The Financial Literacy Gap Costs College Graduates Thousands

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Forbes
By: Robert Farrington
July 16, 2014

A recent study highlighted the huge gap in financial literacy among American students. And while this study was focused on high school students, that same issue continues through college and beyond. With the push for American students to go to college and spend thousands of dollars on their education, the financial literacy gap leads many students to make painful early mistakes with their money.

The sad part is, when college students make poor financial choices, these problems can follow them throughout their lives.

The Student Loan Dilemma

Once of the biggest gaps that college graduates (and before that, high school graduates) face has to do with student loans. What many students don't realize is that a student loan is a loan on their future income. The gap is this: too many students borrow way more than they will ever be able to repay later in life. The sad truth is that many students fall into the Too Poor For College, Too Rich For Financial Aid scenario. But this can't be an excuse for making poor financial choices.

Students need to make sure they understand what it will take to repay the student loan debt they will be taking on. They need to realize that the choices they make to take on debt in early in life could have a profound effect on their lives after college. For example, taking on too much in student loan debt could hurt their credit scores all the way to preventing them from getting certain types of jobs. Without the basics of financial literacy, this is a problem that many will continue to face.

Other Basic Personal Finance Gaps

Beyond student loans, college graduates that lack basic financial literacy will face a myriad of other issues as well. For example, college, for many, is the first time away for students. They will need to plan their spending, use credit and debit cards for the first time, even make monthly recurring payments like rent. Without an understanding of the concepts and tools to be successful, many students and graduates struggle.

Many students and graduates lack the fundamentals of:

- Budgeting

- Spending less than they earn

- How debt works

- What is an emergency fund and why it matters

- Why they should start investing

These gaps only become apparent when the student or graduate runs into trouble. Many times these gaps are masked by supplemented income or free rent, but once these crutches go away, the problems arise.

However, there are several simple solutions to this widespread problem.

Solutions To This Widespread Problem

The fact is, personal finance starts at home. Kids learn everything they can from their parents. But in many cases, their parents aren't the best example. But that shouldn't be a hindrance on their financial future. For example, take the story of Travis Freeman, who grew up on food stamps to become a millionaire by 30. It's completely possible, but it take effort. That's an example, not a solution. But personal finance does start in the home.

Since many students aren't getting the guidance they need at home, we should consider programs in schools. Starting in elementary school, we need to start teaching personal finance concepts like budgeting, spending, and saving. As students' progress into middle school and junior high, we can add in more advanced concepts like debt, interest, and how mortgages and car loans work. Finally, in high school, we need to be teaching out children about student loan debt and what they should expect. We should also cover practical concepts like how to check their credit score and what saving for retirement looks like.

Finally, in college, we should have more advanced courses for students that are required for graduation, like Investing 101 or Personal Finance for Adults. While this may seem unnecessary to some, the lack of real world financial skills demonstrated by our students and graduates tells us something different. It's time we challenge this problem with some actionable solutions.

http://www.forbes.com/sites/robertfarrington/2014/07/16/the-financial-literacy-gap-costs-college-graduates-thousands/

About this Entry

This page contains a single entry by CFED published on July 18, 2014 3:44 PM.

Stop worrying about the one percent. Their money can't help the middle class was the previous entry in this blog.

A College Savings Account For Every Child is the next entry in this blog.

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