PhotoFor many young college students, managing money is still a foreign concept. Bright-eyed and naive students often take advantage of those “free” credit cards being hawked on campus, and the less responsible ones can use those funds for less “necessary” expenses.

This can all come to a head after graduation when bills start showing up in the mailbox, as some loans can take decades to pay if not managed responsibly.

The layers of credit or repayment are deep. Not only for students, but many parents can’t pass a quiz on student loans, either. It’s a problem made even more exhausting because 90+ percent of outstanding student loan volume is managed by a vast network of non-banks for servicing and debt collection, all of which have their own ways of managing credit accounts.

Sadly, when many students get their student loan wake-up call, the dominoes of life can start to fall. A student’s career choice might be affected, as can aspirations of starting a business or family, purchasing a home, or saving for retirement.

Repayment can be even tougher for women and people of color. The Washington Center for Economic Growth found that one-third of all women and more than half of African-Americans say their student loan repayment obligations make them unable to meet essential expenses.

Help is on the way

That hair-pulling might be getting some relief. The U.S. Department of the Treasury and the Financial Literacy and Education Commission (FLEC) just released a report recommending mandatory financial literacy courses for college students.

“Courses taught by institutions of higher education can improve students’ financial knowledge, build key financial literacy skills, and promote sound financial actions during and after their education,” the report found.

The report pointed to research proving that point. “Students from states with financial education provided in high school had higher credit scores and lower delinquency rates on consumer credit as they reached adulthood. College students who took a personal finance course in high school were more likely to save and pay off their credit cards and less likely to max out credit cards,” the report stated.

The Treasury and Commission’s push for financial literacy has support from the Trump administration. Last year, Secretary of the Treasury Steven T. Mnuchin submitted a report to the White House dittoing the complexity of student loans, repayment plans, and program features. Mnuchin said those three prongs “make the program difficult for borrowers to navigate and increase the difficulty and cost of servicing.”

Potential fixes

In the Treasury’s way of thinking, the Department of Education should establish and publish minimum effective servicing standards to “provide servicers [with] clear guidelines for servicing and help set expectations about how the servicing of federal loans is regulated.”

The Treasury also pointed out that, with today’s dependence on digital communication, credit providers should make better use of that avenue for performance monitoring and management of those loans.

The report’s baseline recommendation is that colleges need to address these issues by teaching financial literacy and improving decisions related to student borrowing, including:  

  • Providing clear, timely, and customized information to inform student borrowing;

  • Effectively engaging students in financial literacy and education;

  • Targeting different student populations by use of national, institutional, and individual data;

  • Communicating the importance of graduation and major on repayment of student loans; and

  • Preparing students for financial obligations upon graduation.

The report says colleges should also augment its communication with student borrowers by taking steps such as:

  • Ensuring that their financial aid offer letters are clear, timely, and customized, and provide students with a clear sense of their borrowing obligations;

  • Providing students with annual debt letters, which incorporate the following best practices, to ensure that students have a clear sense of their total borrowing obligations;

  • Offering incentives to complete the repayment on time (or earlier);

  • Dedicating staff to advise students on loans, majors and obstacles to graduation; and

  • Providing emergency financial assistance.

The bottom line

“Helping students and their families avoid the pitfalls associated with financing higher education, and empowering them to make optimal financial choices, should be a priority of all institutions of higher education,” wrote FLEC.

If the commission had two wishes, it would be that 1) everyone -- lenders and colleges -- come together and create a list of best practices for teaching financial literacy and provide information about making financial decisions, and; 2) that colleges get this done while students are enrolled, and not after graduation.

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