School Days

How can CUs help young adults with their first major financial decision?

August 12, 2013

Waning August brings to mind days of my youth during which Mom escorted her four kids on the annual shopping trek for the approaching school year. Acquisition of a zillion crayons and pencils, Spiderman backpacks, squeaky new shoes, and other pricey sundries solicited cries of delight from the children and pained sighs of resignation from The One Toting the Checkbook.

Back-to-school shopping remains a noteworthy financial excursion for many. This year, however, is a little different than last in the checkout lines.

Pent up demand and more kids in school overall last year “put back-to-school spending in the history books, leaving parents in 2013 with an array of school supplies that still work, and a significantly shorter shopping list,” according to a National Retail Federation press release. 

“Families with school-age children will spend an average $634.78 on apparel, shoes, supplies and electronics, down from $688.62 last year… Total back-to-school and back-to-college spending combined will reach $72.5 billion.”

But, back to school retail expenditures are a fraction of the fiscal realities for those on an educational quest. Research findings this week illustrate the significance of student loans for individuals as well as the economy at large, both at the time the loan is taken out and years later when borrowers experience repayment implications.

How can your credit union help consumers make wise choices at the moment a loan is issued as well as years later when student debt may pose additional consequences?

‘The secret in education lies in respecting the student.’—Ralph Waldo Emerson

Student loans, of course, carry an element of risk for both the student and lending institution. Will the student complete a degree or certification? Is the interest rate fair? Will the cost of the education and job earnings be in accord? Is the educational institution of choice reputable?

First, let’s examine student funding of schooling. Scholarships and grants are on the rise, covering 30% of college costs, according to “How America Pays for College 2013.” 

This interesting infographic also reveals that student borrowing comprises 18% of the financing, parent borrowing, 9%, and parent income and savings, 27%. Loans remain important.

Check out “An Examination of Student Loan Interest Rate Proposals in the 113th Congress" by the Congressional Research Service. This report “compares and contrasts selected loan interest rate policy options and provides information on proposed student loan interest rate structures, projections of future interest rates, and estimates of future costs to the government.”

The report examines three typical borrower types: dependent undergrads, independent undergrads, and parent borrowers. Detailed findings are provided for loan type and related expenses each group incurs.

Major factors in setting interest-rate policy are important to borrowers and lenders. They include:

Complications sometimes exist when student loan borrowers fail to understand various impacts of the debt, according to a recent survey by the Consumer Federation of America (CFA).  “The survey found between one-third and two-fifths do not know that the credit scores of student loan co-signers are affected by that loan—improving if payments are made on time (38%) and declining with one late payment (31%).”

Unfortunately, student loan defaults are increasing, says a CFA spokesman. “We need targeted education to ensure both graduating students and co-signers… fully understand their obligations and the repercussions of missed payments.”

A more personal examination of the impact of haphazard student lending is found in “Beauty School Students Left with Broken Promises and Large Debts.” This article features a woman who attended a cosmetology school that misused federal student loan dollars and did not adequately prepare students for licensing exams—leaving her stuck with a bill and lacking necessary skills.

The schools in question led to the approval of 35,726 loans that did not provide quality education. And, “unlike mortgages and credit card debt, federal student loans are difficult to relieve, and there is no statute of limitations on their collection.”

Ill-informed borrowers may find themselves saddled with burdensome student loan debt for years.

Another depressing angle on student loan regret: “About one-third of millennials say they would have been better off working instead of going to college and paying tuition,” according to a recent Forbes article.

Clearly, student loans are burdensome, and financial literacy is crucial to good decision-making. “The other problem on student debt is a lack of financial education. The first major financial decision many students are making is with their college loans… and often times there’s been little financial education, if any.”

How can you help students with this first major financial decision and other money matters?

‘There are two educations. One should teach us how to make a living and the other how to live.’—John Adams.

The societal costs of student loan debt ultimately affect our economy as borrowers struggle with limited spending ability.

Average Student Loan Debt Could Cost a Household $208,000 Over a Lifetime,” says The Huffington Post. “A household with $53,000 in outstanding student loan debt—which is the average college loan balance for a family headed by two people with four-year degrees—will be about $208,000 poorer over a lifetime than a similar household with no debt.”

In addition, “The nation’s $41 trillion in outstanding student debt would amount to an aggregate wealth loss of about $4 trillion over the lifetime of the borrowers.”

Echoing this sentiment, “Student Debt May Slow Home Buying,” says Boston College. First-time home buyers now make 29% of U.S. home purchases, down from historical levels of 40%. “One culprit may be student debt… [as] 43% of young adults have some… The average borrower’s balance has also doubled.”

Consequently, “Student loans cause individuals to do poorly under two of the primary tests by Freddie Mac and Fannie Mae that lenders use to approve standard home loans.”

Homes are valuable assets, and “With fewer adults today able to buy a house, it could make this country’s retirement outlook that much worse.”

This is merely a cursory look at the implications of student lending decisions and the ripple effect on our economy. The cumulative effect of such loans is remarkable.

Think about your credit union’s role in the educational process for your members—before, during and after school. What do your members need to know?

As British statistician Claus Moser once said, “Education costs money, but then so does ignorance.”






Lora Bray is a research librarian at CUNA.