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According to figures published by the Consumer Credit Panel in the USA, a student who leaves college with a $100 000 student loan is twice as likely to repay that debt than a student who leaves with less than $5 000 in debt.
According to Karan Goel, CEO and founder of GetSet, an online platform that instantly connects university students encountering challenges with those who have recently overcome the same challenges, the context behind these figures is that a student with a larger loan is more likely to have completed college than one with a lower loan amount. Without a qualification, the student is less likely to be in a position to repay their loan.
Speaking at the 2017 Financial Literacy Summit in Chicago, Goel said the debate over free tertiary education is in many respects the wrong conversation. “What is the point of free college if people don’t graduate?”
Watch the panel discussion here
Despite the USA being a first-world economy, the challenges faced by students there are very similar to the South African experience. Even if students receive funding, often they do not even start at college or fall out early from the system. The issue is compounded if they have borrowed money to attend tertiary education – leaving them with debt but no job prospects.
“In the US, 40% of students who are the first in their family to enter college do not graduate,” says Ted Gonder, a Chicago-based social entrepreneur who participated at the Summit. His online platform MoneyThink is aimed at providing relevant financial education to college-aspiring high school students.
The low graduation rates could be due to a range of factors but often it is closely tied to socio-economic issues. Students from lower-income families often carry significant responsibilities. The money that was meant to go on transport to get to university suddenly goes to a funeral for a family member or to pay a medical bill. Often the immediate needs of the family require the student to drop out of formal study to take a low-paying unskilled job to make ends meet. There is also no safety net or community network to tap into for lower-income families which makes them more financially vulnerable in general.
Goel says he realised that what is needed is a reframing of the conversation to make it less about the cost of fees and more about the real cost of graduating. “What does it takes to earn the credentials that allow one to have a career and financial success? That’s what GetSet’s support platform delivers – support right when students need it,” says Goel. The platform connects students with mentors who have been through a similar experience. In this way Goel hopes to improve graduation rates, which will be good not only for students, but also for credit providers who will have a better chance of their loans being repaid.
Gonder is fairly dismissive of general financial literacy programmes at schools and universities, as most students are not that engaged with the topic. “We tend to romanticise the idea of access to financial education but people often don’t know what information they need or how to access it. Whilst developing our technology we realised how un-interesting students find financial content, so the challenge is how to make it relevant,” says Gonder whose platform provides real-time advice at key financial moments such as opening your first bank account or getting your first paycheque.
This highlights one of the key challenges around delivering financial education. Financial literacy is as important for society as a whole as it is for the individual making those choices. But how do you give people the information they need, when they need it?
Taking on debt is a good example. How many people understand that if they only pay off the minimum balance on their credit card that it will take them 20 years to pay off a R10 000 balance? Or if they finance their car over 72 months it will be worth less than they owe on it for the first five years? How do we inform ourselves at that critical time and who do we trust with that information? The bank which will earn a 20% return on the credit card or the car dealer who can sell you a more expensive car if funded over 72 months?
Fintech is creating the opportunity to provide both general financial education as well as specific information available when you need it. Imagine an app that could sense that you had just walked into a car dealership and sent you the appropriate information and questions to prepare you before you signed on the dotted line, along with a finance calculator?
While one-on-one engagements are still highly valued by people wanting to make financial decisions, developments in FinTech could provide broader, cost-effective and more frequent access, especially if it is able to provide the relevant information at the optimal moment.