Educational Default

The vast majority of young Americans are starting life after college in a financial hole, while higher education and our government do the minimum in terms of educating them about personal finance issues.

April being financial literacy month, let's talk about how we can change this unfortunate reality.

Students dig their holes with loans, which colleges and Uncle Sam benefit significantly from. The General Accounting Office reports that the federal government generates billions of dollars in "subsidy income" -- most would call it profit -- from these loans. Higher education uses student loans to fund faculty salaries and other expenses. Many colleges could not exist without the funding provided by student loans.

Nationally, 69 percent of the college class of 2014 graduated from public and nonprofit colleges with student loan debt with an average of $28,950 according to the Project on Student Debt. Current outstanding student loan debt is approximately $1.3 trillion dollars--that is more than total debt outstanding for all auto loans or credit cards. The only household debt category larger than student loans is mortgage debt.

The government stipulates that colleges must provide student loan counseling to first-time borrowers. A website provided by the U.S. Department of Education offers personal finance instruction, and all colleges require students to use this on-line educational tool prior to disbursing any student loans. Yet a recent survey of 90,000 college students conducted by Money Matters on Campus found that only 10 percent of students felt that they had all the information they needed to pay off their student loans. Other student feedback shows that most do not comprehend the information, likely in part because they view it as simply yet another requirement of the financial aid process. And sometimes parents of the students complete the required training (pretending to be their child) before they arrive at college.

After this educational intervention at the stressful beginning of college, the next time students might talk about finances is at graduation. Theoretically, they would exit the process by going to the same government website or receiving, by mail, a brochure on how to repay their student loans. But the evidence is clear that the process is viewed by colleges as a compliance obligation and a graduation formality for students. Real learning is not part of this compliance oriented entrance and exit education process.

We know that most students have not received this kind of education in grade school, high school or home. Only five states in the nation received a grade A on a National Report Card on state efforts to improve financial literacy in high schools.

Because students borrow heavily for college, one would think that higher education and the government would feel an ethical responsibility to educate students in managing the economic burden of college.

Burdened with loans, college grads cannot buy homes and cars, are forced to live at home, and delay marriage and children and saving for retirement. Often, their net worth is scary, even for twenty-somethings.

Colleges and the federal government should be more aggressive about ensuring that no one graduates from college without personal finance skills and knowledge. They should beef up the training required to obtain students loans. Here's a thought -- if students can't pass a test on how loans work -- maybe they shouldn't be given the loan in the first place.

At the very least, they should understand the consequences of the loan transaction, and how much debt is appropriate, given the earning potential of their intended major. Too many learn all this too late, when unfortunately they default on their loans and destroy their credit scores. And defaulting proves they were not paying attention during the college exit process. The Feds offer loan deferment, forbearance and other ways to prevent loan defaults.

Congress can fix this. If and when it re-authorizes the Higher Education Act, it could require comprehensive personal finance education from colleges in exchange for student loans. Colleges and universities have a responsibility to do more. I'm pleased that Champlain College requires personal finance education for students. More colleges should follow suit, and test the effectiveness of that learning before students graduate.

And once the U.S. Department of Education links loans to college efforts to teach personal finance, we should measure learning effectiveness by observing its impact of loan default rates, credit scores, bankruptcy rates and other behavioral measurements.

Let's make those who benefit from student loans -- colleges and Uncle Sam -- do more to help those young Americans who are struggling with student loan debt. Let's give them the tools they need to be successful.

John Pelletier is director of the Center for Financial Literacy at Champlain College and formerly chief operating officer and chief legal officer of some of the largest asset management firms in the country. Follow him on Twitter.