Financial Education Critical to Student Debt Crisis

One of the most highly discussed themes in the financial literacy community is the substantial level of debt weighing down college graduates, which hampers many aspects of their personal and professional lives.  A related issue is the larger financial aid system and its current challenges that impede students’ ability to understand and secure financial aid resources to enable them to make informed college-related decisions and attend institutions of higher education without ending up saddled with debt.

The link between the financial aid system and financial literacy has many manifestations.  First, a lack of financial education among consumers results in their inability to make informed decisions regarding the selection of a college that is both strong in quality and reasonable in cost.  This lack of financial aid-related literacy creates confusion, anxiety and poor decision making.  Second, those who believe they are making smart choices based on minimal information often end up with massive debt and credit issues.  From a different perspective, given the lack of education among young people regarding credit, debt and available financial aid options, many young people do not apply to elite schools, notwithstanding their strong academic success and potential, since they are unaware of financial aid resources that could otherwise make attending these schools possible.  Similarly, another segment of would-be college students decide to avoid university studies completely given their intimidation of the financial aid process, fear of impending debt and other factors stemming from financial illiteracy.

So what would it take to change this systemic issue of a weak financial aid infrastructure hampering the successful completion of college among a greater percentage of young people?  Many possible solutions have been presented, each with their own advantages and challenges.  Some of these potential solutions are discussed below.

• Financial Education in High Schools – High schools are one of the best positioned institutions for developing and delivering financial aid information to pre-college students.  High schools could develop programs and resources for students and parents regarding the costs of college and the available sources of financial aid.  They also could provide information and training on how to complete the FAFSA form, as well as other important aspects to the financial aid process.

• Policy and Legislation – Many financial literacy proponents argue that public policy should seek to address the problem.  They contend, for example, that Congress should enact legislation that would mandate the completion of financial education courses in order for students to graduate high schools, and that a component of each such course would be education relating to the cost of college and financial aid options.  Similarly, these policy and legislation advocates assert that regulations could also be instituted at the state level.  Many states already have passed or proposed similar measures.

• School-Community Partnerships – Among the solutions that have been suggested to address the issues stemming from the lack of literacy relating to financial aid is a more effective range of school-community partnerships that would connect students, parents, teachers and guidance counselors with community-based organizations that are well equipped to educate those constituencies about college costs and affordability options.  One unique and significant benefit of school-community partnerships is that community-based organizations could continue to provide educational services, even if school budget reductions result in an inability of the schools to teach financial education directly.  These partnerships would also harness the power of multiple constituencies working together to address the financial aid epidemic.

• Financial Education Mentors – One potential solution gaining widespread interest is the connection that could be made between financial aid mentors and high school students and parents.  When neither the schools nor the community organizations can provide families of high school students with education relating to financial aid and student debt, mentors could play a highly effective role in bridging the education gap.  In short, experienced mentors can help increase the financial aid-related literacy among high school students and their parents and thereby arm families with critical information, tools and resources that would drive better decision making regarding college costs and financing.

• The Role of Colleges – In addition to the other potential solutions outlined above, many contend that colleges and universities should play a larger role in financial education as it relates to the expenses and affordability of higher education.  They argue that colleges can provide greater transparency and help for students looking to navigate the most effective options for financing their undergraduate studies.

There is no question that college education financing remains a critical issue for students and families who too often become victims of huge debt loads, college drop-out scenarios, and even the avoidance of college altogether to eliminate the possibility of financial aid issues.  At the same time, ideas regarding potential solutions to the student debt crisis vary widely among different constituencies.  But all agree that one essential element for the success of any potential solution is a dedicated financial literacy component, as financial education is recognized as the fundamental building block to address and eradicate the student debt crisis in the months and years ahead.