New Jersey bankruptcy Article
By RON LIEBER
Published: January 7, 2011
One of the more difficult questions of the mortgage collapse was just how much blame individuals should take for signing up for loans they didn’t understand.
Yes, many mortgage brokers steered people into harmful products. All sorts of banks, meanwhile, paid the brokers more when they put borrowers into subprime loans, and those same lenders simultaneously abandoned many of their underwriting standards.
But who is responsible that many borrowers didn’t understand the terms that were buried in the documents they were signing?
Is it their fault that they did not know, for instance, that their credit scores might have made them eligible for better terms on a fixed-rate loan?
An education is one of the best defenses against financial flimflam, but many students never learn the things that help. Only a handful of states require schools to teach basic personal finance, and it’s often of the old-fashioned, balancing-the-checkbook variety. Also, it tends to come at a stage in life when students are years away from putting the knowledge to practical use.
So I was heartened to hear about Champlain College here, which recently started requiring all undergraduates to attend two sessions in financial literacy.
And I decided to sit in to see what I could learn.
Champlain, which has about 2,000 undergraduates and places a heavy emphasis on training students for work in careers including video game design and digital forensics, doesn’t actually use the term financial literacy. The opposite of literacy, after all, smacks of ignorance. Nobody wants to be ordered into a classroom for being illiterate.
So the college speaks of its “financial sophistication” offerings, though it still makes every junior attend. “It was based on a simple observation that nearly everyone agreed with, and certainly employers did,” said Champlain’s president, David Finney, a veteran New York University administrator who became Champlain’s president in 2005. “The average college graduate doesn’t know how to do anything or how to function in the world.”
That’s a fairly harsh assessment. Then again, students spend their lives in Spanish and United States history classes. Practical skills are rarely part of anyone’s core curriculum. Most fancier universities are all about bowing to the canon, so they tend not make things like financial literacy a priority. This is also the reason, by the way, that so many undergraduate career placement offices have been so mediocre for so long.
Besides, where in the academic curriculum would you put something like credit reports and scores? This happened to be one of the first things that Champlain chose to focus on. Part of the reason was simple convenience: The Champlain Housing Trust, a nonprofit group, offered to teach one of the courses and train other instructors, who now handle the introductory material.
Making good credit the foundation of financial sophistication makes a certain amount of sense. First of all, it’s complicated. Even the experts can’t always explain why a FICO credit score moves the way that it does, though mastering its basic components is not impossible.
More important, a person’s credit status is becoming a factor in a growing number of areas, including car insurance and hiring for many jobs. Also, younger people tend to have worse credit scores because the age of the accounts in the credit file is a factor in the formula. That can cost them when borrowing, and they are punished doubly because they generally have less income to put toward the higher payments that can result from a lower credit score.
Champlain has chosen to train students to teach its introductory class on credit, a strategy that is fraught with all sorts of danger given how complicated the topic can be. I was impressed, however, with the student teachers I quizzed, and the materials they share with their fellow undergraduates were 100 percent accurate as well.
“We wanted to create little foot soldiers to go out and spread the word,” said Shelli Goldsweig, who runs the life skills program at Champlain, which includes the financial sophistication workshops. Spreading the word was essential, in fact, given how little students seemed to know about how much a higher credit card interest rate could cost them. “When a peer tells them that a computer will cost 21 percent instead of 9 percent if they make the following mistakes, it carries a lot more weight than if I said it.”
Not surprisingly, the student teachers often discover huge misconceptions about credit among their classmates — and their parents. “My mom wanted to know why I needed to know so much about this now,” said Michaela Fortin, 21, who is a senior peer adviser. “It’s not like I’m getting a car or buying a home.”
But negative information can stay on your credit report for several years, so big mistakes in college can have consequences that last. “If I want that house, they’re going to look at that,” said Ms. Fortin, who is engaged to be married and just might want to buy a starter home before too long.
The student teachers emphasize the most important components that make up a credit score: paying on time, the amount of debt you have versus your credit limits and the type of accounts you have. Some things, like how long they’ve had their accounts , are partly out of their control for now, due to their age.
“You can’t maximize your score right now, but you can ruin it pretty easily,” said Mike Fife, the financial sophistication coordinator at Champlain. “If I had had a course like this, I would have remembered to return the cable box.”
On the night I was on campus, Mr. Fife was teaching a budgeting seminar. He had come from a job at a nonprofit credit counseling group and was just a month into his job at Champlain. So he’s wise enough to know better, but at age 28, he’s young enough to get it.
“I look at this as preventative medicine,” he said. “I’ve seen what happens if you let credit cards get out of control. I do feel like that stuff just snowballs.”
He runs a tight ship — no laptops, no mobile phones — but also declares that his classroom is a judgment-free zone. “There is no such thing as a bad budget,” he told the class. “I don’t care where you spend your money.”
When a wisecracking student in the front row said he wanted his budget to allow him to party more, it gave Mr. Fife the opening he needed to explain that goals are, in fact, the basis for any budget. “Budgets lower stress, because they help you get more of what you want,” he said.
Making the process about getting more instead of sacrificing is a nifty trick. And it’s an incredibly useful retort to anyone, college student or corporate finance executive, who finds budgeting excruciating.
Inserting more such a-ha! moments into the lives of undergraduates will require additional courses aside from the few that Champlain has offered so far. So it is adding one on student loans and another that explains why generous employee benefits may make a job with a $37,000 salary better than one that pays $40,000.
The school has bigger ambitions, too, including a financial literacy conference for politicians and other influential people, and a summer institute to train high school teachers who want to include more personal finance in their own courses.
At the high school level, however, principals can’t necessarily snap their fingers and order up a financial literacy course. “Top-down mandates don’t tend to exist at the high school level,” said John Pelletier, Champlain’s director of its new Center for Financial Literacy. “Often, the school board needs to be involved.”
But in universities, those sorts of mandates often do exist. “The student life people didn’t think that our students would want to do this,” said Mr. Finney, Champlain’s president. “But then they conducted a series of focus groups of seniors and recent graduates, and this absolutely topped the list. Which I was happy for, because I was going to insist that we do it anyway.”
The cost for all of Champlain’s programs is about $120,000 a year for the first two years, money that just about any university president can probably pry loose, even in trying times like these.
That said, Mr. Finney told Mr. Pelletier that he would need to find enough sponsors to be self-sufficient after 24 months, something he’s well on the way to doing. “We took a bet, basically,” Mr. Finney said. “Because we wanted to develop something that we hoped would become a national model.”