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.