How about these scary statistics:
1. In the U.S. student loan debt is huge. Last year alone, students took out $117 billion in federal student loans. The Consumer Financial Protection Bureau estimates that the total U.S. debt has now exceeded $1 trillion. And this debit is not simply because new students are going to school. Nope, it’s also because folks with college degrees are behind in their loan payments, which increases the total interest costs. (The New York Federal Reserve estimates that 1 in 4 people with student loan debt is behind in their payments.)
2. The cost of a college education is rising fast. From the 1999 school year to the 2009 school year, tuition and room and board at public institutions rose 37% and at private insituations rose 25% (adjusting for inflation).
All of these statistics — and more — have some economists worrying that student loans are the new economic bubble. Like the tech and real estate bubbles, if this one bursts, the country could be in for another deep recession, this time with the federal government holding the bag.
So what the heck are colleges, parents and students doing to slow down this fast-moving train? Elgin Community College (ECC) in Elgin, IL is getting proactive, requiring financial aid counseling to students who are seeking federal student loans.
“The feedback has been positive,” says Amy Perrin, ECC’s director of financial aid and scholarships. “Students have expressed appreciation for educating them on the loan basics, budgeting, percentage interest rates and expected monthly payments.”
But student expectations are still a big issue. “We’ve had several students walk in with an inflated idea of what they ‘want’ to borrow — and walk out with a better understanding of what they ‘need’ to borrow,” Perrin says.
Student loans aren’t free money. And unlike other debts, these loans can follow a person forever, since they cannot be discharged in bankruptcy. It’s not just the math that trips students up.
“There seems to be a conflict between the Department of Education’s regulations and the student’s reality,” Perrin says. “The loan advising meeting covers many concepts, including creating a budget, interest rates, monthly payments, the student’s rights and responsibilities, and the consequences of default. After meeting with the staff, they should have a good understanding of the basic financial concepts of borrowing a student loan.”
So how can math help? A solid understanding of interest payments is critical here, and although there are online calculators that can help students estimate the total cost of these loans, students must have some basic math skills in order to use them. Perrin also suggests that parents and schools work harder at developing financial literacy skills.
“Parents can definitely play an important role in educating their children on basic financial concepts such as budgeting, how to open a checking account, why having a savings account is important and explaining ‘wants’ vs. ‘needs,’” she says. “Additionally, high schools should infuse financial literacy concepts into their classroom curriculum to further communicate the importance of wise financial decisions. High schools can partner with colleges to offer financial aid awareness events for parents and students.”
This student loan debt isn’t going anywhere any time soon. Unless we turn on our math brains and really deal with the numbers behind these scary statistics, our country could end up in another ugly economic place. Here’s hoping that other colleges require students to attend these programs–so that college degrees can actually mean something more than a monthly debt that must be paid off.
I’ll be the first to admit that my understanding of student loans is limited. So if you have questions, I completely understand! Post them here, and I’ll find the right expert to answer them.