High student debt, low financial literacy makes dangerous combination

By MICHAEL HOLTZ | April 26, 2012

From January to June 2012, I reported for Political Fiber, a news website founded by one of my college journalism professors and funded by the Knight Foundation. Our mission was to cover relevant state and national news for a college-age audience from our newsroom at the University of Kansas. The site shut down in 2013, which is why I posted this story here. 

Leticia Gradington has little patience for financially irresponsible students. As the director of Student Money Management Services at the University of Kansas, she meets them on a weekly basis.

“Ninety-thousand dollars in student loans and no degree? That’s wrong,” she said about one undergraduate student she recently advised. “And I guarantee he’s not the only one out there who’s like that.”

The Consumer Financial Protection Bureau estimates that total student loan debt passed $1 trillion last year. Though many factors have contributed to the recent surge — notably the rising cost of higher education — experts, including Gradington, agree that widespread financial illiteracy has made it worse.

Having emerged as a popular political talking point in the immediate aftermath of the economic crisis, financial literacy has since lost much of its momentum. Instead, the more partisan issues Congress faces, such as tax rates and the national debt, have overshadowed it.

Ted Gonder, co-founder of MoneyThink, a nonprofit financial education program for high school students, said he worried about the economic risks of ignoring the problem.

“Do we really want to see a repeat of what happened with the most recent recession?” he asked. “There were a lot of players involved in what happened, and one of those players was the consumer — consumers making uneducated, disenfranchised, unempowered financial decisions.”

Young people were no exception. About 65 percent of college students misunderstand or are surprised by their loans or the student-loan process, according to a study by Young Invincibles, a nonprofit advocacy group that represents 18- to 34-year-olds. Two-thirds of private loan borrowers said they didn’t understand the major differences between private and federal options.

“If students really understood how much it costs them every time to hit the snooze button instead of going to class, they would go to class more often,” Gradington said. “Students just need to be a little more in touch with their money.”

Many students wish they were. A 2010 survey found that that 82 percent of KU students thought it was important to learn more about money management and credit and debt management. Eighty-four percent thought it was important to learn about savings and investing.

Those findings led the University of Kansas to create Student Money Management Services. Gradington and her small group of college-age assistants help students understand their loan payments, create budgets and manage their credit cards. They do what they can to help young people better manage their personal finances, but Gradington says it’s far from enough.

On Aug. 23, 2010, the U.S. House of Representatives Financial Services Subcommittee on Oversight and Investigation held a hearing on the issue, the third one in a four-part series organized to look at problems exposed by the financial crisis.

“Will financial literacy, on its own, prevent the next financial crisis?” asked Rep. Dennis Moore, D-Kan. then-chairman of the subcommittee who has since retired. “Perhaps not, but I know if we don’t do a better job promoting financial education, that will only increase the likelihood of another crisis.”

While most policymakers ignored Moore’s warning, a small group of Democrats turned it into a policy issue. They proposed a combined seven financial literacy bills in Congress during the last 16 months. Yet progress on most of the bills remains slow. The two that did make it through Congress emphasized symbolic gesturing over substantive policy by declaring April “Financial Literacy Month” both this year and last.

Rep. Andre Carson, D-Ind., said he was “deeply hopeful” that Congress would pass his bill by the end of the year. With 32 co-sponsors, the “Young Adults Financial Literacy Act” is one of the most popular pieces of financial literacy legislation. The bill would establish a federal grant program to help fund financial literacy programs for young people and families. But even it appears unlikely to make it out of committee.

The Consumer Financial Protection Bureau has made up for Congress’ lack of progress on financial literacy by providing free online resources. Earlier this month, the agency launched a beta version of theFinancial Aid Comparison Shopper, an interactive, online tool designed to help students plan for the costs of higher education.

“There’s a tremendous need for people of all ages, but especially young people, to have knowledge and the capability to manage money and avoid the missteps that can really hurt their economic futures,” said Gail Hillebrand, associate director of consumer education and engagement at the Bureau. “We can’t expect people to do well if they don’t have the skills and don’t understand [financial] products.”