Like most student debt stories, Eric Martig’s problems started when he discovered what he thought was “free money” in the form a 2″ x 3″ plastic card. He was a junior at Ohio University and quickly took advantage of his newfound wealth.
“I never said no to the credit card until the limit set in,” says the 24-year-old Chicago resident. “If you have a $2,000 limit, it is OK to spend 60 bucks on something you really don’t need.”
He also realized early that his subsidized student loans were not going to cover the cost of an education. So, like thousands of other students, he logged onto the Sallie Mae website, aimed at students like himself, and applied for a loan. Today, he works at a temp agency in the city, while also pursuing the acting career he went to school for, and is more than $60,000 in debt.
“I think they should start talking to kids about credit in high school,” he says, “so we know what is going on, instead of clicking buttons (on the Internet) like, ‘Ya! Give me $10,000 so I can go to school.”
Many young adults clueless about money
Martig’s story, in varying degrees, is one playing out across the across the country. Almost 40 percent of people like him have more than $10,000 in student loans and more than 20 percent have credit cards with balances of at least $5,000, according to a recent Harris Interactive study commissioned by Northwestern Mutual. The same study says more than half of adults in their early to mid-20s, who by definition are in Generation Y, have little knowledge about financial matters.
“A lot of people come into college having been kept in the dark,” says Anya Kamenetz, a Gen Y finance expert and author of “Generation Debt.” “They go to college and find out they are on their own.”
Meanwhile, just five percent consider themselves very knowledgeable about money management and investing, according to the study that also shows that Gen Y women are even less confident than men about handling finances.
“People have no idea,” says Kamenetz. “They don’t understand rates or the power of compounding interest. They do not get the basics of credit card debt or what it is.”
Students not being taught basic finance
The problem, says Erika Luckow, director of the Northwestern Mutual study, is that young people are not getting any kind of basic financial education at home.
“I’m shocked that this generation really needs a crash course in Money 101,” Luckow says, “but there isn’t a huge emphasis in financial education in the schools or from parents.”
More than 60 percent of those polled said parents are their most trusted source of financial education, her study shows. For 22-year-old Colorado resident Jessica Boes-Johnson, her dad, a certified public accountant, is her financial role model. However, her mother and stepfather have done little to school her on money matters. She has $12,000 in student loans and another $6,000 in debt between two credit cards.
“A lot of people’s parents don’t have a grasp on it themselves,” say Boes-Johnson. “My main issue is that they don’t teach their kids the responsibilities of a credit card and of taking out student loans.”
She uses the example of a friend, who has billionaire parents, but has trouble budgeting enough money to pay rent.
“I found that a lot of my friends could save in high school, but once they went out on their own they couldn’t budget for groceries,” Boes-Johnson says.
Responsibility lies with both creditors and borrowers
The role of education falls on two shoulders, says Marie O’Malley, vice president for Nellie Mae, a subsidiary of national lending giant Sallie Mae.
“Really, the primary owners of the responsibly should be the creditors and borrowers,” says O’Malley. “We don’t want to encourage rampant borrowing among a population that doesn’t really know what they are doing.”
Sallie Mae and its lending partners originated $21.4 billion in loans last year and currently manages $123 billion in loans for nine million borrowers, says Erin L. Korsvall, a corporate communications representative. O’Malley says that while her group provides education materials for borrowers, the main avenue of distribution relies on college offices.
“It’s a big part of how we depend on distribution,’ O’Malley says. “There are certain things we make available to the college and we rely on them to disseminate the information.”
At Ohio University, Martig admits he never received any information that could have served as a premonition of his life today.
“There is not a lot of emphasis on it in school, especially for any sort of artist,” he says. “I completely feel like they are we haven’t been taught anything about it.”
Gen Y has easier access to credit
Connecticut resident Rob Vaghini was a classmate of Martig in Ohio. Both of them went to school out of state, but unlike his schoolmate Vaghini had his parents’ support throughout college.
He has paid off his credit cards, is currently locked into an 18-year interest rate on $12,000 in student loans and is comfortable with his credit history, although he doesn’t know what type of credit score he has.
“We are as smart about finances as other generations, but I don’t think they had the easy access to credit,” says Vaghini. “Credit cards have become the thing to use and cash is becoming the uncommon thing.”
Vaghini believes that while finances are not his generation’s top priority now, they will be later when his peers begin to settle down and that the knowledge will follow too. In conversation he talks to his friends about setting up a Roth IRA, or an Individual Retirement Account that provides tax-free growth.
“I think I would be ahead of the curve,” says Vaghini, “but the whole concept is a little alien to me.”
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