Student Debt Crisis: Financial Literacy is Key to Outcomes

The return on education is a highly talented workforce that propels the economy forward.  While knowledge, skill and creativity fuel business, the cost of education is difficult to fund in the United States with the median income in the country at approximately $53,000. The recession has caused tuition for a college education to rise even higher and the nation also has experienced a surge in the number of borrowers and the balances outstanding on student loans.

Student debt from both federal and private sources was approaching $1 trillion as of one year ago, and jumped to be the second largest amount after mortgage debt.   Young delinquent students have reduced their ability to secure other forms of credit.  Students fresh out of college have student loan interest payments chipping away at their paychecks, hindering their ability to purchase cars, rent apartments, or buy consumer goods.  As a result of this trend, students and their families are rethinking the financial return on education.  For instance, majoring in computer science, engineering or medicine may make it more affordable to pay off debt in a timely manner. However, majoring in a foreign language or a liberal arts program may not enable students to secure sufficiently high paying jobs to match their debt loads.

Financial literacy - or the lack thereof - also plays a key role. Many student borrowers are uninformed about financial terms of loans.  More than fifty percent of these borrowers are eligible for federal loans at lower cost, even though they have opted for private bank loans.  Exacerbating the process is the fact that student debtors often lack guidance in the process.  Many financial aid offices are understaffed (especially after budget cuts during the recession), serving a large student population with technical financial jargon that many students do not understand.  The available online entrance counseling is something most students skim through, if they read it at all, and often do not review the necessary details, opting instead to focus largely on only two questions:  how much they need to pay for the loans, and how much they will owe the creditor.

Amid the student debt crisis, some notable initiatives have been rolled out.  One example is the State University of New York’s "Smart Track Campaign" which provides students and parents with new tools and services to help educate individuals from the earliest stages, as they are deciding how much to borrow and engaging those at the highest risk for default throughout their time on campus.

As the student loan crisis impacts the higher education system, the local and national economies and, ultimately, the U.S. skilled labor force, this matter needs continued attention and effective solutions.  Financial literacy organizations and professionals continue to promulgate the virtues of financial education as a core pillar necessary in any comprehensive solution.  And with financial literacy playing a major role on the stage of the educational, policy, social and political agendas both domestically and abroad, financial education is poised to remain a central focus in any effective solution to the student debt crisis in the months and years ahead.