Higher education is incredibly expensive in many countries. Fortunately, the majority of students can access student loans to help make this goal achievable. But these loans don't guarantee smooth sailing for students and their families – especially if they fall on difficult times.
A student loan goes into default or delinquency when a borrower fails to make the agreed-upon payments. The consequences of this can be severe, ranging from bad credit and debt collection lawsuits to garnishment of wages and tax refunds.
For a while, the default rate on national student loans sat between 6-8%. The NASFAA saw a drastic improvement in these figures1 during the pandemic as debts were alleviated or deferred, but that doesn't necessarily mean the issue is solved.
Financial aid directors are now on the hunt for new strategies to keep default rates low and make sure students remain informed about their loan repayments.
Why Student Loans Go Into Default
According to Save The Student, 59% of college students2 struggle mentally due to financial stress. Some fail to strike a work-study balance; others do find work and yet don't have enough money to cover their tuition and living costs.
A lot of the time, however, the borrower simply fails to understand exactly what they're getting into. They lack financial literacy and don't realize how their loan repayments may affect them in the long run.
For example, they may not realize how interest rates add up or that defaulting on their loan can hurt their credit score and prevent them from qualifying for future loans.
The Consequences of Going Into Default
Though they may not realize it at first, students can really suffer if they allow their loans to go into default. These consequences include:
- Bad credit score
- Debt collection lawsuits and garnishment of wages and tax refunds
- Inability to access future student loan programs or other forms of financial aid
- Higher interest rates on any loans you do get approved for in the future
- Difficulty finishing their course of study
The issue isn't that students are careless – or at least, not most of the time. Financial literacy plays a huge role in whether or not they can repay their loans, and many students just don't have that knowledge base. Most people fail basic financial literacy tests; college students are no exception.
Can Financial Literacy Programs Help?
Knowledge is power, and financial power should be placed in the hands of college students wherever possible. Financial literacy programs are designed to give them the skills and expertise they need to make informed decisions about their finances.
While there has been some debate around the effectiveness of financial literacy programs and interventions, studies both in the US and around the world3 suggest they are useful. In general, people with financial literacy education fare better than those without.
Keep Reading: Diplomas, Debt & Default: How Financial Wellness Helps College Student Break the Cycle
For college students, financial literacy programs can give them a boost in the following areas:
- How to strike a work-study balance
- Understanding federal and private student loans
- Grants, scholarships, and FAFSA applications
- Repayment plans and forgiveness programs
- Loan consolidation
These are foreign terms to many students, and because of that, they often find themselves in a situation where they can't make loan payments. Financial literacy programs not only teach them the basics of managing their money but also provide valuable guidance on how to better manage their debt.
Financial Literacy with iGrad
iGrad's holistic financial literacy program can equip you with the tools and resources you need to help your students stay informed about their finances. The program is designed specifically for college students and covers everything from budgeting basics to loan repayment.
It provides a comprehensive set of online courses that can be tailored to meet the needs of your school and uses proven strategies (like gamification) to keep students engaged.
The student debt crisis is moving in the right direction – but in order to keep it that way, we need to give students the knowledge and tools they need to make responsible financial decisions.
To learn more about how iGrad can help your students stay informed about their finances, schedule a demo today.
1 - https://www.nasfaa.org/news-item/28091/National_Cohort_Default_Rate_Plummets_Amid_Pandemic_Payment_Pause
2 - https://www.savethestudent.org/money/surveys/student-money-survey-2022-results.html#financialstruggle
3 - https://cepr.org/voxeu/columns/financial-education-effective-and-efficient