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1 in 4 College Grads Are Financially Illiterate

1 in 4 College Grads Are Financially Illiterate
Millennials are financially illiterate

Consumer banking firm Sallie Mae released its new “Majoring in Money” study of hundreds of current and recently graduated college students up to age 29. They found one common denominator: Even college graduates don’t know much about basic financial concepts like interest.

Without further ado. Here are the questions to test yourself:

Interest accumulation:

Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

  1. More than $102
  2. Exactly $102
  3. Less than $102
  4. Not sure  

Effects of payment behavior on credit cost:

Assuming the following individuals have the same credit card with the same interest rate and balance, who will pay the most in interest on their credit card purchases over time?

  1. Joe, who makes the minimum payment on his credit card bill every month
  2. Jane, who pays the balance on her credit card in full every month
  3. Joyce, who sometimes pays the minimum, sometimes pays less than the minimum, and missed one payment on her credit card bill
  4. All of them will pay the same amount in interest over time
  5. Not sure

Impact of repayment term on cost of credit:

Imagine that there are two options when it comes to paying back a loan and both come with the same interest rate. Provided you have the needed funds, which option would you select to minimize your total costs over the life of the loan (i.e., all of your payments combined until the loan is completely paid off)?

  1. Option 1 allows you to take 10 years to pay back the loan
  2. Option 2 allows you to take 20 years to pay back the loan
  3. Both options have the same out-of-pocket cost over the life of the loan
  4. Not sure

Interest terminology:

Which of the following best defines the term “interest capitalization”?

  1. The type of interest charged on high-balance loans
  2. The addition of unpaid interest to the principal balance of a loan
  3. Interest that is charged when you postpone payments on your loan

Answers: 1: A, 2: C, 3: A, 4: B

Percent of college grads who got the correct answer to each question

Question 1: 83%

Question 2: 54%

Question 3: 78%

Question 4: 55%

Takeaway

Clearly, something is amiss. How can it be that college graduates, after four years of studies, cannot answer these simple questions? The problem here, of course, is that these are questions that could end up costing grads a ton down the road because most of them have credit cards and/or student loan debt. There are plenty of resources, both in print and online, that can help one get a handle on these sorts of basic financial topics. Marketwatch recommends reading books like “Your Money or Your Life” by Vicki Robin or Dave Ramsey’s “Total Money Makeover.” Certainly in the age of the internet, there really is no good excuse for not grasping these basic staples of living an adult life.

 

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