07 Jan Financial Education: A Delicate Balance
By Tanya Tanaro, Manager, Higher Education Partnerships, American Student Assistance
We in the financial aid industry are committed to teaching students about their student debt obligations early on, both because it’s required by law and also because we want to prevent over-borrowing wherever possible so as to set students up for maximum financial success after graduation. But in our rush to give students a soup-to-nuts overview of student loans, often years before repayment even starts, are we actually doing more harm than good?
In our line of business, we often lament that student loans are a “mañana” issue for most students. They borrow for costs of living, without thinking about the long-term consequences; they don’t compare monthly student loan bills to expected income; and they fail to grasp just how long, and potentially heavy, their education debt burden will be once they’re in the real world.
Naturally, financial aid professionals want students to think more of the long-term. So we frequently load up entrance and exit counseling with all kinds of facts about student loans, from types of loans, to aggregate limits, to common loan terms, to various repayment plans, and the list goes on. Then we’re left to shake our heads in disbelief when former students, in survey after survey and media stories across the country, say they were “unaware” of how much debt they were taking on, or they were “unprepared” for the reality of their loan payment, or they didn’t “understand” what they were getting in to. How can this be?!, we think – we told them everything they could ever possibly want to know about their student loans.
And therein lies the problem: We tell them everything they would ever want to know, but at the wholly wrong time. Our motivations are noble but our tactics don’t achieve the desired results, because we don’t adhere to the four principles of effective financial education communications: Make it timely, ongoing, relevant and actionable.
Human nature dictates that financial education, as with so many subjects, is best absorbed and retained when it can be put to use immediately to positively impact the learner’s situation. We tend to forget what we don’t immediately use (how many of you remember anything from your high school trigonometry class?).
When we attempt to fill students’ heads with various loan repayment plans and terms years before the first payment is due, it’s no wonder their eyes start glazing over. Even the exit interview, delivered six to eight months before the payment begins, is too soon; that can be an eternity to a recent graduate securing employment and living arrangements. At my organization, we found that additional “just in time” communications to students during their six-month grace period, mere weeks or days before the first due date, reduced future student loan delinquency by as much as 50 percent.
Instead of trying to overcome human nature, then, we should be tapping into it and harnessing it to reshape the way we think about and ultimately deliver financial lessons to our students.
Take, for example, the two different experiences of the approximately 10,000 college students who used “My Money 101,” an online personal finance curriculum from SALT, in the first half of 2014. Students who were required to participate in MM101 by their school, and were given a list of mandatory courses, were most likely to complete classes in student loans, student loan repayment and budgeting:
Students who were given the opportunity to self-select which courses to take, on the other hand, were more likely to select topics more relevant to their current day-to-day, like fundamentals and money management, in addition to budgeting. Surprisingly, student loans didn’t even make their top three:
Of course, we can’t allow in-school students to totally neglect educating themselves on their student loans. They should realize how much they’re borrowing every year, they should understand why it’s important to try to stick to federal loans as much as possible, and they should know who to turn to down the road with their student loan questions.
But what these results do show us is that we need to make our financial literacy and financial education offerings a more balanced blend of advice and tips that can be used in the here and now, combined with easy to remember basic rules of thumb for the future that won’t be forgotten the minute they complete a personal finance course.
We also shortchange our students if we limit our financial literacy offerings to student loan training alone. For the student, education loans don’t exist in a vacuum; they are just one part of a financial journey. By capturing their attention with financial guidance that’s top of mind now, we can get them to make small incremental changes in their money habits immediately. These are priceless lessons that will no doubt change their financial behaviors for the better for years to come and put them on the road to overall better financial health, including better student loan repayment in the future.
Ultimately, our financial education efforts need to find that just-right balance between what students need to know and what they want to know. Otherwise, we risk them tuning us out – and we miss an opportunity to elevate the next generation’s financial acumen and create savvier consumers for a lifetime.