G.K. Chesterton once said, “It isn’t that they can’t see the solution. It is that they can’t see the problem.”
Young Americans around the country are being held back by ballooning student loan debt. In recent years, many activists and politicians – including the current administration – have been calling for loan forgiveness. But this is a bit short sighted. After all, the debt will just pile up again. And then we’ll presumably forgive it again. Eventually, we’ll just be giving out free money – in other words, free college for everyone (except, of course, the taxpayers).
If we really want to solve a problem, we have to find, as Chesterton pointed out, the real problem. In this case, the real problem is not so much that students can’t afford college – plenty of students (around 38%) graduate debt-free. So no, it’s not just the top 1 percent, or even the top 10 percent, who can pay off their tuition fees. Instead, there is another factor that most haven’t considered: financial literacy.
Financial literacy is essentially the ability to make good financial decisions and to understand and take into account the consequences of those decisions. These are basic concepts, but unfortunately, most college students don’t understand them.
Financial illiteracy starts at a young age, simply by virtue of not learning. A 2014 compilation of studies on the subject found the following:
Several authors have measured high school students’ financial literacy… As we saw for their adult counterparts, most high school students in the U.S. receive a failing financial literacy grade (Mandell 2008; Markow and Bagnaschi 2005). Similar findings are reported for college students (Chen and Volpe 1998; and Shim, Barber, Card, Xiao, and Serido 2010).
Indeed, another estimate from 2017 gave more than half of the fifty states a “C” grade or worse for high schooler education (or lack thereof) in personal finance. College isn’t much better. Indeed, less than half of those attending both four- and two-year institutions have taken a course on personal finance.
This leads to a high illiteracy rate among college-age students. A 2018 study by the FINRA Investor Education Foundation found that only 17% of Americans aged 17-34 could correctly answer four out of five questions pertaining to financial literacy – down from 30% in 2009. Over all the categories, financial literacy dropped eight points between 2009 and 2018, now resting at 34%. Even after they enter college, many students still don’t learn about managing money.
The Illiteracy Cycle
Having never learned, then, students enter one of the most important stages of financial decision-making without the tools necessary to make those decisions wisely. For example, one survey showed that of the students planning to take out student loans, “just 15 percent… said they felt they had the education, information, and resources to be able to pay off their loans in the future” (emphasis added). And how could they, given most of them have little knowledge about personal finance? Yet another report from 2016 explained that the evidence “so far shows that many borrowers are unprepared when taking out their student loans and are not fully aware of the debt burden they are assuming. As a result, many borrowers have difficulty managing their debt, fall behind on their payments, and report being concerned about whether they will be able to pay off their debt.”
Given these dismal statistics, is it any surprise that 44.7 million Americans have collectively racked up more than $1.5 trillion in student debt? In a 2009 publication, Drs. Annamaria Lusardi and Peter Tufano stated the following:
“We find that self-reported literacy again shows a very strong relationship to self-assessed debt burdens. Those who reported higher levels of literacy are more likely to belong to the group who reported having no difficulty handling their current debt…. Conversely, those with lower self-reported literacy levels are much more likely to have reported having difficulty with debt, and again there is a monotonic (negative) relationship between financial literacy and having too much debt” (emphasis added).
Some might argue that income inequality is to blame – but this is not as significant as it might seem. The Brookings Institute – no right-wing source – reported last year that the “highest-income 40 percent of households (those with incomes above $74,000) owe almost 60 percent of the outstanding education debt and make almost three-quarters of the payments. The lowest-income 40 percent of households hold just under 20 percent of the outstanding debt and make only 10 percent of the payments.” In other words, not only is income inequality not the deciding factor of who has more debt, but those with higher incomes actually end up having more student loan debt than those with lower incomes.
Unfortunately, financial literacy doesn’t get cured after college: it persists into adulthood. A 2017 article by the Wall Street Journal cited a study showing that only 1 in 3 Americans age 40 have mastered basic financial concepts such as “interest compounding… risk diversification and inflation” – “the ABCs of personal finance.” Students aren’t learning how to manage their finances in college, which leads to largely ignorant adults. Some of them – perhaps many of them – desire to be able to handle financial decisions wisely, but without the knowledge, they are left educationally bankrupt.
In conclusion, then, forgiving student loans is simply a band-aid on the cycle of financial illiteracy: high school students aren’t taught, so they grow into college students that don’t understand personal finance. Those college students take out massive loans to get an education where they still aren’t taught about finance, so they grow into adults who can’t pay off their loans.
Chesterton was right. We can have all the solutions we want, but it won’t fix the problem until we know what the problem actually is. If we want to stop overwhelming student debt – not just give it a temporary fix – we have to address the root of the problem.
The United States might have a near perfect literacy rate, but our financial literacy is drastically behind, and until we address it, we will continue to face the consequences.