The ‘Moral Obligation’ for Schools to Teach Financial Literacy

The Center of Financial Literacy provides invaluable service towards teaching millennials like us the fundamentals of personal finance, particularly as it comes to student loan management, while also conducting hugely informative studies on the status of financial education across the good ole U-S-of-A.

Our conversation with John Pelletier, the Center’s director, covered a lot of ground across financial management, debt and education, so the interview was broken up into two parts.

Part one below focuses on the lack of financial management knowledge and the moral obligation of learning institutions to provide proper education.

Part two focuses on the government’s role in the student debt crisis.

Before founding the Center for Financial Literacy, Pelletier had worked at a senior level in financial services. To understand Pelletier’s basis for starting the Center however, you have to look back to his childhood.

I grew up in a mill town community with a high unemployment rate, we were ranked the second-worst metropolitan area in the nation. The town was transitioning from a mill town to the new economy and you just saw people struggling, people needing help.

I was self-taught on the topic of personal finance. I didn’t learn it at home or in college. I didn’t take any relevant courses, even with studying economics in school. It’s a piece that’s missing and it’s critically more important than it used to be.

Credit’s a wonderful thing but it’s almost like a loaded gun and you have to be very careful and I don’t think we’re teaching people how to use it wisely.

This lack of credit knowledge can hold disastrous consequences for those taking out student loans, the motivating factor behind much of Pelletier’s work.

When you look at that there’s a moral obligation. These students are going into debt to keep these enterprises going.

Let’s ignore for-profit and community colleges for a second. Most schools rely on tuition for operating costs. They probably know that about 70 precent of students are on loans to fund their operating budget. They know this — it’s not a secret to them. They know how much is directly attributable to student loans.

On the school’s side, the problem is two-fold according to Pelletier: a lack of education about the loans themselves and a lack of understanding on the connection between majors and career earnings. When it comes to students choosing majors…

Majors matter. I’m all for passion, but passion based on reasonable career expectation and what you’re likely to be able to make. This is a high school responsibility for me because by college it’s too late.

I do an exercise where I have students predict how much they’ll make on the job they’d like to have. Everybody predicts over six figures, in a state [Vermont] where average income is $45,000. That connectivity between career and income, majors and careers, students really aren’t fully aware of it.

Pelletier has some core principles when it comes to educating students deciding upon a major.

Rules of thumb for debt:

Rule one: do you have any idea how much money you’re going to make if you get that job?

For example, if the starting salary in a career like social work or early childhood education is $23,000, don’t take out $75,000 in student debt.

Rule two: look at gross wages. Are you going to be allocating 15 or 20 percent of your income for student debt? Try not to go over 15 percent. That’s a good barometer.

Schools need to show the difference in average lifetime income among bachelor’s degrees. The largest difference was $3.4 million. So that’s a massive, massive change. They’re not all created equal and what you’re willing to pay needs to change on what you’re trying to do.

On top of it, there’s a fundamental breakdown in how students are educated about the loans they’re ultimately agreeing to pay back.

Before you get any money from a federal student loan, you have to go through an entrance counseling process. Pretty much all colleges today use that federal program and before you even show up to school, most kids have complete this online counseling program. Studies show that kids don’t even remember doing it.

The reason they don’t is that about 50 percent of students have their parents do it for them. They don’t see it as a learning opportunity. They see it as a mandatory part of just getting to college. By making sure they use the online portal, there is compliance built in, so when [the school] gets audited [it’s] totally fine.

After you do that, you’re done. You get your loan and you fill out the FAFSA form every year. Then you graduate or leave the school, do exit counseling. This is a compliance issue. Another online module.

From Pelletier’s perspective, schools need to start taking responsibility for getting their students to fully understand the situation.

I don’t think schools see it as part of their education mission, but it should be. Maybe that’s because it resides in the financial aid side of things as opposed to the academic world.

A lot of places offer free online modules that they can just slap onto a website. When you put these free things up there, students don’t use it.

As an example, the University of Vermont added a new core requirement about green and sustainability, so why wouldn’t you have any training about student loans?

I think the University of Indiana sends periodic updates, one-page letter updating current loan balance, rates moving forward. After one year, they reduced student loan balance by 15 percent.

There are things we can do to help students be more educated. I think it’s imperative to say that we have a moral responsibility.

A great one came out from the Brookings Institute, a list of the colleges with the most outstanding student debt. NYU was in the list among a lot of for-profit schools. To have numbers like that, at a place like NYU, I would think hundreds of millions of dollars of operating costs are being paid by student loans. Don’t you owe them something?

The one area there seems to be political consensus is that we need to improve entry/exit counseling. I truly hope the government makes them do more. I don’t think it’s a big stretch to say that these online portals, horribly created, its not a great education.

Part two focuses on the government’s role in the student debt crisis.

*The interview has been lightly edited for formatting purposes.

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