Banks backpedaling on debit card fees...political and consumer pressure having an impact (or perhaps consumers are voting with their wallets and banks trying to stem the exodus?). From Wall Street Journal:
In August, Wells Fargo started a pilot in five states, informing customers that the bank would start in November to charge $3 per month for their debit card. Wells Fargo at the time said it didn't expect the fee to be popular, but the backlash was evidently more substantial: It said in a statement the end of the program is "a response to customer feedback."...Even Bank of America Corp. (BAC), which is among the few banks to have already started charging a monthly fee, is now considering adding options that will reduce the number of customers affected by the fee, according to a person familiar with the matter."
Bank of America later rescinded their plans also (from Business Week):
"Bank of America Corp. is scrapping its plan to charge a $5 monthly fee for making debit card purchases after an uproar and threatened exodus by customers."
"Know Before You Owe" worksheet available on government's Consumer Finance site. Michelle Singletary at Washington Post noted the importance of showing students how much they would be expected to owe at graduation:
"Most important, a box provides not only the total loan amount borrowed but also the total estimated monthly payment for federal and any private loans. This one section should serve as shock therapy for students who don’t end up getting lots of grants or scholarships."
If it is so important, why isn't there something on the form to draw student's attention to these figures instead of being buried at the bottom of the page? Here's what else is missing from this form: what is average salary of students graduating from the school with a given major and what percentage of students have full-time jobs after graduation? Without those nuggets of information, it is hard to provide context for whether the debt load a student has is manageable. Schools will say this information is hard to collect...but consumers should demand it given the extent of their investment. The form as currently constituted only continues to perpetuate the mirage that all college degrees are equal in value, which cannot be further from the truth.
The Economist joins the chorus of voices (469,000 results on Google) asking "is student loan debt a bubble?"
"Two things, however, are clear. The size of student debt is vast (see chart), and lots of borrowers are struggling. More than 10m students took out loans for the latest academic year, according to a report issued on October 26th by the College Board, a consortium of academic institutions. Almost a third of students graduating from college, and 69% of the ones dropping out, hold debt tied to their education."
I had thought the figure was 2/3 of graduates had borrowed but the real damaging figures are for those who drop out as they have not received the economic benefit of their education while being saddled with the debt.
As I have been reading the Steve Jobs biography from Walter Isaacson that recently hit the bookshelves (highly recommended!), I couldn't help but think about what would happen if one were to unleash Job's design principles (simplicity, creating intuitive interfaces, and my favorite " know who are you designing for") to the world of financial service products. For those shaking their heads and saying "but financial services is so different than technology" it may be hard for us to recall that pre-Apple, there weren't many technology products that consumers felt a strong personal attachment to. While I don't know what those redesigned product descriptions would look like (not feeling particularly creative now) for student loans, I can assure you that if I was designing with the student or their parents in mind, I would not include footnotes like this in my product description (most lenders provide these tiny footnotes):
"2 The following repayment example is for informational purposes only and is an example of available loan terms of the Smart Option Student with the Fixed Repayment Option made to a freshman borrower at a degree-granting institution: A $10,000.00 loan with two disbursements, and no grace, a disbursement fee of 0% and a 7.21% APR. APR is variable and may increase after consummation. Repayment consists of 51 fixed $25/month payments during the in school and separation period, followed by 119 payments of $140.28 per month and one payment of $114.17, for a total amount paid of $18,082.49."
Financial literacy can make you wealthier....recent NBER paper shows those with strong financial literacy more likely to invest in stock markets (not exactly a winning strategy over the past decade) and also to develop a retirement savings plan:
"Our findings provide evidence of a strong positive association between financial literacy and net worth, even after controlling for many determinants of wealth. Moreover, we discuss two channels through which financial literacy might facilitate wealth accumulation. First, financial knowledge increases the likelihood of investing in the stock market, allowing individuals to benefit from the equity premium. Second, financial literacy is positively related to retirement planning, and the development of a savings plan has been shown to boost wealth. Overall, financial literacy, both directly and indirectly, is found to have a strong link to household wealth."
The amount of student debt (over $1 trillion by some estimates) likely to dampen consumer spending for recent graduates and not so recent graduates too as many choose repayment terms over 20 years (from Chicago Tribune):
"Now, a generation of students and graduates is walking off campus with a collective $1 trillion in student loan debt and troubling career prospects. The daunting combination is forcing them to rethink their futures, postponing weddings, home purchases and vacations to make hefty monthly payments on loans that will follow them into middle age."
This article reminds me here financial literacy programs fall short...it can't be taught like other academic courses, it has to be all about providing a decision-making framework rather than a focus on facts. So, you can teach a module about saving, then have students collect information from 3-4 financial institutions and make a decision about which product to select. Students have to be allowed to fail in the classroom before making decisions like this:
"I knew when I applied that it was a really expensive college,”...who expects to have $100,000 in debt when she graduates and expects to earn $16,000 to $34,000 a year as a teacher. “I’m hoping the caliber of the education will allow me to get a job that will make it easier to pay off.”
I hope that she learns about the Public Service Loan Forgiveness program...hope is not a viable strategy when it comes to student loan debt. While I am on the topic, would a private lender really underwrite almost $70,000 in private loans (government max is $31,000) and would she be able to find a cosigner to support her excessive debt levels?
OK, do we really need more evidence of how our mental faculties decline as we age...yes, our financial decision-making worsens over time too (from MarketWatch):
"The scores on a test measuring knowledge of investments, insurance, credit and money basics fell about 2% each year starting after age 60, falling from about 59% correct — hardly a passing grade — for those in their 60s to a dismal 30% for those 80 and older, according to Michael Finke, an associate professor at Texas Tech University and a co-author of the study."
Colleges are now required to post net price calculators as of yesterday (October 29th). Should help students make sense of financial aid they would be eligible for BEFORE they apply:
"Beginning on October 29, U.S. colleges are required to post net price calculators on their web sites. These calculators are supposed to go beyond sticker prices to include estimates of total cost of attendance, including the extras, as well as estimates of typical aid paid to students at the school."
Next week, I will take a closer look at the College Board report on student aid...have a nice weekend.