Over-borrowing among students happens when they are not educated on loan repayment options and paying for college. In other words, a lack of financial literacy can create a series of debt problems that can last a lifetime.
You can put a lot of blame on the unbelievable costs of college that have contributed to the mammoth numbers of outstanding student loan debts. There is, however, another thing that has a direct impact on this grave situation - the level of financial literacy among students. Being naïve in this situation leaves them unable to cope with the confusing maze of financial aid and student loans, leaving them in financial hardships even after finishing school.
According to an article on USNews.com, the national student loan debt toppled $1.1 trillion. According to this article, more than $26,000 is accrued by each student upon graduating. Repayments of these debts are extremely hard because the borrowers are already in financial constraints and have no savings. At the time of borrowing, these students don't know what they're getting themselves into and are not educated on their repayment options.
When discussed with the director of policy and federal relations at the National Association of Student Financial Aid Administrators, Megan McClean, she replied: "It comes back to a financial literacy issue and making sure students understand what they're getting into, how much they're borrowing and understanding there are different options for them at the end."
Back in August of this year, President Barack Obama pledged that the Department of Education will be reaching out to struggling borrowers and enroll them in what will be an income-based repayment plan. The sad reality is that barely 10% of the millions of federal loan borrowers are enrolled in such a plan. While talking about these plans, McClean added, "Those programs really are under-utilized when you consider how many students we have going into default."
It has also been seen as a common practice for these students to give up repaying altogether because of the confusion in repayment options. Defaulting on their student loans can seriously damage their credit scores and also cause cuts in wages. Lauren Asher, president of the Institute for College Access and Success believes that keeping the default situation unresolved can ultimately take bites out of the Social Security checks of such students.
"It's crucial that borrowers are getting good and timely information about repayment options before they fall so far behind that they default. They need to know that these plans exist," Asher said. She further added, "The default rates that just came out are just the tip of the iceberg." Asher's experience suggests that most of the defaults done by borrowers are due to not knowing of any flexible options of repayment. Borrowers also think that they can get away by defaulting. What they don't understand is that once they default, they can never enroll in a similar program ever again!
Many experts believe that financial education should be started at a much earlier stage. Some states have also mandated including financial education to as early as K-12 curriculum. However, in a 2011 survey by the Council for Economic Education, not more than 20% of the teachers believe they are competent in educating students on personal finance.
The corporate responsibility leader at PricewaterhouseCoopers (PwC), Shannon Schuyler also shared her opinion on financial literacy. In 2012, PwC made a pledge to invest a comprehensive $160 million in educating students, teachers and parents on the financial issues.
"You have a certain number of states that have mandated financial literacy, and we hope that those continue to grow. But even in those states where it's been mandated that students have (financial education) before they graduate from high school, those teachers don't know how to teach it," said Schuyler.
She further discussed the importance of financial literacy, which can affect where you'll end up living, what items you'll be able to buy and how soon you'll be able to consider starting your own family. The whole idea of financial literacy is to groom individuals into becoming better equipped to enjoy their life without having to worry about a decision they made without understanding the consequences.