Monday, June 17, 2013

How we failed the Class of 2013


Our country has long prided itself on the idea that everyone gets a fair shot at the American dream. For the Class of 2013, this may not have been a reality. The quality of the education they received may have in large part been determined by the zip code they were born into, partially explaining why economic mobility in the United States is worse than most advanced economies throughout the world.

The inequality gap has also greatly widened for the world they are transitioning into. Inequality and mobility problems are complex and require a broad range of solutions. However, research correlates financial knowledge and wealth inequality, yet due to legislative failure in 46 states we have failed to adequately equip them with one common sense solution, a financial education.

So while they have attended school through a time when our public education system has had it’s funding gutted, European nations have made a dedicated effort to improve financial education. A matter of fact, financial literacy has now been added to the PISA.

There are a number of consequences of failing to provide a financial education, including our failure to equip students with basic knowledge to help them grapple with the postsecondary process.

Up to fifteen percent of students have chosen not to attend any kind of postsecondary program, even though they have been accepted into one. This is costly as high school graduates with associate’s degrees earn about 25 percent more than other high school graduates, and those with bachelor’s degrees earn over 50 percent more.

Clearly, a failure to understand the process, FASFA forms, and student debt contracts is a reason why. Ideas42 recently released a White Paper exploring reasons why, and providing behavioral finance suggestions worth exploring further.

“Many of the students most in need of financial aid are also some of the least likely to take advantage of the options available to them. Even though students with more grant aid and smaller loan burdens tend to persist at higher rates, one in four low-income students who qualify for Pell grants do not even apply for federal aid.”

So as the student debt bubble has grown to one trillion dollars, guidance departments are overwhelmed and understaffed with students who have never taken a basic personal finance course that introduces resources such as the CFPB’s Paying For College. Most students may not understand the maximum amount of student debt to take on, or that student debt is not dischargeable in bankruptcy. Yet we are expecting teenagers to make one of the most important financial decisions of their lives and have failed to provide them with the preparation they deserve to make wise and informed choices.

Dan Kadlec recently reported that Caroline Ratcliffe of the Urban Institute explained to the Federal Financial Literacy and Education Commission that educating students about student debt choices should be a priority, and added:

“But teaching financial literacy at younger ages is also critical. The earlier in life a person begins to build wealth, the more time those assets have to compound and become more valuable. So the key is to teach more people to make sound financial decisions earlier in life.”

The long-term impact of excessive student debt will impact many aspects of their lives in years to come. As the Federal Reserve recently reported, excessive student debt is coalescing into a financial anchor for current borrowers who want to move forward to purchase cars and homes.

We haven’t just failed preparing them for the postsecondary process, but to make practical financial choices. The FINRA survey released last week quantified many of the consequences of failing to provide students with an adequate financial education. What is particularly alarming is how little recent graduates save, as the consequences of inadequate emergency funds often lead to consumers using high interest credit products.

“Among those in the 18-29 age group, only 31 percent had set aside rainy day funds, while only 26 percent of those with annual incomes below $25,000 had such funds. As a result, many individuals and families would not be able to draw on personal financial resources if they were faced with an economic shock.”

Meanwhile banks are making a fortune from of our financial ignorance. The CFPB just reported that in 2011 the banking industry earned $12.6 billion in bank fees such as overdrafts and penalties.

For the Class of 2013, our legislative failure impacted the matriculation to postsecondary programs, their capability to comparison shop postsecondary financial offers, and understand the consequences of too much student debt. Most have never been exposed to the value of and knowhow to make basic personal finance choices such as starting an emergency savings account, investing for retirement, and building their credit scores early in their lives. 

So it looks like most from the Class of 2013 from 46 states will be learning these lessons from the school of hard knocks. Unfortunately, it will not be as easy to get up from the costly financial lessons they are about to learn as it used to be.

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