College graduates are in debt and lack the basic financial knowledge needed to manage the bills, according to one GW business school professor.
Annamaria Lusardi, a professor of accountancy and economics, recently published a study that found student loans were weighing down millennials and their wallets. To help that population, she said she hopes to start a new required course to teach GW students about personal finance.
The study, which was published in The Wall Street Journal this month, interviewed thousands of people aged 18 to 34 nationwide and discovered that 39 percent of them have student loan debt. Of those individuals, 54 percent are concerned about paying off their student loans. The study suggests that worries about student loan debt last even a decade after graduation.
“These are the groups I teach,” she said. “At the business school, most of my students are millennials, and millennials are going to be the labor force of the future.”
Lusardi said she wants to start a new course, called “Personal Finance for College,” and make it required for all students as a way to make sure every GW student is prepared to make important financial decisions.
“We are an institution of education and I think it is incredibly important that we start teaching personal finance,” she said.
The study also found that college graduates lack the basic financial literacy needed to manage that debt. Although the age group believes they have a good handle on their finances and can make critical financial decisions, only 8 percent could answer five basic financial literacy questions correctly.
Officials at GW have already implemented optional programs for students to prepare them for the real world, like Future U, which helps juniors and seniors learn “real world” personal finance skills, according to a University website.
Studying the impact of debt is important, Lusardi said, because students’ future financial choices will be impacted by it. Crippling debt loads could limit the jobs they take, and whether they can buy a car or a house, or retire on time.
“We have seen that the young and the students are already defaulting on student loans,” Lusardi said. “If this trend continues, there could even be implications for the taxpayer and for society. This is an important problem, in my view, that needs to be addressed.”
About 1.5 percent of GW graduates default, or are unable to pay their loans – a percentage that is far lower than the national average of about 14 percent. The average cost families at GW pay after receiving scholarships is about $32,000.
“I would say this is the ABC of finance, what everybody needs to know to make financial decisions,” Lusardi said. “If you borrow using your credit card, and you don’t know what interest compounding does, chances are you are not going to be able to make good decisions about the credit card debt and about your student loan debt.”
Lusardi added that understanding personal finance is more complex than students expect it to be.
“So many times, people say, ‘Financial literacy is not rocket science.’ And I think it is both,” she said. “It is a science, so in the same way we teach corporate finance, we should teach personal finance. But secondly, it is also a rocket, and it is a rocket that will fall squarely on our head if we do not address this lack of financial literacy, particularly among the young.”