Is the lack of financial education leading to a rise in the student loan default rate?

Financial Education

By Angela Brown
05/21/2015
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The main capital of a company is its young employees and the college grads who will prove to be the most trained workforce in future. While these companies fill up the administrative positions with the young workforce, don’t you think that there is a lack of financial education among the Gen-Y in 2010? As we are about to bid goodbye to 2010, we should embrace the New Year with some new and successful ideologies that will help facilitate the US economy. With the student loan default rate gradually spiraling out of control, financial experts are blaming the lack of financial education as the primary reason behind it. If the student borrowers have to emerge debt free, it is very important for them to educate themselves on financial matters.

The present student loan default rate is at its highest and has surprisingly crossed the consumer credit card default rate. However the alarming statistics actually understate the actual number of students who have defaulted on their student loan debts. With such depressing figures, a sense of doom seems to invade the student loan market and adding fuel to fire is the growing rate of unemployment. As the unemployment rate rises, more and more students are being thrown away from their part-time jobs and therefore they are losing their source of money to repay their federal educational loans as well as private ones. The experts opine that the main reason behind this default is the scarcity of students who are financially literate. Have a look at the reasons why the students must be financially literate in order to boost the economic growth of the country.

Primary reasons to become financially literate

To handle your finances effectively: As the teenage students enter college, they become financially independent. They start using multiple credit cards and also take educational loans to finance their education costs. With the sluggish state of the US economy and the huge educational costs, it more and more students are resorting to using credit and legal financing. If the students plunge into this market before being financially literate, they will never be able to manage their finances on their own. The pitfalls of using too many credit cards and shopping on credit should be taught to them so that they can avoid falling in credit card debt.

To understand the law of interest: Another reason why financial education is very important for students is to make them understand the law of compound interest. While they take the student loans, it is a disheartening fact for the US economy that they’re taking the loans without any prior knowledge of the costs, interest rates and fees associated with it. The concept of risk management and timely payments on their loans should be taught to them. They should know the dire consequences of defaulting on their payments of student loans.

To understand the consequences of bankruptcy: As there is an ignorant attitude in the air, most students are even oblivious about the after-effects of filing for bankruptcy. As they’re students who are just starting off their career, credit score takes an important part in their financial life. With a poor credit score, they can jeopardize the prospects of securing a good job. They should be taught that bankruptcy hurts their credit score terribly and that careful handling of finances will only help them avoid facing such a situation.

The correct financial education will benefit all individuals at all stages of their life. If you’re a student, it is all the more necessary to stay financially updated and literate enough to deal with your finances and walk through the path of a debt free life. Despite the rise in the education costs in America, students must be educated on the various loan repayment options so that they do not unknowingly contribute to the already increasing student loan default rate.

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