Politicians, academics and students alike have all criticized the ballooning cost of college and its contribution to the existing mountain of outstanding student loan debt. But students also suffer from a lack of financial literacy that leaves them unable to navigate the complex maze of financial aid applications and loan options, further adding to their money troubles even after they leave school.
National student loan debt now tops $1.1 trillion, with the average student accruing more than $26,000 in debt upon graduating. And more than half of this outstanding debt is not being repaid because borrowers are struggling financially. Many have said these statistics are the result of a higher education system that has become increasingly inaccessible and unaffordable. But it also stems from a deeper issue: students don't know what they're getting into when they take out loans, and they don't know what their options are when they have to pay them back.
"It comes back to a financial literacy issue and making sure students understand what they're getting into, how much they're borrowing and understanding there are different options for them at the end," says Megan McClean, director of policy and federal relations at the National Association of Student Financial Aid Administrators.
In his Aug. 22 speech announcing a plan to tie federal financial aid to colleges' performance, President Barack Obama also made a proposal to tackle one aspect of student debt that can start immediately, without congressional approval: he pledged that the Department of Education will reach out to struggling borrowers by encouraging them to enroll in income-based repayment plans. Of the millions of federal loan borrowers currently in repayment, roughly 10 percent are enrolled in one of these plans, according to the Consumer Financial Protection Bureau.
"Those programs really are under-utilized when you consider how many students we have going into default," McClean says.
But when students aren't aware of or are confused by different repayment options, those who are struggling financially sometimes just stop paying. After nine months of doing so, they default on their loans, which can affect credit scores, lead to wage garnishments, and if left unresolved for long enough, can even take a bite out of the their Social Security checks, according to Lauren Asher, president of the Institute for College Access and Success.
The Department of Education on Monday released new data that show the number borrowers who default on their student loans within two years of entering repayment has increased for the sixth year in a row. The Consumer Financial Protection Bureau estimates there are more than 7 million borrowers in default on a federal or private student loan.
"It's crucial that borrowers are getting good and timely information about repayment options before they fall so far behind that they default. They need to know that these plans exist," Asher says. "The default rates that just came out are just the tip of the iceberg."
Those numbers, which monitor students who default within two and three years of entering repayment, don't include delinquencies, which occur when borrowers fail to make payments for more than 90 days. They also don't reflect the number of borrowers who are struggling to make payments, or borrowers who default after being in repayment for more than three years.
Asher says borrowers often default because they are not aware of more flexible repayment options that adjust payments based on the borrower's income. But what many borrowers also don't know is that once they default on their loans, they are no longer eligible to enroll in these programs.
That's why many say this type of financial education should start much earlier, before students get to college. In fact, several states – including Tennessee, Virginia, Missouri and Utah – have mandated that financial education be included in K-12 curriculum. But according to a 2011 survey from the Council for Economic Education, less than 20 percent of teachers feel competent in teaching personal finance topics.
Shannon Schuyler is the corporate responsibility leader at PricewaterhouseCoopers (PwC), an accounting firm that promotes financial literacy among K-12 students and teachers. Last year, PwC pledged to invest $160 million toward educating students, parents and teachers about financial issues that range from managing an allowance to understanding what it takes to start and run a business.
"You have a certain number of states that have mandated financial literacy, and we hope that those continue to grow," Schuyler says. "But even in those states where it's been mandated that students have [financial education] before they graduate from high school, those teachers don't know how to teach it."
Schuyler says PwC has developed grade-level curriculum for financial education that teachers can access and use in the classroom, and also has staff work with teachers individually and in the classroom at schools throughout the nation.
"A lot of it is trying to get a better understanding more broadly about why financial literacy is something that is important and how having students that understand this topic will actually help them lead better lives in the future," Schuyler says. "Giving them the tools is important, but I think the most important thing is having them understand why it is important to embed financial education [in school curriculum] in the first place."
Schuyler says it is important for students to understand the financial market before they even select a college because having overwhelming amounts of debt can have an effect on where they live later in life, what items they are able to purchase and even how soon they can get married or start a family.
A recent survey from the nonprofit group American Student Assistance found nearly three-quarters of students said they've put off saving for retirement because of student debt. Another 43 percent said they've delayed starting a family and 27 percent said they found it difficult to buy daily necessities because of loan payments. Additionally, close to 70 percent said they were confused about the different loan repayment options.
Schuyler says educating students sooner about the cost of college, how much they need to borrow, how to repay loans and what their future earnings may look like could help solve this problem.
"If you look at that before you make the decision, your ability to start seeing the payoff of your education will come much faster than if you just enter into it blindly where you don't know the ramifications of taking out loans and how those get paid off," Schuyler says.