Few things have recently sparked as much controversy as the sudden announcement about student debt forgiveness. President Joe Biden has announced that, for those making under $125,000 per year, up to $20,000 in federal student loan debt will be forgiven. While many were ecstatic about the news, others were angry. Some thought the forgiveness did not go far enough, while others thought it was unfair to forgive any amount on loans that people took out voluntarily. Others are angry that the forgiveness is limited to federal student loans and does not include private student loans borrowed from traditional, non-government lenders.
Teens Signing Up For Tremendous Debt
Some of those who have not been included in the student debt forgiveness lament that they received little or no guidance on student debt while in high school. Indeed, it is common for those with student debt to regret part of their higher education decision-making. Many feel like they were misled by the education system – and society in general – about the value of a four-year degree. Indeed, college students often significantly overestimate their salary upon graduation. There is also a lot of misconception about student loan payment requirements, with almost half of college-bound families unable to identify important facts about federal student loans and repayment policies.
Presenting high school students with excessively optimistic outlooks on the job market for college graduates, and not fully informing those students about loan repayment requirements and interest rates, can lead to teenagers signing up for high debt levels.
Need Education and Transparency to Overcome Present Bias
In the aftermath of the loan forgiveness are additional policies to help the college funding crisis going forward: reduced payment requirements on income-based repayment (IBR) plans, improvement of the Public Service Loan Forgiveness (PSLF) program, and efforts to increase the size of Pell Grants. The policy matrix should include additional resources to help states implement high-quality personal financial literacy classes for high school students. While more states have begun requiring standalone personal financial literacy courses for high school graduation, they are in the minority. As a result, many students who take out student loans are coming out of high school without knowing as much as they should about personal finance and loans.
Education about student loans as part of personal finance is important due to the present bias implicit in these loans. Unlike most other loans, federal student loans do not need to be paid until six months after graduation, allowing borrowers to assume they will have sufficient income by then. Car loans, business loans, and mortgages enter repayment immediately, meaning borrowers go in with clear expectations of the monthly repayment obligations versus their income. With borrowers not having to begin repayment until four years or more after signing their contracts, it is easy to make assumptions about the ability to repay.
An additional risk in student loans is that recipients have less need to verify income or credit history. After all, many 18-year-old students heading off to college in the fall may have zero income or credit history! The fact that students’ ability to repay these loans can be significantly affected by these factors should require states to explicitly educate high school students about them. While it is likely necessary to give student loans to those without a history of income or managing credit, it should be expected that all recipients of student loans – including 18-year-olds – be knowledgeable of the vocabulary, expectations, and risks.
A Long-Term Solution to College Cost Crisis Includes Finance Education
Debates can rage forever about the primary responsibility for student debt and higher education funding. But education about college funding should definitely be included in the high school curricula. Students should be familiar with budgeting, determining college costs and tuition rates, and using a college cost calculator before taking out student loans. If students are not taught these skills, they may find themselves making costly snap decisions in their final months of high school, potentially damaging their finances for decades to come.
Students should be shown how to compare the tuition rates of public and private universities, apply for federal grants and common scholarships in the state or region, and compare the costs of living in the dorms or sharing apartments with roommates. Those who are never taught this may end up having to take additional loans to cover expenses. Living “inefficiently” during college can saddle college students with tens of thousands of additional dollars in debt, which prevents them from being able to purchase homes, get married, and enjoy other life milestones.
