Students and Financial Literacy
by Alissa Roy | published Mar. 4th, 2016
It is a truth universally acknowledged that a single college student will not be in possession of a good fortune due to the unequivocally heart-wrenching costs of a higher education.
That’s how that Jane Austen quote goes, right?
But perhaps even more worrying than the costs of education is the fact that while American students are racking up more debt than ever, they are also falling below average in understanding financial literacy, according to Forbes.
Lack of Financial Literacy
“No,” Roberta Klein laughed. “In a word, no.”
That is how Klein, a 10-year professor of Personal Financial Management at RIT, responded when asked if students entering her class had prior knowledge of managing their finances.
Recently, the Organization for Economic Cooperation and Development (OECD) had the Program for International Student Assessment (PISA) run a test to see how 15-year-old students in 13 different countries performed in financial literacy. The test involved students differentiating basic wants and needs, recognizing basic financial documents like an invoice and being able to make simple spending decisions. Almost 18 percent of American students were unable to perform these basic tasks, leaving our country’s students below average on a global standard, right behind China, Australia, Belgium, Czech Republic, Estonia, New Zealand and Poland, according to Forbes.
Almost 18 percent of American students were unable to perform these basic tasks, leaving our country’s students below average on a global standard.
A survey of 42,000 American students entering college showed that only 34 percent had taken a class on personal finances in high school, leaving the majority unprepared for what is soon to follow. Klein said that most of the students entering her class had never been taught about personal finances and budgeting in any previous class.
Every semester, up to 25 students enroll in Klein's class and there are usually many more on the wait list. As the realization that the real world will be coming soon sets in, students begin to understand that they need to learn as much as they can about their finances.
Why We Should Be Worried
Students on the brink of leaving the comfort of their homes to come to college are shown to be unprepared for how expensive this endeavor will be. The cost of college has been rising substantially, outpacing inflation, while income has plateaued, according to online college Straighterline. Since 2004, student loan debt has increased by 324 percent, and almost 40 million people carry debt from their student loans, with approximately 15 percent of borrowers defaulting on this debt within the first three years of graduation.
Defaulting on debt affects credit scores, making it difficult to buy a house or car later in life. When getting loans now, many college students just assume that they will get a job immediately and be able to pay off their loans while making enough to cover the cost of living. However, over 8 percent of college graduates under 25 are unemployed, and almost 44 percent of recent college graduates are underemployed or working at a job that is much lower than their qualifications, according to Economics 21.
“There are large knowledge gaps,” Klein stressed. Many students in her classes ignore income taxes when trying to calculate their budgets, which can be up to 25 to 30 percent of their income. Many students don’t keep track of just how much they owe or the interest on their loans, which can be higher than rent.
Of course, the costs of college aren’t going away any time soon. Over the past 35 years, the cost of public colleges has nearly quadrupled even though more people go to college than ever before, according to The New York Times.
There are a few reasons that college costs so much. Between 1993 and 2009, there were almost 60 percent more administrative positions created. This may not seem to mean much, but an average of 75 percent of the tuition you spend during your four years at college is spent on employee wages and benefits, according to Straighterline. When there are more employees, tuition will rise to accommodate them.
Government plans that are meant to help students afford college can end up hurting the students more in the end. Almost $165 billion of federal government money is spent annually on college grants and student loans, according to Economics 21. However, this causes colleges to increase their costs, hoping to get more of this money, causing a vicious cycle: the college raises costs, causing the student to take out more government loans, which keeps prices superficially low, which then causes colleges to raise their tuition. This is a baffling phenomenon that only serves to detriment the students.
The college raises costs, causing the student to take out more government loans, which keeps prices superficially low, which then causes colleges to raise their tuition.
So far, we have established that most American students are not being taught basic finances early in life and that both the college and the government are failing to help the average student, who is about to enter the real world with approximately $40,000 in debt, according to The Simple Dollar. Feeling panicked yet?
Perhaps the best way to deal with this nasty situation is to run at it head-on and try to understand it, rather than curl up blubbering in the fetal position, avoiding the situation until it becomes too late (my own first reaction to reading these depressing numbers).
“Students are going to graduate with two important numbers: their GPA and their credit score,” said Klein. “They spend all their time focusing on their GPA, but not their credit score, which will affect their interest rate; and potential employers may even look at their credit score, which will affect jobs. After your first job, your GPA is irrelevant but your credit score will follow you for seven to ten years. ”
Being able to understand your loans and how to manage them is key to survival, as simply ignoring them will have an effect on your future. Let us begin with the basics and distinguish between different types of loans.
First, there is a need-based aid, which is awarded to students that have shown that they have financial need. You get this annually when you fill out the Free Application for Federal Student Aid (FAFSA) every year. Once you complete your FAFSA, there are different types of aid that you may be qualified for.
A subsidized loan will have a fixed interest rate of 4.29 percent, according to the Federal Student Aid website. The government will pay for this interest in college while you are accumulating debt, but once you graduate, it is up to you to pay for your debt as well as the interest. So the more debt you accumulate, the more this interest will affect you.
An unsubsidized loan is not based on student need and will also have a fixed interest rate of 4.29 percent. However, this interest will begin to accumulate in college and will be added to the outstanding balance earlier, costing you much more in the long run.
A Pell Grant may give you up to $5,775, but only if your family will be unable to contribute much to your education. A Federal Perkins loan is similar to a subsidized or unsubsidized loan (generally referred to collectively as a Stafford Loan). However, this is lent directly by Title IV-eligible universities and has an interest rate fixed at 5 percent. The Federal Work-Study Program allows students to work part-time while pursuing their education, with the government paying for half the student’s wage and the school paying the other half.
There are also private loans, which are not subsidized by the government. However, you would need someone to cosign on this in case you are unable to repay them. The key is to remember that you are not alone in this situation, but at least understanding the types of debt you are in will help you to prepare now for once you graduate.
Other Kinds of Debt
Being a (kind-of) adult means that you probably are also accumulating other kinds of debt to just pay for living expenses, such as credit card debt. College students often make mistakes with the best ways to use credit cards. Being safe with them so you aren’t piling on more and more debt is important to your future.
Rather than applying for every credit card for which you get an application in the mail, try sticking to one for a couple of years. This will help teach you how to manage it, help establish credit, manage spending and pay bills without building up any debt if you pay it in full every month. A lot of people don’t pay attention to their spending. It is so easy to swipe a card and get stuff immediately, but you will receive a bill at the end of the month. If you can't pay that off, then you will end up paying more for the same thing when you account for interest.
We also live very hectic lives in college and can forget to pay the bills. As previously established, we may not receive the best paying job immediately out of college, so it is best to not adapt an attitude in which you think you will be able to pay this debt later. It is best to only charge what you know that you can afford, never assuming that extra money will magically appear in your bank account at the end of the month.
Each credit card is different, so understanding the different terms that go with it is extremely important. Annual Percentage Rate (APR) is the interest that is charged if you carry the balance of debt across several months rather than paying for it within the first 30 days. If you pay the entire bill before the due date then you will pay no more money than you borrowed. If you don't, interest will be applied and end up costing you more money. If you fail to pay the minimum payment, then you get a mark against your credit score. There may also be certain annual fees that may be applied to your credit card. It is best to apply to cards without annual fees and with good cashback programs.
How to Prepare
Now that we have an understanding of the different types of debt one may accumulate, it is best to think about how to tackle this debt head-on in order to pay for it right away and minimize just how much it will all cost in the end.
Some of the ways to prepare seem basic, but are perhaps not being done effectively. Taking on a part-time job and placing some of that money aside every week is the simplest way to prepare for the debt that will suddenly appear once you graduate. RIT JobZone is a website that helps you find on-campus jobs. Taking a class such as Klein’s would be very helpful as well, as she ensures that students are prioritizing financial goals.
“Often, students focus on just getting through the month, and don’t have long-term plans. I would like to see more students develop more concrete financial goals to set out a financial map for the future," Klein said. "I think that would go a long way. We spend so much time teaching our students how to make money, but virtually no time teaching them how to take care of their money.”
The Personal Financial Management course helps students to handle credit, learn to budget for post-graduation, figure out rent and utilities, renters insurance, car payments, emergency funds and even retirement.
“If they could put more money into retirement in their 20s, they will have more in their 60s,” Klein said.
Making a budget is also very important, and embracing the stereotypical “poor college student” life while you can is strategic. Buy used furniture, look at RIT’s Free and For Sale Facebook page, eat ramen and go thrift shopping. Paying your dues now can pay off in the future. It’s OK and even expected to seem like a bum in college, but if you can graduate with a bit of savings and even some part-time employment experiences, you will likely pay off your debt faster.
You see, that wasn’t so hard.