America consumerism

Teach students financial literacy

[Originally published in The Guardian]

Barack Obama’s new student loans legislation won’t help young people who have grown up accepting that debt is the norm

After graduating from Cambridge, I considered doing further study in America. I checked out some of the top colleges and looked into how much it would cost to study at them. I was looking at a minimum of $40,000 – per year – just for tuition alone. It was off-putting to say the least. First, I had already had a degree from one of the best universities in the world that had cost me £1,500 per year; to pay $40,000 per year to go to any other college seemed absurd. Second, it would have meant taking out further, huge loans with commercial interest rates, which I was unwilling to do.

Most American students don’t have that choice if they wish to study. I have a few American friends who graduated with debts in the region of $100,000, and went to work in professions which pay them an annual salary which is nowhere close to that. They will be paying those loans off for a long, long time – and goodness knows what the actual cost of the loan is when you take the interest into account. If you want to go to college here in the US, especially a top one, you’re looking at a minimum of around $50,000 per year to do so.

There’s no doubt, therefore, that the student loans legislation – which cuts out private lenders as the middlemen in federal lending – that has just gone through Congress will provide some relief to the many millions of American students who are considering going to college and taking out federal loans in the future.

But ultimately, the new measures – which were put in place to assist students financially and to provide greater access to higher education for more students – are lacking a vital component. In fact, it is like putting a sticking plaster on a gaping wound. The gaping wound is the increasing level of financial illiteracy of my generation and those coming behind. President Obama has talked about being on the side of students rather than banks. If he is, he needs to start implementing financial literacy into the education system – and soon.

Despite this legislation, a large number of college students will still continue to take out private loans, some of which are known to have practices and terms similar to those which fuelled the sub prime crisis; students are also defaulting on their loans in larger numbers.
Basically, it matters little whether or not there are lower interest rates if one does not know how to manage one’s money or make beneficial financial decisions in the first place.

Whether we were raised in the US or the UK, we have been brought up in a consumer culture in which easy credit and unaffordable debt have become the norm. The economic crisis is a large-scale reflection of the normalcy of individual debt in modern day society. Student loans are the first introduction many young people get to the world of debt. For American students even this is compounded due to the expensive nature of college. At the age of 17 and 18, young Americans have started to learn that it is OK to borrow tens, if not hundreds, of thousands of dollars. And of course that amount increases for those who do graduate studies. After getting their first taste of it, they will go on to take out credit cards, huge mortgages, car loans and other types of credit. Although it is said that there is “good” debt and “bad” debt the reality is that debt is debt and the people who generally benefit most from it are the creditors.

This student loans reform was tacked onto the healthcare bill, and both healthcare and student loans have similarities. Just as Americans would benefit more if they took care of their health preventatively, people would also benefit from being financially literate in advance of making decisions involving large sums of money. Without financial literacy, which involves not just the hard facts of money but also the emotional drivers of people’s financial management, we will continue to see economic crises, as people who believe that unaffordable debt is normal continue to make economic decisions based on that faulty premise. It is time for financial literacy to become as important a part of the education system as English and geography.

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