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Gerri Walsh on Expanding Financial Capability

February 2013

By Marta Perez Drake

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Student loan debt has risen sharply in recent years, even as significant federal tax incentives exist to encourage saving for college. What can be done to better prepare families for the cost of higher education and reduce the burden of student debt? 

Gerri Walsh, president of the FINRA (Financial Industry Regulatory Authority) Investor Education Foundation, argues that greater up-front involvement by colleges and universities can mitigate the harmful consequences of too much or the wrong kind of debt. Her organization helps underserved audiences—students among them—better understand what’s entailed in making smart financial decisions.

Student financial literacy has become an issue of growing concern for NACUBO’s members. How does the FINRA Foundation define and address this?

 While our focus includes the financial literacy component—that is, the knowledge of financial terms and concepts—we use the term financial capability. This includes the capacity to apply financial knowledge to decision making but it also encompasses behavior—for instance, the factors people consider and the skill sets they use to manage their financial resources. For us, financial capability involves four pillars, which need to work in concert. They include making ends meet, planning ahead, managing financial products, and financial literacy. 

With regard to student financial aid specifically, how well do parents and students understand their options? 

Foundation-funded research by the Institute for College Access and Success (TICAS) found that a large number of students are making use of private loans before maximizing their use of federal student loans, which offer deferral options and greater flexibility in repayment than private loans. Many students and families don’t appear to understand key differences between private and federal loans or that the capitalization of interest on private loans can have a huge impact on the amount they eventually have to repay. More broadly, some students and families are uninformed or misinformed about the nature of their financial aid packages. When students don’t understand their aid package and loan options going into the process, too often they come out the other end with crippling debt. 

Is part of the problem that students have easy access to loans and credit cards? What can be done to help students navigate through the implications of taking on too much debt?

Some students do use loans for lifestyle purposes beyond the need to cover education costs exclusively, but counseling can go a long way in turning that tide. The change in behavior often occurs when a student understands that a loan is not free money. It’s critical for colleges to improve the way they frame information about taking out a student loan, as well as what portions of a student’s financial aid package are truly aid versus funds the student must repay. 

What does this suggest for the way college and university leaders should respond? 

One solution may be to incorporate a counseling component into the loan certification process before a student is issued a private loan. Few of the institutions that TICAS examined tracked the outcomes from their financial aid coaching, yet those that did saw significant improvement in the type and amount of loans students took, often reducing their use of private loans and focusing on first maximizing federal student loans. Institution leaders should consider requiring students to complete entrance counseling prior to receiving their first financial aid package and exit counseling before setting up loan repayment plans, integrating financial quizzes at each stage to test students’ knowledge so they understand the consequences of their debt. 

Are parents typically involved in this coaching process? 

Too many aren’t. Parents as well as students should understand the makeup of any financial aid package and the full impact of the investment a student makes when going to college. While involvement by parents typically levels off after the freshman year, they should remain involved in loan decisions throughout a student’s career. In many cases parents incur a financial obligation if they have cosigned for a loan. 

What more can be done to prepare students and families for the cost of a college degree?

A recent Government Accountability Office study of tax-advantaged savings plans—such as the Coverdell Education Savings Account and various 529 plans—indicates that many families simply are not using these, and those who are tend to be more affluent. This reflects similar findings from a nationwide financial capability study the FINRA Foundation conducted in 2009. Among respondents with dependent children, only 31 percent indicated they were saving for their child’s college education. Of that 31 percent, fewer than one third reported using tax-advantaged programs. This underscores the importance of one of FINRA’s four pillars of planning ahead. 

At the same time, we are hearing more about generational debt, where parents who want to save for a child’s education are still struggling to pay off their own student loans. What is best for parents to do in this case? 

Financial decision making is charged with emotion, and it cannot happen in a vacuum. Parents have to weigh decisions about providing for a child’s education in conjunction with their other financial priorities, ultimately making decisions that make sense for the family as a whole. For instance, does the family have an adequate emergency fund so that if a parent loses a job, or the car breaks down, or the boiler burns out, they can weather the crisis without going into debt? This financial picture includes housing, medical expenses, the daily cost of living, and retirement. While a student can borrow for college, parents can’t borrow for their retirement. 

Some argue that improving the financial literacy of Americans must start by establishing financial education as part of the school curricula. How should colleges and universities be involved?

Financial education should evolve over a life cycle, so it’s important to tailor education in an age-appropriate way. Even at the college level, student needs differ depending on where they are in their education cycle. Underclassmen have a different set of concerns compared to those getting ready to enter the workforce, who are making decisions about the debt they have acquired. 

The challenge for educators—from elementary to postsecondary—is finding a place to integrate financial education. Math provides an obvious fit for helping students understand key concepts such as the power of compound interest. Yet, social studies can also provide an opportunity for students to learn about financial priorities within the context of something like the Great Depression. Financial education and financial aid counseling can even be integrated into GED programs. 

Are there examples of institutions that are particularly successful with efforts to help students become financially literate adults?

There are a number of really good programs. One is the University of Tennessee, which offers an online financial education course that it has integrated into the classroom experience. This required broad faculty agreement to include a financial component as part of the core curriculum. Their Love Your Money program ( has built-in metrics so that teachers can monitor how students are changing attitudes toward money and their understanding of financial concepts. Students who use it are reporting significantly higher levels of confidence with developing a budget, tracking spending, and paying bills on time.

How should high school students be educated about what they can afford and the cost of choices they might make to attend a certain college or university? 

A student’s decision about where to go to college should be based not only on a chosen career path or the particular features of an institution, but also on multiple factors related to cost, including the amount of debt he or she is likely to incur. One factor is how long it may take students to complete their education, given their personal circumstances.

 Taking a six-year path through a four-year degree will accrue significant additional debt. The Department of Education provides some great information through its National Center for Education Statistics about yearly costs, graduation rates, and loan default rates by institution, for easy comparison. 

What lessons can be learned from the recent housing crisis that institution leaders can point to as they work with students to help them understand their college payment options?

Perhaps the biggest lesson is the importance of understanding the debt we take on and being realistic about what that debt means for our future. For some students, taking out $100,000 in debt may be workable, but for many others, it won’t. All students should understand the financial implications of accruing debt and what it means to repay it, including how best to work this repayment into their other financial goals. 

The sad reality is that whether they are using banking services or engaged in nonbank borrowing, many Americans don’t seem to understand the terms of the financial products they own—whether that is a car loan, a home mortgage, or a student loan. Too many younger people in particular are struggling to make better financial decisions. Our hope is that with wide-scale early intervention, we will begin to turn this around.

MARTA PEREZ DRAKE is vice president, professional development, NACUBO.

The sad reality is that many Americans don’t seem to understand the terms of the financial products they own.