College students are ignorant about how student loans work

by Grace

The New York Times recently profiled college graduates who were forced to move back in with parents because they could not afford to live on their own.  Most had student loan balances ranging from $10,000 to $140,000.  Here is one who obtained a degree in economics from Loyola University Chicago.

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“I feel like I had no idea of what I was doing when I took out those loans. They didn’t really sit us down and talk to us about financial aid or what our options were. I wish they would have had a class before you graduate high school, or like the first semester of college: ‘Let me teach you about basic student loans, math, finance, anything that you’re going to need now that you are 18.’ I wish somebody would’ve been like, Alex, it is not a good idea to take out a loan that has 12.5 percent interest.”

 

How does this happen?

If they are not doing it already, high schools and colleges need to educate students on the basics of personal finance.  Many schools are already doing this, sometimes mandated by state regulations as is the case of New York.  However, my observation is that the course work does not adequately stress some critical basic items like the effects of loan balances and interest rates.  Every student should have to calculate the effect of student loans on realistic income projections, including scenarios for six-year college attendance and dropping out with no degree.

In the case of this profiled graduate, a degree in economics would seem to provide the framework for understanding the risks of taking out a loan with a 12.5% interest.  However, it’s hard to know how much students really learn in college.

When I graduated from college years ago with a minor in math, I had no idea how my bank calculated interest on my accounts.  It’s an embarrassing admission, but this memory gives me some insight into the naiveté of young people.  Still in all, when I borrowed for college I made sure to know the amount I would have to pay back and anticipated how I would be able to afford it on my projected income.  Apparently most of these profiled students were not thinking that far ahead.

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Adam Davidson, “It’s Official: The Boomerang Kids Won’t Leave”, New York Times, June 20, 2014.

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7 Responses to “College students are ignorant about how student loans work”

  1. How on earth did we get to the point of student loans with 12.5% interest???? Back in my day, the main student loan program was the NDSL, with 3% interest, and the supplemental program was the GSL which I believe had 5% interest.

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  2. This must be a private student loan, which have been around for a long time. Government student loan rates are a fraction of that rate. She probably maxed out on the government loan amount and then went to private lenders. Or maybe she didn’t know about government loans.

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  3. “Interest rates on Federal Stafford Loans are fixed. The current interest rates for new Federal Stafford Loans in 2014-2015 are 4.66% for undergraduate students and 6.21% for graduate and professional students. Interest rates are the same for subsidized and unsubsidized Federal Stafford Loans.
    Stafford Loan Interest Rates < Information | StaffordLoan.com"
    http://www.staffordloan.com/stafford-loan-info/interest-rates.php

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  4. Her loan balance is $90,000, so she borrowed way over the maximum federal amount, which would have been around $27,000.

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  5. Those private loans are really problematic. No way would I let my kids do that

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  6. “No way would I let my kids do that.”

    Her parents would have had to co-sign her private loans. Maybe they all thought for sure with a degree from a good school she could get a well-paying job . . .

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