College Costs 101: What Many Students DON’T Know About Their Loans

Student-loan-app_26-Jan-2015I’ve stated it before, but this statistic gets me at such a deep level it is worth stating again: student loan debt in America is at an all-time high of over $1.1 trillion, which includes an average of $30,000 of debt per student, whether they graduate or not. As a parent, and as a college graduate with loans still to pay, the reality of these figures is staggering. However, in many ways, it is a reality that can easily be reversed if more parents recognize what their children don’t know and focus more specifically on communicating the profound importance of financial literacy in general and student loans specifically.

What Is Financial Literacy?

A really hot topic among educational and financial aid professionals alike these days is “financial literacy.” It is defined by Investopedia simply as “the possession of knowledge and understanding of financial matters,” the absence of which “can lead to making poor financial decisions that can have adverse effects on the financial health of an individual.”

However, there are so many details embedded in this definition, from budgeting to balancing a checkbook to the particulars of compound interest, that it’s hard to really comprehend financial literacy until you are financially literate. For many people, however, the details and the mathematics of these concepts quickly overwhelm them and they just give up. “I just don’t get that stuff” is a common excuse I’ve heard from young people and adults alike. However, not paying attention to the particulars of every single financial decision you make can have dire and far-reaching consequences.

What Many College Students DON’T Know About Their Loans

Yet, many young people, specifically high school and college students, lack financial literacy to such a degree that they find it amusing. Not only to they fail to understand what a student loan means and what it is actually based on, they don’t get how failing to repay that loan can adversely impact them for years after the fact.

Don’t believe me? Take a look at this video, produced by iGrad, a company who specializes in financial literacy education for college students, their parents, and those who work with them. The video includes real college students (and statistics at the end) which shows the profound lack of knowledge about basic questions pertaining to finance in general as well as simple facts about their student loans. This is (to me at least) almost painful, but worth watching.

The Real Deal Behind Student Loans

Unfortunately, many students seem to possess a general misunderstanding of the basic premise of student loans in the first place. So, let’s break it down:

When taking the money they “need” to go to school in the form of a loan, students often fail to realize where the numbers from each loan originate. The lender, whether it is the government or a private institution, determines how much money to give a student based on needs and costs, yes, but they also base their figure on what they determine to be the student’s likely “future” income.

This is a number which is hard to tally in the best of circumstances and certainly difficult for a young adult to fully comprehend.

What College Students Need to Know About Finance, and Why

The only way for college students, and their parents, to get through the loan process and come out the other end financially intact is to consciously work on learning and living the most important financial literacy concepts ASAP. Specifically, a lack of knowledge in five, basic financial concepts, sets the stage for young people’s lack of ability to see the bigger picture. These are:

  1. Budgeting
  2. Spending less than you earn
  3. How debt works
  4. What an emergency fund is and why it matters
  5. Why investing is important

Financial literacy starts at home. By getting your own financial house in order and involving your children in the family’s financial plan you begin to lay the foundation for smart spending and greater financial understanding in the future. Your children literally cannot afford for you to box them out on this.

What can other parents do today to better prepare their children for the realities of student loans?

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