Financial Literacy and Student Loans

In 2018, 29 states and Puerto Rico introduced a form of financial literacy legislation that majorly focused on young people and their education. The increased priority on financial literacy has been largely driven by the rise in the number of students that use debt to finance college and the notion that they lack the knowledge and skills necessary to make sound financial decisions. Financial literacy is a subject all people should be well versed in because its use goes beyond graduation. With the increasing amount of outstanding debt and default rates, it is necessary to understand whether a lack of financial literacy is responsible for the crisis, and more reasonably, if efforts towards financial literacy target the right students.

With college expenses rising every year that passes by, financial aid struggles to keep up. With this in mind, it is now more pivotal than ever for students to be conscious of their spending choices as well as clearly distinguish between needs and wants. This is necessary for balancing daily expenses while staying on track for the long term. Without a doubt, a little financial wisdom can help anyone, particularly students, go a very long way.

To get a grasp on financial literacy and perhaps better manage student loans, students should have knowledge of the basics such as; creating and adhering to a budget, understanding the kinds of debt, become more aware of interest on loans, build emergency funds and generally have a better appreciation of financial literacy as a lifelong skill. Through budgeting students can have a better understanding of factors such as income, flexible expenses e.g. utilities and groceries and fixed expenses e.g. tuition and rent. By properly understanding their incomes and keeping their total expenses reasonably low, students can have some money left over which could be used for investing, building an emergency fund or paying off existing debts. Most students could simply re-evaluate their flexible expenses and significantly cut down on their costs e.g. by making themselves coffee instead of purchasing it at coffee shops. With regard to debts, they should clearly distinguish good debts from bad debts i.e. loans taken out with the prospect of generating long-term income versus debt incurred by items that don’t generate income and whose value depreciates quickly.