by Jeff Sovern
Here, an op-ed by people from Ohio State,Associate Professor of Consumer Sciences, and Anne McDaniel , Senior Associate Director there. Excerpt:
[D]ata from our study showed over half of student loan users tried to borrow as little as possible (52 percent).
Additionally, 38 percent considered the total amount of debt that they expected to graduate with. Thirty-three percent considered the amount that had borrowed in the past when deciding how much to borrow for the school year.
But about 28 percent, almost three out of 10 students, reported borrowing the maximum amount available in their package. And about 17 percent of student loan users borrowed the maximum available without also employing a strategy to minimize overall borrowing. * * *
The SCFW included two financial knowledge questions to test whether respondents could understand the concepts of interest and inflation and had basic financial numeracy. These questions assess basic concepts of financial literacy – the knowledge and skill needed to manage financial resources effectively.
Nearly 80 percent of the college student respondents answered the interest rate question correctly. But only 59 percent answered the inflation question correctly. Just over half of the college students (53 percent) answered both questions correctly.
I'm not sure how confident we can be in a measure of financial literacy based on only two questions. But with that caveat, it sounds as if many college students are not, in fact, financially literate. And that in turn raises questions about whether some college students take out larger student loans than is prudent.
This is an awful excuse for thoughtfulness.
Typical university types, not getting to the heart of the matter because their very existence depends upon it, or you’re so insulated you don’t have a clue. Let’s face it, the soaring cost of education and the fact that it’s the result of a predatory lending system perpetuated by universities willing to lend as much as a student can borrow, are the main reasons students borrow so much. College costs at least 600% more than it did when I graduated 25 years ago. Let’s not even talk about text books, whose costs have gone up astronomically (even professors know it’s a racket). Go ahead, look at the cost of Ohio State in 1986 vs. 2016 and put your figures here.
What options do students have by not borrowing the maximum? Work? Depending on your source, roughly 75% do work, so that’s not a viable point. If they do work, how much do they make? $12-14.00 per hour, perhaps? Yeah, that’ll go a long way. Even at full-time (which is unfair to students that really want to excel in school) that’s maybe $18,000.00 per year after taxes? Who do you know that can live on that period, much less pay any college costs?
To Steve’s point about parents borrowing for their kids? That’s a valid point…sort of. His is typical of people who think that you should only borrow if you’ll earn enough based on the degree you pursue, as if this is the reason people should go to college. “Wow” is all I can say. Here’s a point even the barely conscious can understand: if everyone pursued what was profitable in college, most of those areas of study wouldn’t be profitable for long…
Moreover, once students hit 21 or are no longer on their parent’s taxes it means they can borrow on their own. How many banks do you know that will lend $20-40,000.00 a year – or more – to a kid who has no credit history or means to pay it back? I didn’t think so, but it’s OK for a kid attending college? Oh, that’s right, their loans are subsidized by the federal government (who is directly influenced and lobbied by the student loan industry), so who cares, the banks and lenders will get their money, right?!
I have to stop, because as someone who has been punished beyond anything you can imagine by student loans, I could write a novel on this “hit piece” that puts the onus on students.
Jeff, you raise an interesting point but in my opinion the financial literacy argument has one big hole; parents!
The vast majority of private student loans require co-signers by adults who are more aware of how financial stuff works, yet they blindly sign for these private loans with onerous terms.
This topic is just another great example of why we need to understand that no matter how much experience or how many forced classes, often our underlying personalities and behavioral economics tendencies drive the way people spend.
Until there is some actual awareness and disclosure about your actual chances of graduating and the expected income for your degree, people will continue to make bad financial choices that are enabled by lenders, the school, and assumptions.