Originally published by Roger W. Ferguson, Jr. on LinkedIn: A New Year’s Wish: More Financial Literacy, Less Student Debt
The New Year brings the chance to take stock of where we are – and where we want to be. I hope that in 2017, the U.S. will take aim at an issue that has implications for both our economy and the financial well-being of millions of Americans: student loan debt.
Now at $1.4 trillion and rising, student loan debt is expected to reach $2 trillion in just five years. Many have voiced concern that the impact on future growth could be significant, as young adults weighed down by debt delay decisions such as buying a home, starting a business, and getting married. Some fear that it might also contribute to growing income inequality, since underrepresented minorities and low-income families carry a disproportionate share of student loan debt.
The issue of default underscores the nuances around student loan borrowing. While the default rate for federal student loan borrowers has declined, the total number of borrowers in default now stands at more than 8 million, a record. But the highest default rates are found among those who have the smallest amount of student loan debt – typically people who did not complete their degrees. (Students who take out loans but don't graduate are three times more likely to default than borrowers who complete their degrees.) Graduate students take out the most debt but have far lower default rates than other students; they are more likely to be employed and to have well-paying jobs.
Whether one’s debt is high or low, the key to successfully managing it is being “financially literate.” This means having the financial knowledge needed to responsibly manage one’s financial life – by budgeting, avoiding credit card debt, and building healthy, lifelong financial habits like saving. Yet studies have consistently shown that Americans have low levels of financial literacy, and the 2016 FINRA National Financial Capability Study found that financial literacy has actually declined since 2009.
Boosting financial education on college campuses is just one part of a solution to this challenge – but it’s an important one, particularly given the student debt challenge. Students, both undergraduate and graduate, are at an optimal stage of life to receive financial education, since they are typically taking on a range of financial responsibilities for the first time. That doesn’t always go smoothly. In fact, one national survey suggested that seven in 10 undergraduates are stressed about their personal finances, including their ability to pay for their college education.