A simple solution to the student debt crisis
As college tuition continues to skyrocket and stories focused on student debt levels are an almost daily occurrence, the debate over whether earning a college degree is financially prudent seems to be raging louder than ever. As our economy continues to evolve into an information and technology based system, the earnings gap between high school and college graduates will likely expand.
However, student loan debt is a growing problem that must be addressed. News of rising student debt delinquency and default rates has become commonplace, with some financial analysts suggesting that the student debt bubble will rival the real estate bubble that famously popped in 2007 and 2008. Student loan debt exceeds $1.2 trillion, more than all other forms of consumer loans except mortgages.
The core issue is not the value of higher education, tuition costs or even student loan debt itself. The issue is that students and their parents need to make informed financial decisions on the front and back ends of the college experience. Careful deliberations are required to decide on a field of study to pursue, how to finance a degree, and ultimately how to pay for it.
We are therefore faced with two primary challenges. First, we must inform potential college students (and their parents) that taking on student debt — to earn a degree in a field of study with solid job prospects — is a worthwhile investment that should produce a solid return. Second, we must equip those students with the skills, knowledge, and clear understanding of how to manage their finances and debts after graduation. By doing so, we will be able to head off a student loan bubble by dramatically reducing delinquency and default rates, while positioning college graduates to achieve a successful financial future.
Fortunately, a simple and relatively inexpensive solution is already available to policy makers and universities. Nonprofit experts are eager to provide one-on-one counseling and education to help students prepare for financial success. Students can receive a customized post-graduation budget and cash-flow analysis, a financial roadmap that includes multiple scenarios based on options they may be considering. Students can be counseled on their student loans to ensure that they know exactly how much they owe, payment amounts, when those payments will begin, and how they will fit into their personal budget. Students can learn about their credit report, why credit scores are important, and get tips for maintaining a high credit score. These resources are available today to provide students with the financial management skills that many currently lack.
As it stands now, we saddle students with debt and then unleash them into the world without giving them the basic tools to manage their money and debt load. As a result, many students who decide to take on student loan debt do so without money management skills or a plan to repay the debt. Simple money management techniques can often make the difference between keeping on track with loan payments and default.
GreenPath Debt Solutions is a nonprofit organization that is dedicated to helping people responsibly manage their finances. We most often deal with people after a personal financial crisis, and we assist them in organizing and managing their entire financial picture to help them get out of debt. A large number of the people who turn to us for help have struggled with managing student loan payments. Their inability to manage debt right out of school cascaded into financial trouble in other areas.
Instead of waiting for people to reach a financial crisis stage, we should be doing everything we can to ensure that our young people receive financial literacy training on the front end. Legislators and higher education officials should make resources available to students and formulate specific requirements to ensure that they learn critical money management skills.
By working in a proactive fashion, student loan delinquency and default rates will drop considerably. The financial burden of obtaining a college degree will appear less daunting.
When we implement common sense, low-cost solutions, we can help avoid the impending burst of the student loan bubble. Our young people will seek higher education, and they will graduate with the knowledge and skills to achieve financial success. Our country and economy will reap the benefits.
Jane McNamara is president and chief executive officer of GreenPath Debt Solutions in Farmington Hills.