Student Debt Can Haunt You Forever

Three million Americans are in default on
their student loans taken out 30 – 40 years ago !

How would you like to be 65 years old and still paying off student loans that you took out over 40 years ago?  Believe it or not, more and more seniors are facing this problem every year. 

Think you can just ignore the loans and no one will bother to chase you down?  Think again.  In 2013, the federal government took nearly $150 million out of the Social Security checks of America’s senior citizens in order to make payments on their unpaid student loans. The number of seniors facing these forced repayments has skyrocketed from 6,000 to 36,000 from 2002 to 2013 and the number continues to grow.  

Making matters worse, more than 3 million Americans aged 50 to 64 are in default on their student loans.  The number is so staggering it bears repeating: 3 million Americans are in default on their student loans taken out 30 – 40 years ago !  Stunning.  And that number is expected to grow as well as more and more Baby Boomers retire and see a decrease in their ability to pay back what they owe.  So what is going on here?  How can it be that student loans taken out by 18 year olds 40 years ago can still be out there like a drogue anchor on America’s seniors? 

   

The answer is twofold: (1) Most teenage borrowers didn’t have a clue about what they were signing on to when they borrowed the money all those years ago; and (2) most student borrowers thought that they would have good jobs some day and could easily pay off the loans long before they were planning to retire.  Life, however, caught up with them after graduation, jobs didn’t pan out like they thought they would, they didn’t earn what they thought they would earn, the expenses of life were more than they had imagined and they knew very little about how to earn, manage and invest money because no one took the time to teach them.  It was the perfect storm of financial bad news. 

Make no mistake, the seniors that still owe all this money are not dumb.  They are not bad people.  They simply never had the benefit of learning about the financial life skills they would need when they were young to really get ahead in life.  For today’s young people, however, that is going to change.

As a country, we are finally starting to recognize the benefits of teaching financial literacy skills before high school graduation.  Ever Fi, a progressive education company, surveys 65,000 college freshmen each year to see what their attitudes are about money matters.  It is probably the most comprehensive survey of America’s young people that there is.  EverFi’s conclusion: those students who are exposed to financial literacy programs before high school graduation have much healthier attitudes about money in college and beyond.  They are less likely to borrow money, more likely to save money and more focused on properly managing their money as they get older.  

As we prepare to send yet another crop of high school graduates off to college in a few weeks we need to remember what we can learn from EverFi’s annual surveys.  College students need to minimize student loans and borrow only what is absolutely necessary; they need to get a pair of scissors and cut up the unsolicited credit cards that will show up in their mailboxes with tempting credit limits that make it too easy to borrow money and buy things they can’t afford; they need to set up a budget that makes sense and stick to it no matter how much their friends may be spending; and they need to find a way to earn some money each semester to help defray the cost of the weekend parties and entertainment. 

With a little thought and a commitment to really understand what it takes to be “money smart,” today’s college students can avoid the pitfalls of their parents and maybe keep all of what Social Security sends them some day.

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A Financial Education Can Be Fun and Easy

 "If we don¹t learn as much as we can about money 

and investing when we are young we will have

 a much tougher time when we are older."

Imagine a running race with 100 kids where they all are told at the start that the first 50 to cross the finish line will get all the best jobs and all the best salaries. The other 50 will be left to fend for themselves. They will have to scrounge around for whatever jobs they can find no matter how menial they may be.

Now imagine that 50 of the kids are told they have to wear 30 pound backpacks for the race and big heavy boots to go along with it. How do you think those 50 are going to fare? Every parent of the “backpack kids” would complain that the process was grossly unfair; none of their kids would even have a chance at placing in the top 50. The burden for them would simply be too great and they would automatically be destined for all of the worst jobs. It would be over before it started.

Such is the case with today’s kids who start the journey into adulthood with no meaningful knowledge of money and investing. They will always be racing from behind and will have a tough time ever breaking into the winner’s circle.

So what to do? Here are some suggestions for how to incorporate financial a education into a child’s everyday life without making a big deal out of it.

1. Engage with your kids and speak to them about money. While most parents are not experts on financial issues it doesn’t matter. Parents know more about money than they may think and they certainly know more than their kids do. Take the time to share what you know and your kids will learn something from you every day. 
2. Get over the notion that talking about money, investing and the stock market will make kids too money obsessed. It won’t. It will help them. It is never too early to get a good education and the benefits of a good financial education will help them in ways they cannot even imagine at a young age. 
3. Make the learning fun. For example, whenever the bill comes at a restaurant, play “guess the check.” Have everyone guess what they think the bill is going to be before taking a look at it and then congratulate the winner. Kids love competition and they will soon be anxious to beat their parents and their siblings at this little game. In the process, they will be developing a real appreciation for what things cost. 
4. Once the restaurant bill has been disclosed, tell them you want to leave a tip of between 10% - 20% depending on how good the service was. Have them rate the service, decide on the percentage and then have them calculate the amount in their head. It is a great little math exercise where they will quickly learn to calculate 10% of a bill (just move the decimal point one place to the left) and 20% of a bill (double the 10% amount) and then pick the ballpark number in between for the agreed upon tip. (15% would be the mid-point; 17% a little more than the mid-point, etc.) The spirit of competition will keep them interested and sharp and they will become increasingly comfortable with everyday math. 
5. When they pass storefront signs that advertise 40% off “today only,” ask them what the price would be for something that normally costs $100? Or $150, etc. It gets them thinking about money and how to quickly do simple financial calculations on the fly. 
6. Open a small trading account at an online brokerage firm for your teenager to manage. Fund it with whatever you can afford and tell your child that he/she will get to keep half the profits. For example, if the account is funded with $4,000, tell your child they can buy any 4 stocks they want to buy but they have to give you a reason for buying each one before the purchase is made. That will force them to start thinking about why they want to buy a particular stock rather than just picking something out of thin air. Once that is done, they will have to calculate how many shares of each stock they can buy with $1,000. At $15 a share, how many shares can they buy with $1,000? At $110 a share, how many shares can they buy with $1,000? Finally, show them how to buy the stocks online through the account you have funded. Thereafter, encourage them to check the account regularly to see how they are doing. When the time comes that they want to buy another stock, no more money from mom and dad. They will quickly understand that they will have to sell something to raise the cash to buy a new stock. The concept of “fully invested” will suddenly mean something to them. 
7. Take them to one of the currency exchange booths at the airport and have them convert some U.S. dollars into the currency of another country. It is a great way to get an appreciation for the relative value of different currencies. Have them study the pictures and writing on the foreign currency so that they can learn about it and see how it differs from our money and money from other countries. 
8. Start a foreign currency notebook. Arrange the notebook by country and have them go online, print out a map of each country and place the map in the notebook next to the currency from that country. It is a great way to learn about foreign currencies and world geography. 
9. Take them with you to buy groceries. Have them guess what the total cost of the goods in the shopping cart will be and then see how close they come to the actual number. While there, have them swipe your credit card at the checkout line. They will quickly learn how that system works and how you have to sign when the transaction is completed. 
10. Review your credit card statement with your kids. Show them where the line item is for the grocery store transaction that they signed for so that they understand the relationship between signing at the store and having to pay for the purchase later on. 
11. Give them a dollar bill and a magnifying glass. Tell them they are official “money detectives” and they need to study every detail of what is on the bill. When they are done, ask them questions about what they observed. Do the same thing with other denominations as well and ask them why they think there are differences between the denominations. Give them a $100 bill and ask them how many times “United States of America” appears on the front of the bill. Most people say “two,” but there are at least three. Can you find the third? 

These are just some of the suggestions for what can be done to introduce kids to the world of money and investing on an everyday basis. Come up with your own ideas and share them with us by emailing dbianchi@bluechipkids.com. We will post some of them on the website. 

-David Bianchi

Uber Debt

"Too much debt is never a good thing"

The other day, while I was in Boston, I hailed an Uber car with my iPhone app and within minutes a black Mercedes SUV magically appeared to pick us up. It is terrific technology.

One thing I have learned from riding in Uber cars is that the drivers are almost always interesting people; polite, well educated, entrepreneurial and happy to engage in conversation. This driver was no exception. Within minutes I found out that he was 24 years old, working multiple jobs and was $150,000 in debt because of student loans. $150,000 in debt because of student loans!

I asked him how he thought he was ever going to pay off all that debt and he said he didn’t know but “I will just keep working and do the best I can.”

What does it say about our society when we claim to have one of the best education systems in the world but are burdening our students with unimaginable debt if they want to avail themselves of what our colleges and universities have to offer? It is a broken system that needs to be fixed now.

In 1976, when I graduated from Tufts University in Medford, Massachusetts, the “all-in” cost of tuition, room and board was about $7,500 per year. I remember thinking that “some day” the costs may rise to $10,000 a year. It seemed like an unimaginable number in those days. I never dreamed that by 2014 the “all-in” cost to go to Tufts would be more like $65,000 a year of after-tax money. In round numbers one has to earn $100,000 a year just to have enough left over after taxes to pay for one year of college. Unbelievable.

Now imagine that you have two kids who want to go to Tufts; or 3 kids or – even worse – 4 kids. And Tufts is by no means unique. There are many schools that cost as much as Tufts and some cost even more. The cost of a college education is out of control and unsustainable and I mean unsustainable. It cannot keep going like this. 18 year olds and their parents cannot keep borrowing truck loads of money for an education. It cannot continue.

I don’t pretend to have all of the answers but one thing I do know is that life is getting more expensive all the time and knowing how to make money, save money and invest money is more important than ever.

No one should be bashful about focusing on this simple fact of life: we need a “money smart” society and anything we can do to better educate our young people – those who will bear the burden of supporting our economy in the years to come – is a good thing. “Blue Chip Kids” is an attempt to start the education process.

-David Bianchi