Call it the big regret.
A recent study commissioned by the Financial Industry Regulatory Authority Inc. found that more than half of college-bound students failed to calculate their potential student loan costs before taking out loans and, of course, later regretted their decisions to the tune of $1.3 trillion in student debt.
A triennial study published by the Global Financial Literacy Excellence Center surveyed 27,000 respondents to benchmark financial literacy characteristics among various categories. It found that three in five student loan borrowers did not try or did not know how to figure out their future monthly payments.
“Most students are looking ahead to their future with rose-colored glasses," said Robert Schmansky, founder of Clear Financial Advisors. "They're not worried or even thinking about future costs.”
Federal loans are a popular choice but don't cover the full tuition cost, prompting some borrowers to take out private loans. It is this lack of awareness in the future costs that prompted over half of the respondents to regret their loan decision, according to the study.
“If you're going to borrow, make sure you understand the basic components of a loan and calculate what your payments are going to be with a timely graduation,” said Douglas Boneparth, a partner at Longwave Financial. “Having this knowledge will help you understand which loans are more attractive to use when borrowing.”
In fact, those who did try to estimate their potential monthly payments are 15 percentage points more likely to be satisfied with their loan choice than those who did not, the study said.
That said, students are increasingly unable to repay their loans due to rising costs and sticky wages. Student loan borrowers have almost doubled in the past decade to 43 million from 23 million, the study revealed. Average tuition and fees at public colleges grew faster than wage growth and inflation grew 13% in the last five years.
One in three borrowers have missed their payment at least once; one in four, more than once. Those most likely to fall behind are minorities, lower-income respondents, and borrowers who did not complete the educational program they borrowed for in the first place. Three in 10 respondents did not make it through to graduation, according to the study.
Mr. Boneparth believes students and parents need to ask themselves what the goal of getting a college education will be before taking out the loan. He advises families to examine financial aspects along with the reason for attending.
“Taking out student debt without first understanding how you're going to get a return on your investment can be a disastrous financial decision,” he said. “For example, if your goal is to work in the 'big city' and work an advertising job that pays $40,000 a year, it might not be financially feasible to pay your monthly debt payment, rent, and lifestyle expenses when you have $25,000, $50,000 or even $100,000 in debt.”
He said that is where advisers can help clients understand how monthly payments can fit in their cash-flow, as well as counseling their emotions over student loans.
Yet as the study showed, close to half of the borrowers have concerns in their abilities to pay back their loans; close to half of the respondents are also millennials — a demographic found to be most reluctant to seek adviser help, let alone add an additional expense to their mounting student debt.
“It may be that many [borrowers] see this time as one they just have to put their head down and fight through alone,” said Mr. Schmansky. “To me, the long-term benefits as an adviser outweigh the need to charge for this type of engagement if I'm managing the parents' investments.”
For the student looking for advice but unwilling to pay for an adviser, Mr. Schmansky recommends directing them to online resources and to see their school's financial aid officer, and hourly based advisers.
Mr. Boneparth said he will go further. He believes that it is short-sighted for the financial advisory industry to hesitate in engaging with younger professionals because of their current wealth and asset levels. It is the long-term potential a young professional has that he seeks.
“I see their trajectory. If they are high-achieving professionals, I'm going to invest in them. If they pan out, they're going to become an extremely valuable client over a long period of time,” he said.