Investment in Financial Education Leads to College Access and Success

Student loans, not credit cards, are now the largest source of debt for many Americans. According to new survey by The Institute for College Access and Success, the average college student has a debt load of $24,000. That’s a heavy load for many students, as skyrocketing default rates on student loans are demonstrating.

It’s important that college students know what they’re getting themselves into when they take out large student loans – and the Department of Education is getting involved.

In July 2010, the U.S. Department of Education developed an education initiative designed to challenge states to create and implement a financial literacy program in troubled school districts. The program is designed to better prepare students to apply for Federal Student Financial Aid (FAFSA) by awarding money to needy school districts for financial literacy education.

Out of 14 initial applications, Tennessee schools scored the highest and will be rewarded with grant funding over the next four years. Through the funding received from The Financial Education for College Access and Success Program, Tennessee will be able to prepare educators to better assist students with financial-aid and financial planning decisions as well as other decisions related to pursuing and succeeding in higher education.

Pursuing post-secondary education, whether at a ground school or online university, is often confusing. The U.S. Department of Education hopes the program will provide students with the information they need about the college enrollment process and the importance and availability of financial help.

In a U.S. Department of Education press release, Secretary of Education Arne Duncan said, “the United States has the best colleges and universities in the world, but we’re not doing the best job of preparing our students to be college or career-ready. Investing in financial literacy through programs like Financial Education for College Access and Success will ensure that teachers have the tools and resources they need to help students make informed decisions about pursuing and paying for college, and planning for the future.”

Financial Education Core Competencies

More than 50% of respondents failed a short three-question quiz on financial basics, the TIAA-CREF Institute reported. The respondents – age 50 and above – lacked basic financial knowledge on interest rates and inflation. What’s worse, the youth aren’t doing any better. A study conducted by the Financial Industry Regulatory Authority (FINRA) revealed that today’s younger generations were unlikely to be better at finances than their elders.

This is unfortunate but unsurprising, given that only four states require high school students to take up a personal finance subject.

This situation is dire, as a lack of basic financial literacy can mean serious issues further down the line. People who do not have the basic tenets of personal finance in their grasp are less likely to grow their wealth, save money, or invest.

In response, the US Treasury now aims to simplify the process by introducing core competencies in what has been dubbed the “financial literacy pyramid”. There are five items in the Treasury’s “Financial Education Core Competencies”. Here’s what you need to know:

1. Income (What You Earn)

  • Gross versus net pay. This is a very basic concept that should make it much easier for anyone to analyze their pay slips. “Gross pay” refers to the employee’s total salary prior to the deduction of taxes (as well as other expenses). The amount left over (this is the amount that you actually receive) is your “net pay”.
  • Benefits and taxes. It is important for employees to go beyond cursory understanding of their workplace benefits. Some companies offer multiple options for retirement funds, for example. Similarly, employees should understand income tax calculation and how it affects their pay check.
  • Education. An employee’s income can increase through education – an oft-ignored detail that could truly improve any worker’s finances.

2. Expenses (What You Spend)

  • Needs versus wants. One of the most commonly repeated sayings where finance is concerned exhorts people to live within their means. Simply put, this means spending less than you make. The easiest way to do so is to eliminate unnecessary and impulse purchases. Differentiating necessities from frivolous purchases can prevent the unfortunate situation of living from paycheck to pay check.
  • Consequences. Spending unnecessarily can have its impact beyond your personal life. Excessive materialism is a major concern that must be addressed.

3. Savings (What You Save)

  • Compound interest. The difference between saving money in a bank account and stashing money away in a jar is compound interest. The principal amount grows with interest. More importantly, the principal amount plus the interest earned will continue to grow due to compound interest. This is why it’s a good idea to save consistently over a long stretch of time.
  • Savings and investments. Individuals must learn to differentiate between savings and investments. Diversifying the portfolio is crucial – it’s best to have a balance of safe (despite low returns) savings accounts and riskier investments (with higher returns) like bonds, stocks, and mutual funds.
  • Planning. Part of the “savings” area of the core competencies focuses on planning for big ticket items and long-term goals. This can mean paying for a home or saving up for your retirement fund.

4. Credit and Loans (What You Borrow)

  • Consequences of borrowing. Using a credit card is not free. People should learn how to choose the right loan or credit card by looking at the terms such as interest rates. Borrowing should not be taken lightly.
  • Credit scores. Not paying your bills or loans on time can have serious impact on your credit score. This means difficulty getting loans in the future or having to pay higher premiums due to bad credit.
  • Debt obligations. Learn to manage current and future expenses in order to prevent being overdrawn. Possible debt repayment scenarios should also be discussed.
  • Renting versus owning a home. Taking out a home loan is a serious responsibility. Learn to figure out the expenses and the best time to pursue a home loan.

5. Protection (Protecting Yourself)

  • Identity theft and scams. Learn to protect yourself from identity thieves.
  • Credit report. Getting a credit report (and knowing how to read your credit report ) is important. You have to keep track of the data it contains and ensure that you’re not the subject of identity theft.
  • Insurance. Study the different types of insurance and the best coverage you may require.
  • Emergency fund. One of the most important things any individual must have is an emergency fund. This should be able to cover at least six months’ worth of monthly expenses to protect people from sudden expenses like health problems and more.

If you are interested in becoming more “financially savvy” there are several college courses which can help you become a much more “financially savvy” person.

Best Financial Education Online Resources

Financial literacy is the key to a brighter future. This is why it’s incredibly unfortunate that few Americans truly understand how to manage their finances. More than 50% of Americans do not have basic grasp of financial literacy; this simply means that people lack vital information that should help them budget, save, and invest their money properly.

Without financial knowledge, people will simply go from pay check to pay check, unable to save for a rainy day or plan ahead for their retirement. It’s an altogether unfortunate scenario that can be altered only if financial education becomes a crucial part of the country’s education system.

For adults who want to catch up, self-education is always an option. Apart from reading books and articles, the Internet now also offers a lot of very useful information and it could help you improve your financial knowledge at your own pace. These websites are regularly updated, have expert writers, and offer relevant insight that could definitely sustain your financial education.

Here are five online resources to help increase your financial knowledge:

iGrad

For students and recent graduates, there simply is no better online resource than iGrad. Though the other resources are informative and range from practical to academic, iGrad was designed specifically by financial aid professionals to assist college students who are trying to make sense of their financial independence – and responsibilities – for the first time. The website covers not just personal finance, but also helps students make sense of their student loans (they offer entrance and exit loan counseling), find scholarships, handle credit and find jobs.

Yahoo Finance Experts

Yahoo! Finance offers a wide range of articles on personal finance, investments, and financial news. The articles are interesting, easy to read, and very informative. More importantly, the articles contain practical advice that can be easily applied by even the greenest of financial rookies. What’s more, the website has so many articles that you can find multiple opinions and perspectives no matter what topic you choose to read about.

Morningstar’s Investment Classroom

What’s the difference between investing in stocks and investing in mutual funds? Is there a difference? Morningstar’s Investment Classroom will teach you about these and more. It covers all the topics concerning investments in short, ten-minute courses that you can study at your own pace. For experienced investors, it’s possible to go straight to the advanced topics for tips; newbies can start from the very first and most basic course before moving up.

CNN Money 101

The best thing about CNN Money 101 is that it really is a thoroughly planned class that takes its “students” through easy all the way to advanced financial lessons. The website focuses on the practical application of financial knowledge. Though it doesn’t delve into theoretical or academic discussions of investments and personal finance, the lessons are very useful and can definitely help readers increase their financial knowledge as well as apply these lessons in real life.

Investopedia University

The website is a valuable resource; it works for both newcomers and advanced investors alike. For those who already have a working understanding of investing, they can move forward and take advantage of the more advanced tutorials on Investopedia University. The site covers in-depth topics such as trading stocks, bonds, Forex and more. The site also has very helpful and easy to understand tutorials for newcomers. In fact, one of the most invaluable tutorials on Investopedia would be its introduction to financial literacy for kids and teens.

Evaluation of a Financial Aid Award

The most difficult aspect of college has to do with the finances required. Although there is a very small percentage of people who are fortunate enough to have money or family with money for a college education, the majority of people depend on a variety of sources. For instance, some students use personal money coupled with student loans. Some students qualify for one or more scholarships. Then, there are other students who depend on government funding in the way of federal grants.

Because there are several different financial aid awards, it is common for students to feel either confused or overwhelmed, especially those just entering college. If this is your case, the information provided will help clear some things up. We wanted to take this opportunity to provide an evaluation of a financial aid award so you can see the process and outcome.

Okay, the first step would be for you to determine true financial aid, which is the difference between the cost of your college education and the amount that you alone or with the help of family would be able to contribute. The family’s ability to assist with the cost of your education would be assessed by the federal government, along with the college by using a process known as EFC or Expected Family Contribution. Keep in mind, while the financial information associated with the EFC would prove highly beneficial, it is meant only as a guideline.

The next step for the evaluation of a financial aid award would be for the cost of going to the preferred college. Included in this would be tuition and books, as well as room, board, transportation/parking, personal expenses, and a small amount for recreation and entertainment. After the assessment by the federal government and college has been completed, your need for financial assistance would be calculated. For example, if it was determined that your college education was going to cost $50,000 and $20,000 would be paid by your family with another $2,000 paid by you, the result would show you needing a financial aid award in the amount of $28,000.

The above is the crux of the evaluation for a financial aid award but the process does not stop there. With this information determined, you would get assistance from the financial aid office for the college or university you plan to attend in putting a package of awards together based on awards available. Using the example above, the remaining $28,000 needed for your college education has to come from somewhere. Therefore, the financial aid package would include a number of funding solutions such as federal grants, scholarships, funding from a work-study, and student loans. Keep in mind that with financial aid decreasing, it would be vital to get started quickly to increase your chance of receiving financial assistance.

The people in the financial aid office will work hard to help you secure money so you can get your degree but if your request for a financial aid award was denied or you were not awarded an amount you feel is fair, you have the right to appeal. Now, although you would need to show need to be approved for federal grants or scholarships, not all students receive funding because of availability. The final decision would be based on set criteria in order of priority. There are some cases when requests are under review. If you found yourself in this position the financial aid office may advise you to seek funding from family temporarily, which would then be repaid once the award goes through.

The last thing we wanted to mention about the evaluation process associated with a financial aid award is that the assumption is you would be going to college on a full-time basis and while in school you would be required to pay full-time tuition, as well as other expenses. Finally, the award granted would be applicable for the college or university you attend at the time the process was completed. In other words, if you were to change schools and still needed financial assistance, you would need to go through this process again.