Why is it Important for Students to be Financially Literate?

The repercussions of the financial decisions we make when we are young can often last years—or even a lifetime. Those who are not provided the opportunity to learn how money works early in life are more susceptible to poor choices and become mired in debt. Career success and financial security then often elude those who dig themselves in a hole. Life becomes harder, more expensive and stressful—a combination everyone wants to avoid.

Alarming U.S. Rankings

Unfortunately, far too few U.S. students are well-versed in financial literacy. Studies have consistently ranked the U.S. below average with regard to international assessments of financial knowledge. Even students in smaller and less developed countries such as Estonia and Poland consistently outscore their U.S. counterparts.

Unfortunately, this issue isn’t given the critical attention it deserves. So let’s take a minute to explore why it’s imperative that U.S. students improve their financial literacy.

The Student Loan Crisis

Most people are aware that there is a serious student loan crisis brewing, with more than $1 trillion in loans outstanding. The amount of debt the average college student has by the time he or she graduates has tripled in the last two decades, rising from $10,000 to $35,000.

There are several reasons why this is occurring, including relatively lax lending standards and skyrocketing tuition costs. Yet many students are woefully unprepared for the implications of assuming this type of debt load. Without a foundation in financial literacy, the average 18-year-old simply lacks the tools to assess the long-term implications of taking out a large student loan.

Unfortunately, student loans are fairly easy to get (federal loans require no credit qualification), yet exceedingly difficult to discharge under our current bankruptcy laws. A persistently tight labor market for younger workers and stagnant wages, have made it difficult for millions of students to meet their monthly payments. The result is a loan default rate of nearly 12-percent—slightly down from a few years ago, but much higher than the four percent default rate of 2003. It is estimated that an astounding 40 percent  of all federal borrowers currently aren’t making payments either due to default, deferment or simply from falling behind.

The Benefits of Financial Literacy

Students who are grounded in financial literacy are much more likely to grasp the long-term implications of their decisions and the effects this has on their potential for success. They also are more likely to be judicious when taking out loans. Should they fall behind, they possess the knowledge to navigate federal loan assistance programs such as the Income-Based Repayment Program.

The ability to consider and act in their own long-term interests means these students are better armed to make decisions in order to avoid graduating with crippling debt. They are also less likely to damage their credit history and will have the savvy to buy a home with reasonable lending terms.

Students who are financially literate also make smart decisions at a young age. They start saving and investing early, and allow their portfolios to grow over a 40-50-year time period, which ultimately allows them to become financially independent.

The Takeaway

Financial literacy is a prerequisite for financial security that should be emphasized and taught at an early age. By ensuring students develop these skills early, we will help them make smarter lifelong decisions for a prosperous future.