Will Debt Be a Nasty Surprise for Students?

Students are often surprised by their own debt when graduating college, according to a recent study by Fidelity Investments.

The study found that 70 percent of the class of 2013 is graduating with debt, and half of those say they are surprised to learn exactly what condition their finances are in when they enter the working world. This debt factors in federal, state, and private loans, as well as familial debt and credit cards. The average student in 2013 owes around $35,000. As a result, the class of 2013 told incoming freshman to save as much as possible, and be careful when selecting a major in order to maximize job prospects after graduation.

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This highlights a need for financial education among students and parents, as 39 percent of participants said they would have made different choices had they better understood the ramifications of such a debt burden. This is up 14 percent from the previous survey by Fidelity in 2011. Keith Bernhardt, vice president of college planning at Fidelity Investments, indicated the need for further financial literacy among families, saying, “It is critically important for families to have thorough discussions related to college planning a lot earlier than they do now, and to understand their options and create a college savings and funding plan to help avoid significant post-graduation debt.”

There were some bright spots in student behavior following graduation, though. More than half of all recent graduates have set financial goals for themselves and are on track to meeting these goals — cutting spending, saving, and enlisting parents, to cope with their debt. Moreover, 81 percent claimed to have worked a job during the year or over the summer to contribute to funding their education.

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However, no matter the level of responsibility from students, the amount of debt they amass has serious economic consequences for America at large. From 2004 to 2013, consumer debt posted only a modest growth of 9 percent, with student debt actually tripling to $986 billion in that same time span. Rohit Chopra, student loan ombudsman at the Federal Consumer Financial Protection Bureau, put this into perspective in a recent interview, noting, “Many borrowers are telling us their dreams of owning a home or starting a small business may be out of reach.” In a time where the U.S. is looking for any means possible to get GDP growth about or around 3 percent, an entire generation of productive people is burdened with debt.

It’s not debt designed to spur economic activity either. Buying a home and starting a successful business represent the two most powerful ways one can contribute to the economy, and as these actions are postponed by more and more college grads, the prospects of a fast and prosperous recovery are postponed with them.

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