From The POV Of Student Loans: The Importance Of Financial Education

Debt can be a powerful tool if used properly. However, debts can constrain individual prosperity and advancement as repeatedly shown through history, from the era of Ancient Rome to the current millennia.Historically, individuals with low financial stress and increased flexibility achieve career goals and personal aspirations quicker than those with greater financial stress and less flexibility. Credit cards, mortgages, and more recently, student loans, are largely the source of debt in America. The infrastructural mismanagement of these debts led to the infamous financial crisis of 2007, whose effects spanned worldwide. Even though, as a society, we have seen the economic implications of excessive debt on national and international levels, we overlook the importance of educating individuals on the basic principles and mechanisms of financial responsibility. Basic financial education could limit unnecessary credit card debts, mortgages, and student loan debt, as well as possibly prevent another financial crisis.

The growing concern for excessive student loan debt has sparked discussions at the state, federal, and Presidential level. The subject of these debates revolves around students’ inabilities to pay back unwarranted amounts of debts. This theme is reminiscent to the core forces that drove the financial crisis of 2007, begging the question, what did the financial crisis teach us and how can this be used towards general education reform?

The financial crisis revealed the consequences of poor and risky financial actions at an institutional or “big” business level. Comparably, students who take excessive loans above their future ability to pay are indulging in the same risks. These unjustifiable risks can lead to financial hardship in the future caused by the inability to pay off accumulated student loan debt. This behavior is similar to how large institutions like Fannie and Freddie Mac, AIG, and GM were heavily levered in high-risk financial instruments and thus required a bailout when the financial crisis hit. An individual might not receive the same Emergency Economic Stability Act of 2008 treatment like “big business” did, but the debt will eventually have to be paid off, whether it be by the students themselves, their parents, or maybe even the government. Therefore, with the increasing amount of student debt concerns and legislative interest, further education should be implemented to improve understanding of personal finances.

Jacob Soll reaffirmed the importance of understanding basic financial and accounting related issues in The Reckoning: Financial Accountability and the Rise and Fall of Nations. Student loans are a remarkable government program that originated in 1965 with the formation of the Higher Education Act. They provide the opportunity to leverage access to higher education for those with financial need. However, without a basic understanding of a loan or even accounting, how are future students supposed to make the right choice to reduce debt obligations? Having too much debt defeats the initial purpose that student loans: to help those in financial need. As discussed by various personal finance gurus, the initial debt taken by a student could force job selection, reduce flexibility, and hinder innovative thinking. These outcomes do not align with the original purpose for student loans.

College graduates everywhere can attest to the effect that low debt has on a graduate’s ability to pursue innovative goals and aspirations. A holistic college experience is possible without breaking the bank with the use of basic accounting tools and financial awareness. An ability to understand financial effects and integrate them into an individual’s decision-making process is imperative to future fiscal sustainability. Achieving low personal debt and financial accountability for student loans is a lesson of the 2007 financial crisis. Furthermore, the financial crisis calls for an increased focus on the integration of basic accounting and financial understanding in the education system. As Benjamin Franklin once said, “An investment in knowledge pays the best interest”, so why not invest in an education that includes essential accounting and finance to produce more well-informed borrowers?