Growing up, students are told by their teachers, elected officials, and parents that without a college degree, they will be stuck working in low-end clerical or service jobs with minimal compensation.
The school of their dreams is, however, happy to provide some assistance. So after diligently completing a financial aid form (FAFSA), high school seniors realize they can borrow their way to a college degree with no payments due until after graduation.
At the age of 18, you can sign a contract, serve in the military, vote, and obligate yourself to tens of thousands of dollars in student loan debt; yet you don’t have to demonstrate competence in basic banking, check book balancing, investments or compound interest to graduate from high school.
Politicians decry predatory behavior on the part of credit card companies, but is easy access to a government student loan package any less predatory? At least credit card debt can be discharged in bankruptcy.
Every high school has graduation requirements that are meant to set kids up for the next stage of their lives. To get a diploma, most kids need to pass physical education, math, science, foreign language, U.S. history, English, and social studies classes.
Sadly, very few schools have any meaningful personal finance requirement. The classes offered rarely prepare student on how to evaluate a school’s financial aid package or help them determine whether that pricey four-year college is really worth the time and expense.
There are some striking similarities between the current student loan situation and the recent mortgage and housing debacle. In both cases, the federal government has encouraged, through lax regulation and generous terms, significant borrowing on the part of individuals who are poorly prepared to understand the consequences of their decisions.
The result in both cases has been rampant increases in the cost of the pursued object. It remains to be seen whether the current student loan situation will present a similar drag on the economy as the mortgage and housing crisis once did.
It does seem fair to say that someone burdened with student loan debt won’t be qualifying for a mortgage anytime soon.
The common thread to both of these issues is the stunning lack of financial literacy amongst the population—especially graduating high school students.
At around $1.1 trillion, student debt now exceeds auto loans and credit cards as the largest source of household debt, not including home mortgages. Rather than have Congress discuss ways to reduce the cost of these loans, perhaps it might be wiser to let the market determine the cost.
Maybe the borrower should be required to present a business plan to the lender, including the degree sought, the expectation of employment, and the expected time frame of repayment. The lender can then respond with a yes or no, with an interest rate appropriate to the “risk” involved to the lender, which is not unlike any other loan.
High schools need to step up and realize that financial literacy is a critical skill in today’s economy.
Todd Freeman, CFP.ChFC,AIF is a registered representative with Cambridge Investment Research, Inc., a broker dealer, member FINRA/SIPC. The subject matter and opinions in this article are those of Todd Freeman and are not those of Cambridge. Cambridge and TakePart are not affiliated.
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