Higher education has long been touted in America as the path to success.
A person with a college degree makes, on average, 50 percent more than one with just a high school diploma.1
This is what is driving more and more students to pursue higher education.
But with that surge in student enrollment comes a cost. Quite literally, actually.
More students borrowing, along with the soaring cost of tuition, has led to ballooning student loan debt. Student debt now tops $1.6 trillion. That’s more than American credit card debt or car loans. In fact, the only category of debt higher is the home mortgage debt.1
Many experts have raised issues with the ever-increasing amount of student loan debt. Leaving school with unmanageable debt can lead to hardship down the road.
The balance per borrower rose 26% between 2009 and 2020.1
Now, more than 40% of borrowers leave school with over $20,000 in debt.2
Related article: How Financial Wellness Can Break the Student Loan Debt Cycle
That can lead to difficulty obtaining future financial goals like buying a home or a car.
All those graduates with heavy debt obligations can be a drag on the larger economy, especially if they feel stressed by their debt or fall behind on their payments. In 2020, nearly 20% of federal student loan debt was in default.2
Related article: Financial Literacy Becomes One of the Most Desired College Student Programs for 2021
What is to be done about this burgeoning debt level?
While Congress debates student loan forgiveness and free community college, there is a much simpler solution – financial education. Financial education can help prepare students for making the right loan decisions and help prevent defaults.
Many studies have been conducted on the impact financial education can have on student debt. The results are not surprising.
One study found that financially educated students are less likely to be stressed about their student loans. They are also less likely to be late on their payments.3
Another study found that students with high financial literacy are more likely to view their student loans as a solid investment in their future. Those students made better financial and education-related decisions. The less financially literate students were more likely to make counterproductive decisions when it came to borrowing and education.4
Financial education can help prevent some of the biggest mistakes borrowers make with their student loans. There is a pervasive lack of knowledge about income-based repayment programs that can help keep payments low. Without knowing about those programs, many borrowers are stuck with high monthly payments despite low income, which can lead to default.2
Additionally, many borrowers admit to deferring their payments during times of financial hardship. Many do it without realizing that interest will continue to accrue despite not making any payments, causing their debt level to grow.
Accumulating interest and deferring payments can make it difficult to ever pay off student loans.1 Imagine being 90 years old and still paying for your college education. It’s possible.
Related whitepaper: Diplomas, Debt & Default: How Financial Wellness Helps College Student Break the Cycle
The simple solution here is to educate borrowers. Not just about these common mistakes, but about holistic financial wellness. That can lead to smarter borrowing. Very few students base their loan amounts on estimated education costs – they just randomly borrow amounts.
It can also set students up for success when it comes time for repayment. Understanding how a loan works make it more manageable for students and causes less stress.
Addressing the rising cost of college and endeavoring to make community college available for free are noble goals. But educating the young generation before, during, and after college about all things financial will have a larger, more immediate, and more pervasive impact on the student loan debt crisis. The benefits of financial education reach past just addressing student loan debt. They carry on later in life and further out into the whole economy.
To learn more about the iGrad Financial Wellness program and how it can help your college, click here.
1 - https://www.cfr.org/backgrounder/rising-student-debt-harming-us-economy
2 - https://www.voanews.com/a/student-union_lessons-finance-could-reduce-student-debt/6203349.html
3 - https://link.springer.com/article/10.1007%2Fs10834-018-9589-0
4 - https://ir.library.louisville.edu/jsfa/vol49/iss1/4/