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Both undergraduate and grad school students flunk the financial literacy test when it comes to student loans, according to newly released data that polled hundreds of students. The survey, conducted in January 2016, was the subject of a recent article in Bloomberg News – mainly because the results were so disturbing. There is a growing body of evidence and research that supports what the article described as “widespread ignorance among young people about debt that could follow them to their graves.”
Grads Are Uneducated About Student Loan Obligations
Nearly 500 students participated in the data collection survey, and when asked what interest rate they were being charged, 92% weren’t sure about that. That statistic is particularly unsettling when you consider than more than 75% of the respondents do know how interest rates work. It indicates that even thought they have a basic understanding of interest rates, they have not taken the trouble to figure out how much interest they are paying on what is probably their largest debt.
Additionally, less than 8% of students surveyed knew their current interest rates, and only 6% knew their repayment terms. Similarly, almost 98% of students surveyed were not sure which kinds of loans accumulate interest while they are still in school or enrolled in a deferment plan. It’s not that surprising, then, to learn that 94% of students surveyed said they did not know the repayment length of their student loan debt. Meanwhile, approximately 70% of all students graduate with student loan obligations, and the average amount owed by graduates is nearly $30,000.
A Growing and Alarming Problem
As a result, student loan debt is one of most problematic types of consumer debt, rivaling mortgages. More than half of the students responding to the survey believed that the total student loan debt in America was in the millions of dollars.
The truth? Student loan debt in the United States now exceeds $1.2 trillion.
The lack of borrower understanding of the magnitude of the debt crisis further illustrates just how little grasp there is about student loan debt – and how much college grads still need to learn in order to be considered financially literate.
Other Highlights from the Survey
The survey polled borrowers with both federal and private student loans, but more than two-thirds of those who have private student loans don’t know the major differences between private and federal student loans. Only about 7% of students surveyed know the difference between subsidized and unsubsidized loans, less than 30% know the basic risks to a cosigner, and not even 4% of those surveyed knew that student loan refinancing was an option after graduation.
A Chronic Trend
A similar survey of undergraduates was conducted by the Brookings Institution two years ago, and that research found that less than four of 10 students knew how much they had borrowed. Nineteen percent underestimated their loan debt, and nearly half of the students didn’t even know the cost of their tuition and room and board.
During that same year, a Federal Reserve Bank of New York survey learned that more than 70% of students didn’t realize that the government could garnish their wages or take their tax refund payments if they failed to pay their outstanding student loans. More than 60% didn’t know that even if you declare bankruptcy, it could be extremely difficult to escape paying your student loans.
Steps You Can Take to Learn More and Protect Yourself
Knowing how these loans work can help you avoid unmanageable debt and could also save you lots of money over the lifetime of your student loans. One of the best resources – which you can also trust 100% – is the Consumer Financial Protection Bureau, or CFPB. They have free, easy-to-understand online guides to explain whatever you need to know about student loans. The CFPB maintains an up-to-date knowledge database to answer all your questions, too, and can help you shop for the best deal as an informed consumer. There are sections about choosing the right loan, how to repay or refinance a loan, and ways to compare to see whether a private or a federal loan is best for your particular needs. Visit the CFPB “Paying for College” website to learn more.