It all started with American Banker’s July 22 article, Alleviating the Student Loan Crisis through Digital Banking. It really got me thinking. About student debt, yes, but lots of other things, too; our system of higher education and its value, financial literacy, borrowing, parenting, and my own personal experience with financial matters.
For starters, I’m guessing that many of you reading this also have some personal experience with student loans. Perhaps you took one (or more) in your college days. Perhaps you have a child or children who are borrowing for college. I think it’s reasonable to make this assumption because, as the article points out, there are approximately 45 million borrowers in the U.S. — with an average debt of about $38,000 — bringing our total student debt as a nation to $1.7 trillion. Want just a tiny bit of perspective on this dollar figure? According to Statista, in 2020 the US manufacturing industry added $2.2 trillion to the US GDP.
The article goes on to state some of the “primary causes of the student loan crisis," citing a lack of state funding for higher education, tax cuts, higher tuition, and among others, loans that are awarded without adequately screening the borrower. Another reason? Borrowers are often unprepared to take on the debt because they do not have an adequate understanding of financial matters. And, believe me, borrowing for college demands more than just an understanding of money management basics, like sound investing strategies and managing one’s credit. If you’ve any doubt that borrowing for college isn’t a complex process that really requires advanced degrees in both accounting and law, try to make sense of the “guidance” provided here on studentaid.gov. Imagine trying to navigate this process as an 18-year-old high school senior.
“As future business owners, leaders, and members of society, banks and credit unions need to support these individuals with the right tools to alleviate their financial burden. Without guidance and true financial education, people with student debt will not be able to secure a successful financial future for themselves and their families,” says the article. And I couldn’t agree more. I’ll add a few thoughts to this: 1) With “support,” these young, indebted individuals are more likely to become more valuable banking customers earlier in their lives and, 2) that “support” needs to start way before they owe, on average, $38,000. It needs to start before they even think about borrowing for college.
Now, I am a huge proponent of higher education. I am also a huge proponent of financial education. We all know that far too many Americans are, to put it bluntly, truly unable to properly manage their personal finances. “Most individuals lack a foundation for financial success,” says the article. “In fact, less than 17% of high school students are required to take at least one semester of personal finance in high school and only 34% of Americans can answer four of five basic financial literacy questions."
Clearly, more financial education is needed and individuals with student debt are certainly hamstrung when it comes to securing a financial future for themselves and their families. But where will they get that guidance and financial education?
Can young people learn financial literacy from their parents? Perhaps, but that doesn’t seem to be happening. It didn’t happen in my home. While my father certainly taught me the importance of working hard and paying my own way, with a little bit of “save your money” on occasion, that was the extent of the financial guidance I got from dad. I’m guessing that many young men share that same experience. And for young women and their parents, I doubt that there’s much conversation at all about financial matters.
When this is so important, why isn’t this learning taking place at home? I learned a little bit about why from reading cnbc’s “Who should teach kids about money? Americans say parents, but many don’t talk to their own children about it.” You can pretty much guess “why” from the title of the article. “While most Americans believe it is the job of parents to teach their kids about money,” it says, “many don’t actually talk to their children about finances.” Certified financial planner Tom Henske, managing partner at the Affluent Insurance Advisor, tells us that parents don’t talk to their children about money because “it seems like a herculean task, an endeavor to take on to teach your kids about money when you don’t really feel comfortable about the topic of money yourself.”
I guess I never really thought of a discussion about money with my son or daughter as herculean or uncomfortable… at least compared to some of the other discussions we’ve had to have with our children about topics that I’m, well, too uncomfortable to mention here. So, as in many cases where children aren’t learning what they should from their parents, we turn to the schools. And there’s good news on that front, according to cnbc:
“The trend towards in-school personal finance classes is slowly building. Recently, Florida became the largest state to mandate a personal finance course for high school graduation. Twenty-five states now require high-school students to take personal finance coursework, either in a standalone class or integrated into another course. ‘Research shows that students who are able to participate in financial economic education class in high school make better decisions about their college financing,’ said Nan Morrison, president and CEO of the Council for Economic Education. 'They have better credit scores and lower loan default rates.’”
Back to American Banker, which quotes “student loan expert, Mark Kantrowitz” as advising us that the best way for students to overcome student debt is to avoid overborrowing in the first place. To accomplish this, “students should limit their total debt to less than their starting salary in the first year of their job out of college, allowing them to pay off their loans in less than ten years.” Now, that seems like sound advice. However, I’m not sure it’s all that practical. I don’t know when and where Mr. Knatowitz went to college, or if he borrowed to do so, but I do know that in today’s world, it is pretty impossible for a student to limit their total debt to less than their first job’s starting salary. That’s tough to do when the average cost of college – tuition and fees — runs around $20,000 per year. According to the May 5 USA Today article “College students expect to make $103,880 after graduation – almost twice the reality,” while college students expect to make about $103,880 in their first post-graduation job, the average starting salary is actually about half that at $55,260. I was able to borrow less than my first year’s salary, but my cost of attendance at the time was less than $9,000/year. The COA at this same university today is $52,000/year.
So, if you’re reading this as a parent, hopefully you’ll have these “herculean” and “uncomfortable” dinner table conversations about money management with your children. And, if you’re reading this as a community banking professional, hopefully you’ll encourage everyone within shouting distance to take a financial management course and to share what they learn with their children. Perhaps then, both students and parents will make more informed decisions when it comes to borrowing and truly reap the benefits — and the value — of a college education.
As always, I would love to hear your thoughts on this subject.
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