 26 percent increase over a decade signifies that financial literacy, while not the sole answer, is an instrument that must be applied in the fight to address this growing financial crisis.
Fostering Financial Literacy
Created by Executive Order 13530 in 2010, the President's Advisory Council on Financial Capability was developed to assist the American people in understanding financial matters and making informed decisions. Three years later, Executive Order 13646 established the President’s Advisory Council on Financial Capability for Young Americans. Through the work of those Councils, financial literacy became defined as “the ability to use knowledge and skills to manage financial resources effectively.”
There was good reason for government leaders to be concerned about Americans’ financial literacy skills. Around the time the second council was created, 15-year-old American students fell short of global financial literacy expectations in 2012 in the first large-scale global financial literacy assessment. The Programme for International Student Assessment (PISA) evaluated students in 18 countries on their ability to apply mathematical skills and basic financial concepts to real-world situations. The U.S. mean score ranked ninth.
Over the past several years, several states have established laws requiring their K-12 schools to teach financial literacy. However, more work must be done. A nationwide study that Next Gen Personal Finance conducted in 2018-2019 of more that 11,000 high school course catalogs found that in 23 states and Washington D.C., fewer than 5 percent of students were required to take a standalone semester of a personal finance course.
As for higher education, financial literacy is not a mandated course or initiative provided at most colleges. Several years ago, the Free Application for Federal Student Aid (FASFA) began integrating information and resources to help college students to improve financial decision-making. It was a good start, but still not enough.
To help students make good decisions, colleges should consider seriously the recommendations made in a best practice report published in 2019 by The Financial Literacy and Education Commission. Established under the Fair and Accurate Credit Transactions Act of 2003, the commission calls on institutions to provide “clear, timely, and customized information to inform student borrowing” in financial aid offers and debt letters. It suggests that colleges mandate financial literacy instruction with standalone courses or by integrating lessons into core curricula, and identifies peer education as a promising way to get financial literacy information out to students. Because timely degree completion is a safeguard against defaulting on student loans, the commission calls on colleges to incentivize students to graduate on time and to invest resources that help, such as emergency financial assistance.
Colleges that enact these strategies will help to better prepare America’s future workers to make financial choices throughout their lives that enable them to effectively participate in our economy, build wealth and attain their goals. If pursued and accomplished correctly, the state and federal mandating of financial literacy programs throughout K-12 and higher education might very well be the current-day education legislation with the longest-lasting impact for generations to come.