Last month, the Supreme Court ruled that the Biden administration’s student-loan forgiveness program, which would have forgiven $430 billion in loans held by 40 million borrowers, cannot move forward as originally proposed.
This is regrettable, but in some ways, we’re missing the point when it comes to the crisis of student debt. Where is the call for wise student borrowing? Isn’t anyone making the connection between this national problem and the financial-illiteracy crisis? (Financial illiteracy cost Americans roughly $1,819 each in 2022, according to this survey from the National Financial Educators Council.)
A lack of financial knowledge and skills leads to wildly different approaches. One student may enroll in an expensive private college in their town, and decide to live on campus, despite having to take on debt that will be very difficult to pay off, given their choice of major. Another student may set their sights on the same school, but plan to save thousands of dollars by going to the local community college for two years before transferring.
Not everyone agrees that the community college as a gateway to a more elite institution is a foolproof plan. As Chana Schoenberger, now editor-in-chief of American Banker, noted in this 2017 article on MarketWatch, students in the American Honors program at some community colleges can apply to transfer to top schools like Amherst College, Duke University, the Massachusetts Institute of Technology, and George Washington University.
But she cautions: “Keep in mind that transfer students may pay a price for entering a four-year school after freshman year, since they will have missed out on some important social aspects of college, including extracurriculars and relationships with professors and students.”
“The average student-loan debt is $37,338, but that rises to $54,921 per borrower for private student-loan debt. The average starting salary for students graduating last year was $55,000.”
Bottom line: the student-debt crisis exists in large part because young people borrow thousands of dollars for college, and oftentimes end up with jobs that make it difficult for them to pay off their loans in a timely manner. A rough guideline is that your total loans should not exceed the annual salary of your first job.
The average student-loan debt is $37,338, but that rises to $54,921 per borrower for private student-loan debt. Now for more bad news: The average starting annual salary for students graduating last year hovers at just over $55,000.
Why are students and parents so quick to take loans that will be such a burden? It is partly because of tuition costs, but careful planning can take some of the bite out of these costs. And careful planning requires personal-financial knowledge and skills.
For starters, this recent study by the National College Attainment Network, a nonprofit membership and advocacy association, shows that 2022 high school graduates left $3.58 billion in Pell grants on the table last year. These grants are designated for students with financial need, but all families can and should look first for local, state and national grants and scholarships.
You can learn more here from deputy enterprise editor Jillian Berman and Rachel Fishman, acting director with the Education Policy program at New America, about why financial-aid offers are so hard to understand and get more strategies for cutting through all the jargon.
Financial advisers also recommend putting your budget on paper and figuring out your own strengths and weaknesses (including your “wants” vs. “needs”), remembering to factor in taxes when you are calculating your student loans and expected salary upon graduating, saving early, protecting your credit, and learning from your mistakes. After all, we all make them.
Frank kitchen table conversations should occur about the impact of not only the cost of various college majors, but also what earnings can be expected if one majors in math, sociology, physics or finance.
“As of this month, 22 U.S. states guarantee that every student will take a full-semester personal finance course. Many more states are considering following suit.”
This Georgetown University study does just that. “The top-paying college majors earn $3.4 million more than the lowest-paying majors over a lifetime,” the study found. “STEM (science, technology, engineering, and mathematics), health, and business majors are the highest paying, leading to average annual wages of $37,000 or more at the entry level and an average of $65,000 or more annually over the course of a recipient’s career.”
Every high-school student in America should know about college loans. Some states, like Pennsylvania, are proposing that all students be required to fill out the FAFSA, or the federal financial-aid forms, based on the fact that in states with such laws, college completion rates are higher. I applaud this, as we have found that even states that teach personal finance don’t always include college loans.
As of this month, 22 states guarantee that every student will take a full-semester personal finance course. Many more states are considering following suit.
Free online curricula abound, and some lessons, like this game released by my nonprofit organization, Next Gen Personal Finance, which has been played by more than 4 million students. It focuses on college loans, and is designed to help students and parents make realistic decisions to keep their college debt manageable.
Student debt in the U.S. currently exceeds $1.6 trillion — and rises to $1.7 trillion if you add on private student loans. A recent report by Moody’s Investors Service states that slow repayments are a bigger cause of the mounting national student debt than are increased enrollment and tuition costs. I’d add a lack of personal financial education as another major cause, and it’s a problem we can solve.
Tim Ranzetta is co-founder, Next Gen Personal Finance, a Palo Alto, Calif. non-profit that provides free curriculum and professional development for teachers across the nation. Its affiliate, the NGPF Mission 2030 Fund, advocates for states to guarantee a personal-finance course for all high school students by 2030.
Related:
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