The graduation gown comes off, and reality hits. You have your diploma in one hand and student loan debt in the other, with interest already accumulating. It would help if you had a job, the ability to pay for rent, transportation, and feed yourself.
This is a high-level picture of a fresh college graduate's challenges. Unfortunately, whether students graduate as engineers or English majors, college doesn't prepare students on how to manage their money.
Instead of asking why college students should study personal finance, we should consider why we send young adults into the world with a significant student loans (45 million Americans have outstanding student debts) and no understanding of managing their finances.
Why Is Personal Finance Important?
Being secure financially plays a significant role in our mental health and wellbeing. Financial responsibilities like car payments, loans, and mortgage payments creep up fast for young adults.
Making these financial decisions without being adequately informed can be a huge source of stress and anxiety. 73% of Americans rank their finances as the number one cause of stress. High debt and a lack of savings can lead to poor relationships, health, depression, and even bankruptcy.
There is a correlation between low financial literacy and poor financial decision-making, such as accepting higher borrowing rates like credit card debt, defaulting on mortgage payments, and home foreclosures. This behavior is also higher among younger people between 18 and 34.
It becomes vital for people to understand various financial skills such as budgeting, saving and investing, spending, managing debt, and acquiring and growing assets. To make informed decisions that lead to prosperous financial health, people also need to understand the many financial instruments available such as stocks, bonds, and mutual funds.
Why Should Colleges Teach Personal Finance?
The Cost of College and Student Loan Debt Is Rising
Teaching personal finance in college may even be considered too late as many people believe the earlier students learn, the better. Yet, according to the Council of Economic Education, less than half of U.S. states require high school students to take personal finance courses.
When students reach college, the rising cost of attending makes navigating financial decisions more difficult. Between 1980 and 2019, college costs have increased by 169% over the past four decades. Meanwhile, earnings for workers between the ages 22 and 27 have increased by just 19%.
Almost 45 million Americans have outstanding student debts, and of the borrowers, 43% aren't making their loan payments. Student loan debts are the second-highest debt in the consumer debt category in America, even higher than car loans and credit card debt.
Suppose college students haven't had any exposure to personal finance such as budgeting, mortgages, understanding debt, investing, etc. As they graduate, they will be largely unprepared for managing their money.
Millennials, aged 25 to 40, are the most highly educated and make up the largest share of the American workforce, yet 76% of Millennials are not financially literate. We can look to the Millennials to confirm this. How have they fared?
According to research by the TIAA Institute, the 2008 recession left them unprepared and making poor financial decisions. 44% of Millennials say they have too much debt, mostly from students loans and mortgages. 43% have used expensive financial services like payday loans and pawnshops. Over 50% don't have an emergency fund to cover three months of expenses, leaving them vulnerable to unforeseen costs.
Financial literacy programs could have benefited this age group when they were in college and before they faced a financial crisis.
With 78% of Americans living paycheck-to-paycheck, it's not surprising that people cannot keep up with their debt payments.
There Are Long-term Consequences to Poor Choices
Imagine drowning in debt with high-interest rate charges accumulating every month, and you have no savings. The bills are never-ending, and your income can't cover your expenses. In addition, you are paying late fees every month, and as a result, you have a poor credit score.
You couldn't pass the credit rental check for an apartment you wanted to live in. You can't afford car insurance and the installments, so you take public transportation, which adds to your commute time.
You missed opportunities to make your life better. Still, you have also placed yourself in a cycle of paying high-interest debt from credit cards, with no savings and no ability to acquire assets or save for your retirement.
Poor financial literacy has cost Americans $415 billion in 2020.
Here are some other statistics to further show how Americans are struggling financially:
- 56% of Americans can't cover a $1,000 emergency expense with savings, and 1 in 4 Americans have no emergency fund. If ever faced with a severe financial hit like an unexpected medical expense that insurance won't cover or a job loss, not having any emergency savings will send you into crisis mode.
- The average credit card debt in America is $6,270. The Federal Reserve data shows a $52 billion increase between the 3rd quarter of 2021 and the 4th quarter of 2021, making it the most significant quarterly jump in its 22-year history. With average interest rate charges (APR) at 18.26% for new credit card offers and 14.54% for existing accounts, carrying balances from month to month can be challenging to pay off with such high-interest charges.
- 1 in 4 Americans have no retirement savings, and 66% of Millennials have no retirement savings even though they work for an employer that offers a retirement plan. With higher life expectancy, higher cost of living, and lower-income replacement from Social Security than the previous generation, Millennials need to save significantly more than previous generations to maintain a good standard of living at retirement.
‘Boomerang Kids' are adult children who move out of the house and return to their parents' or grandparents' homes to live and receive support. What drives them back home is usually the inability to pay for the cost of living independently.
The number of Boomerang kids is rising because of the pandemic. 52% of young adults in America reside with one or both parents.
However, those returning home generally have higher income earning parents. For kids who don't have parents who can support them financially and want to achieve financial independence, understanding how to budget, keep spending under control, and save is imperative.
People Will Plan Better for Their Future
Live on a Budget
Starting a simple budget and sticking to it is fundamental to financial prosperity. A budget is where you can gather up all your expenses and see where your money is going. You can see if you are spending more than you make, cut unnecessary costs, and divert money to savings and an emergency fund.
Have a High Credit Score
To have a good credit score, you must pay your loans on time regularly, not max out your credit limit, and only apply for credit when you need it. In addition, your payment history accounts for 35% of your credit score, so it is critical to keep your account in good standing and not pay any late fees.
College students will learn to automate savings and invest:
- As soon as your paycheck reaches your bank account, set up transfers into a savings or investment account and watch your savings grow.
- Catch up on your employer-sponsored 401(k) retirement plan. Ask your employer if they have a matching contribution plan to take a portion of your paycheck, invest it into the program, and match that contribution up to a certain percentage. These contributions will not only lower your taxable income, but also your savings will grow tax-deferred.
- If you don't have an employer 410(k) plan, you can alternatively invest in an independent retirement plan (IRA). Again, automate transfers out of your checking account into your IRA to continue to build your retirement savings.
Teaching College Students Personal Finance Will Help Them Make Good Decisions
In a study of schools in Georgia, Idaho, and Texas that implemented state-mandated financial literacy courses, a study found that all three states saw a reduction in serious delinquency rates and high credit scores.
Preparing college students for the world after campus life where money exchanges hands constantly can change the trajectory of their lives. 83% of people who set financial goals feel better about their finances after just one year.
As college graduates, they will be better informed to make sound financial decisions, but they can also avoid the cycle of high debt and lack of savings that affect so many young adults.
This article was produced by Wealth of Geeks in support of the Plutus Foundation Impact Series.
Featured image: Wealth of Geeks.
Nadia is an M.B.A. graduate and freelance writer. She also likes to write about all aspects of mom life, co-authors the blog This Mom Is On Fire, and advocates for better dementia healthcare for seniors.