In a new report, the U.S. Financial Literacy and Education Commission “recommends that institutions of higher education require mandatory financial literacy courses.” It is about time.
The average student loan debt in the U.S. stands at $33,310. In fact, overall student loan debt is about $1.5 trillion, which means student debt has become the second-largest debt market after mortgages.
There are obvious concerns about this mounting student loan debt.
When looking back at data from the 2015 National Financial Capability Study, we found that 45% of individuals age 18 to 34 had a student loan. Thus, almost half of young Americans start their working life in heavy debt. But there are many indications that borrowers did not fully comprehend what they were taking on when they obtained their loans.
To that point, the NFCS data showed that, at that time, 54% of student loan holders did not try to figure out how much their future monthly payments would be before taking on their loans. As further evidence that student loan decisions are not well thought out, a staggering 53% said that they would make a change if they could go through the process of taking out loans all over again.
The situation seems dire because a great deal of student loan debt is taken on by people who have little understanding of what they are signing up for in the first place. Many of these students feel uneasy and unsure, with 48% of student loan holders expressing concern about their ability to pay off their student debt.
Sadly, the situation is not improving. The 2018 NFCS data released last week show that a majority of student debt holders did not try to estimate their monthly payments in advance. Also, about half of student debt holders are concerned about being able to pay off their loans.
And student debt holders have struggled with payments. The 2018 NFCS report shows that 42% have been late with a payment at least once in the past year, up slightly from 37% in 2015.
This debt crisis is obviously weighing heavy on the students, causing financial anxiety. As many of 63% of young people age 18 to 34 in the 2018 NFCS said that “thinking about my personal finances can make me feel anxious.”
It’s evident that the lack of financial literacy can lead to owing large amounts of debt and making poor financial decisions. Therefore, it’s a step in the right direction that many universities and colleges have started teaching personal finance courses. It is an important and welcome change if we want to make sure that young people have the basic skills and knowledge to manage their student loans.
But should financial literacy courses made mandatory, as the FLEC report recommends?
The answer is yes for three reasons.
If financial literacy courses are not mandatory, only a small fraction of students may end up taking them.
chair of economics and accountancy, George Washington University School of Business
First, if students default on loans and simply cannot find a way to pay back their student loans, taxpayers may be asked to pay for those loans, and it is important to take preventive measures and make sure that students acquire some basic knowledge and skills to better manage those loans.
Second, if financial literacy courses are not mandatory, only a small fraction of students may end up taking them. And it’s obvious that all students need this financial education.
Finally, making financial literacy courses mandatory may help to create a rigorous courses with a standardized curriculum rather than the ad-hoc and simple financial education programs that we often see in higher education institutions.
Times have changed and students are now required to make many complicated financial decisions. Let’s make sure they are equipped with the knowledge and skills that are necessary to make those decisions. Let’s do so before stress takes a toll on their financial lives — and perhaps ours, too.
—By Annamaria Lusardi. Lusardi is the Denit Trust Endowed Chair of Economics and Accountancy at the George Washington University School of Business. She is also a member of CNBC’s Financial Wellness Advisory Council.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.