The Sad Truth About Careers, Loans, Financial Literacy and Recessions

By Dan Kadlec

May 16, 2017

A decade after the housing bust we are staring at a similar bubble in student loans. When this new debt bubble bursts the fallout, again, will be severe. But even now the weight of those loans is suppressing home buying, personal saving and investment.

Would massive student loan defaults stir up another financial crisis? Yes, but it would feel different. Banks and institutional investors don’t broadly hold student debt. So the ripple effect would be muted.

But that probably means the impact would be felt longer. Millions of individuals saddled with debts they can’t pay or discharge in bankruptcy court might choke an already slow economy for decades to come.

Financial education was supposed to stop this kind of thing. In the years immediately following the mortgage-fueled financial crisis, countries around the world rushed to adopt national strategies for financial literacy. The U.S. already had one of those—but quickly dusted it off for revision.

At the state level, treasurers began pushing for financial education in schools and employers began beefing up financial wellness programs at work. The impetus for all this activity was the Great Recession and the belief that we might avoid a repeat if individuals were smarter about things like credit and investing.

Yet, in a blink, here we are again–watching the bubble inflate. Student debt has reached $1.4 trillion. Rapper Dee-1 managed to pay Sallie Mae Back. But countless others have not. A big chunk of that mountain of debt will never be repaid. A big chunk of that debt went to sub-prime borrowers that didn’t understand what they were signing.

Like banks issuing mortgages with little regard for suitability a decade ago, Sallie Mae issued students loans all but designed to fail. That is the central allegation in government lawsuits against Navient, the student loan giant spun off from Sallie Mae in 2014.

Has financial education failed? No. It has barely been tried. That’s the tragedy. Despite all the talk and good intentions, young people still are not being exposed to money management instruction on a broad scale.

Last month, The New York Times featured a handful of young adults handcuffed to their student loans. One owes $150,000 for a photography degree and now waits on tables because that profession doesn’t pay enough. Another owes $83,000 for a degree in maritime history. Her seasonal tourism gigs pay more than anything she could find in that field. Some of her loans went straight into default.

Do you think these young people would have signed up for those loans if they had an inkling of what they were taking on? Do you think a course in high school that addressed college loans might have led them to reconsider—either their loans, or their career choice?

If you bunch enough of these poor decisions together you are bound to get another financial crisis, which is exactly what financial education is supposed to prevent. In March, business services giant PwC broadened its financial literacy commitment to include discussion and analysis of 21st Century jobs—and steer students to the kind of degree that will pay enough to make college debt a wise investment.

That’s a step forward. For many it’s already too late. But the pipeline of wide-eyed borrowers never stops. We still have time to help the next class.

More on the financial literacy movement:

This rapper drives a ’98 Honda

Financial Education Battle Reaches a Boil in Quebec

Budget in Shambles, New Mexico Opts Out of Financial Education

Will Ohio Backtrack on Financial Literacy Effort?

Teacher Pushback in Canada

Waiting for the cavalry

 

Posted in Policy & Government on May, 2017