Student Loans? First Pass This Test

Soon you may have to do more than ace the SAT to get into college; if you're a kid borrowing money for tuition, you may have to pass a financial literacy test too.

This idea has been floating around for a while. Proving you can actually manage your student debt before you get to spend it is the centerpiece of legislation introduced in Congress in 2009. It makes so much sense that it never went anywhere.

But some powerful Washington players, including the Financial Services Roundtable, which represents the 100 largest U.S. financial institutions, say they will push for the bill to be taken up now that Republicans have regained control of the House.

"Anytime I meet with folks like (J.P. Morgan Chase CEO) Jaime Dimon and Charles Schwab, if I don't put financial literacy on the agenda they ask me what I'm doing about it," says Steve Bartlett CEO of the roundtable. He made those comments at the JumpStart for Personal Financial Literacy National Educator's Conference, where he added that the group also intends to get behind requirements for teaching about money in high school.

Momentum for tough measures is building. Testing over the last 10 years has shown repeatedly that kids are not learning as much as they should about personal finance. Meanwhile, student loans outstanding have surpassed total credit card debt, an important flashpoint in our debt-ridden economy.

Most student loans come from the federal government -- $606 billion, vs. just $168 billion from private lenders. Too often these loans are mishandled; students fritter them away on lifestyle spending or use them in pursuit of an expensive private-school education in a major that will never allow them to earn enough to pay the loans back in a timely way.

So think of this proposal as tough love. According to the original bill from Sheila Jackson Lee of Texas, every borrower must receive four hours of counseling in these areas:

· Banking basics This includes the types of financial institutions, why and how banks may be useful to individuals, and the fundamentals of using checking and savings bank accounts, including how checking and savings accounts work, fees that may be charged and how to open and maintain an account.

· Budgeting This includes matching goals and savings, identifying ways borrowers can save money and understand savings options that can be used to reach savings goals, and the main components of a budget, such as income, fixed income, fixed expenses, flexible expenses and discretionary expenses.

· Credit cards This includes how to use credit, how to determine what forms of credit best suit the needs of the borrower, the common pitfalls of credit card debt, and the differences in types of credit cards, including pre-paid cards, debit cards, secured credit cards linked to checking accounts, and charge cards.

· Loans, grants, tax credits, and scholarships This includes general information about and differences between installment loans, including car loans and student loans; the difference between grants, scholarships, and loans, including the differences between need-based and merit-based aid; and information about options for repayment, deferment, and the ability to discharge or cancel education loans.

· Renting and Housing This includes information on renting an apartment and the basics of getting a mortgage.

· Credit scores This includes information about credit, such as that credit is a sum of money lent by a bank or institution for repayment in the future and includes interest on the balance that is borrowed; what factors go into a credit score and the importance of having a good credit record.

· Investing This includes information about the risks and benefits of investing, setting goals and time horizons for when money may be needed, establishing risk tolerance, and the differences between stocks, bonds, and dividends.

And you thought the SAT was tough.

Photo courtesy Flickr user just_d_miller.

Dan Kadlec

Daniel J. Kadlec is an author and journalist whose work appears regularly in Time and Money magazines. He is the former editor of Time’s Generations section, which was written and edited for boomers. Kadlec came to Time from USA Today, where he was the creator and author of the daily column Street Talk, which anchored the newspaper's business coverage. He has co-written three books, including, most recently, With Purpose: Going from Success to Significance in Work and Life. He has won a New York Press Club award and a National Headliner Award for columns on the economy and investing.

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