Student Loan Crisis Secret: This May be the Unexpected Solution

NEW YORK (MainStreet)—More than 7 million consumers are in default on federal or private student loans, according to a new study, and standardized financial illiteracy is on the horizon to stop it in future generations.

The Consumer Financial Protection Bureau (CFPB) found that student loans now outpace credit cards as the highest level of consumer debt.

In the U.S., existing student loan debt is estimated at $1.2 trillion.

Default typically occurs when a loan receives no payment for 270 days. New collection costs are then added to the loan's balance, and the loan becomes more expensive than its original principal. The added costs can only be reduced or eliminated through negotiation or legal action.

According to the U.S. Department of Education, 37 million Americans currently have outstanding student loans and 11% of all student loans are at least 90 days delinquent.

"We strongly believe in the importance of communication and financial education that helps students better understand the serious ramifications of defaults, delinquencies and forbearance," said Pat Morris, CEO of ACA International, an association of credit and collections professionals.

Problem is many Americans are illiterate when it comes to finances.

A John Hancock Survey found that 46% of respondents who answered a literacy quiz earned a failing grade with 22% earning a D and 23% receiving an F.

While some were able to select correct answers to questions about financial concepts or product definitions, most exhibited significant knowledge gaps.

For example, only 37% were able to choose the correct answer when asked about an optimal retirement savings strategy.

About 94% of those surveyed properly identified the definition of asset allocation and 85% understood dollar cost averaging but only 62% understand that the price of a bond or bond fund decreases as interest rates rise.

"It is critical that children learn the grammar of economics and finance, the specialized language that describes how our economy operates," said Nan J. Morrison, president and CEO of Council for Economic Education (CEE). "Without that proficiency, they are likely to remain on the periphery of their own potential."

Currently, only four states require a minimum of one semester of financial literacy education in primary and secondary school and only 20 states require that the topic be taught within another subject area.

That will soon change if Rep. Matt Cartwright has his way. He introduced the Financial Literacy for Students Act, HR 2920 with the support of 23 Representatives earlier this month.

The Act would create incentive grants to states who agree to provide financial literacy education in Title I public elementary and secondary schools.

"The importance of consumer sophistication on financial matters has never been more important than it is in today's economy," said Cartwright. "The key to improving the financial literacy of all Americans is ensuring that our students have access, at all appropriate stages of their education, to formal financial literacy education."

Under current law, individual states are left to create and implement financial literacy education curriculum and courses in their districts and schools.

Below are 5 financial terms that improve your financial literary

  • 1. Dollar cost-averaging: Purchasing the same dollar amount of investments each month so when share prices are low you get more shares, and when share prices are high you get fewer shares.
  • 2. Asset allocation: A method of assigning your financial contributions to different risk classes of investments, such as equities and bonds and cash.
  • 3. Index funds: Seek to match the investment returns of a specified stock or bond benchmark, such as the S&P 500
  • 4. Forbearance: An agreement that allows graduates to temporarily postpone or reduce their federal student loan payments.
  • 5. Delinquency: Student loan default is a state of delinquency on student loans occurring after a missed payment exceeds 270 days. Student loan default remains on a graduates credit report for seven years.

--Written by Juliette Fairley for MainStreet

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