This will peak your interest.
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 — and one big red flag sticks out: Even college graduates don’t know much about basic financial concepts like interest.
Indeed, Sallie Mae asked them four questions related to credit and interest, and fewer than one in four got all four of these correct. Here are the questions (the correct answers are below):
1. Interest accumulation:
Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a. More than $102
b. Exactly $102
c. Less than $102
d. Not sure
2. Effects of payment behavior on credit cost:
Assuming the following individuals have the same credit card with the same interest rate and balance, which will pay the most in interest on their credit card purchases over time?
a. Joe, who makes the minimum payment on his credit card bill every month
b. Jane, who pays the balance on her credit card in full every month
c. Joyce, who sometimes pays the minimum, sometimes pays less than the minimum, and missed one payment on her credit card bill
d. All of them will pay the same amount in interest over time
e. Not sure
3. 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)?
a. Option 1 allows you to take 10 years to pay back the loan
b. Option 2 allows you to take 20 years to pay back the loan
c. Both options have the same out-of-pocket cost over the life of the loan
d. Not sure
4. Interest terminology:
Which of the following best defines the term “interest capitalization”?
a. The type of interest charged on high-balance loans
b. The addition of unpaid interest to the principal balance of a loan
c. 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%
The issue 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.
Indeed, 83% of college grads carry a credit card, Sallie Mae revealed — and yet only about six in 10 say they pay the balance(s) in full and on time each month. And nearly seven in 10 college students take out student loans, graduating with an average of nearly $30,000 in debt.
While many colleges do offer personal finance courses and seminars, these are optional for many students — which means thousands graduate without having taken them. That could explain why confusion about student loans, for example, is rampant.
So where should college students go to learn the basics of everything from credit cards to loans? Mitchell C. Hockenbury, a certified financial planner at 1440 Financial Partners, recommends reading books like “Your Money or Your Life” by Vicki Robin or Dave Ramsey’s “Total Money Makeover.”
And there are plenty of online resources, including MarketWatch. See “7 money moves smart graduates make right after college” and “Everything recent grads need to know about planning for retirement.”