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No money, big problems

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They’re young, in debt, and can be clueless about what that really means.

Rick Kim was forced to leave university when he could no longer afford tuition. (Photo: Ora Morison)

Young people today face higher levels of student debt and greater access to credit than ever before. They’re too old to have received lessons from new high school and elementary curriculum on financial literacy, and too young to be informed by life experience. Yet they are out in the real world now, making decisions that will affect their lives, financial and otherwise, for years to come.

Three quarters of undergraduate university students do not know their student loans will begin to accrue interest immediately after graduation, according to a Canadian Alliance of Student Associations survey from 2010.  Despite this indication that many students have little understanding of their debt, college and university students are taking on student loans in record numbers.

“I didn’t really research how much school was going to cost me,” Rick Kim, a former University of Waterloo engineering student, says.

Source: Statistics Canada

Part way through his four-year degree, Kim was forced to drop out of school when he couldn’t cover tuition and living expenses with his student loans.

“To begin with, I wasn’t a guy to save a lot of money,” Kim says.

A difficult semester where his marks dropped and he lost the chance to apply for co-op jobs, and Kim’s finances snowballed into a debt of $32,000 dollars. Kim was borrowing money from friends and using the food bank to make ends meet. He was forced to drop out of school when he couldn’t afford tuition. Click here to learn more about Rick Kim’s situation.

With their lives stretched out before them … and no plan

Would better money management skills have saved Kim’s academic career? An unexpected bump in the road, such as failed courses and loss of a co-op job, should be manageable if a person has a financial plan in place, credit counsellors say.

The problem for people in general, and young people especially, is they have a tendency to discount the future. Getting young people to simply pay attention to their money and plan for the future is the crux of any plan to teach this age group financial literacy.

Mélanie Nadon, a counsellor at Ottawa’s K3C Credit Counselling, says carrying a large balance or maxing out credit cards may not have bothered some of her clients when they were younger, but five or 10 years later when they want to buy a house, they are cursing their poor credit score.

 “I didn’t really research how much school was going to cost me.” – Rick Kim

Many young people don’t realize the impact their financial decisions today can have on them years down the road, Nadon says. Click here to see how one credit counsellor shows Rick Kim how to get his finances in order.

Credit cards are increasingly becoming a danger for young people with little or no income. With 72 per cent of Canadians aged 18-29 owning a credit card, the proportion is roughly equal to the number of young people with a savings account (74 per cent), according to a survey commissioned by the Financial Consumer Agency of Canada.

“The banks are almost throwing [credit] at them,” Ellen Roseman, a personal finance columnist with the Toronto Star, says. “They want you to take it even if you have a fair bit of debt already.”

“Young people growing up with this widespread availability of credit may not be aware of how hard it is to dig yourself out of a hole,” Roseman says.

Cards marketed specifically as student credit cards can come with features such the ability to withdraw $2500 in cash advances per day, at a 19.4% interest rate. Some also appear to specifically entice young people with customizable designs.

These cards often don’t require the student to have any income. They are marketed as a tool to build a credit history, but a first foray in to the world of credit has the potential to hurt rather than help your credit score, and finding help when you’re young and in debt isn’t always easy.

Not finding help in all the right places

Kaitlin MacVicar was put off investing when she didn’t know what to make of one bank’s investment manager’s sales pitch. (Photo: Ora Morison)

Kaitlin MacVicar is 25, working at her permanent first job and chipping away at her $35,000 worth of student loans. Before this, she held a series of several-month-long contract positions that made making regular payments toward her student debt extra stressful. Despite this, MacVicar was determined to keep up to date with her student loan repayments.

Weeks ahead of her first payment, MacVicar tried to contact the Ontario Student Assistance Program (OSAP) about how to make regular payments. She found herself navigating seemingly endless menus on her touch-tone phone and unable to speak to a real person. Frustrated, MacVicar had to wait until OSAP called her, looking for her first payment, in order to speak to someone. Now late on her first payment, it wasn’t the way MacVicar had planned to start her repayment process. She says she has found the OSAP system opaque and hard to navigate.

Click here to learn more about Kaitlin MacVicar and the other money management problems she has encountered.

Who can you trust?

It’s often difficult for young people to get personalized financial advice from someone who will take the time to sit down with them and explain their options in detail. Without much in the way of assets, young people tend to be an unattractive market for financial advisers.

“It’s more profitable to deal with people who can afford the product and have a lot of money to invest,” Heath Haughton, an Ottawa-area financial adviser, says.

Haughton estimates about 15 per cent of his clients are under 30, and these are mostly children of his older clients.

“There are a couple of sound business reasons why it doesn’t make sense for an advisor [to deal with young people,]” he says.

Even though he says young clients represent potential for good business in the future, Haughton says he would rather seek out people who will help him earn profits now.

While Haughton agrees learning about managing your money, saving and investments is an important skill, he says it’s not his job to teach these things in the private sector.

“Banks are profit-making organizations. We can’t forget that” – Norah Foster

Norah Foster, another credit counsellor at K3 Credit Counselling, agrees the private sector is not the place to teach these lessons. Foster has helped many young people work through their financial problems and set up a budget. She says banks can also give valuable advice to young people, but as private companies, they can’t always be relied upon for unbiased advice.

“They do provide financial literacy, but the underlying thing is the banks are profit-making organizations. We can’t forget that,” Foster says.

Other places young people can turn for advice are government-sponsored websites, not-for-profit counselling agencies and communities of blogging amateur finance geeks. Are young people using these sources to get the information they need to be financially healthy? For people like Rick Kim, easy access to credit and loans didn’t come paired with the need or desire to learn about how to manage them.

Boosting financial understanding for young people is important because they are in a uniquely vulnerable situation: little to no income, relatively large student loans, easy access to personal credit, and a tendency to believe financial decisions can be put off until they get older.

Getting young people to care, and care today, is the first step to solving the problem

Read on– Next chapter: Getting back in the black

Getting back in the black

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The recent recession has put a spotlight on the bank accounts of individuals and how much we save. As governments cut spending to get their own deficits down to an acceptable size, the average Canadian’s debt level has hit new highs – according to the latest data from Statistics Canada, Canadians owe $1.50 for every dollar they earn. This ratio is among the highest in all OECD countries and has been increasing since the global financial crisis in late 2008.

Mixing money and math class

At the same time, more is being done to teach Canadians, young people included, about how to save money, invest, and manage debt. In September 2011, elementary and high school students in Ontario learned about taxes, credit cards, advertising and investing for the first time as part of their formal curriculum. The Ontario Ministry of Education reported in 2010 that there was a growing need for this kind of personal finance education as the financial decisions required of the average person become more complex. British Columbia has had a similar financial literacy curriculum in place since 2004, and the government of Manitoba plans to launch a program based on the others in the next few years.

But while these lessons are being taught in at least some provinces today, today’s twenty-somethings are facing decisions their formal education did not address.

Perhaps that is why today’s young adults are a focus of the federal government’s Task Force on Financial Literacy.

Financial illiteracy skews younger

Established in 2009, the task force’s work drew on a Statistics Canada report from the same year that noted young people are struggling to make ends meet, choose the right financial products and plan for their financial future.

The task force reported to Parliament in February 2011, and seven of the 30 task force recommendations specifically mention young people and ways to address their unique financial vulnerabilities:

  • There should be counselling and education provided to every student who applies for a loan through the Canada Student Loans Program.
  • Employers should incorporate financial literacy training into current training programs. The task force noted “early work experience and career development are ideal points in the life cycle when money management and financial planning may be most salient for youth.”
  • Financial-service providers should take advantage of “teachable moments” based on specific life events such as having a baby or changing careers. People aged 20-30 are likely to experience many of these life changes.
  • The Canadian government should make financial literacy programs eligible for funding under the Youth Employment Strategy (YES) programs.
  • Programs for financial literacy should pay more attention to behavioural biases. The report notes that young people “have a tendency to discount the future.”
  • The task force believes there should be a single-source website for youth and students to convey information related to budgeting for school, getting a first credit card, and saving for university or college.
  • The government and private sector should encourage young people to learn about financial literacy through awards and contests.

None of the task force’s recommendations have been implemented yet, but one of the task force members, Evelyn Jacks, says she is confident the recommendations will make a difference once they are put in to action.

“Financial literacy really has a lot to do with life events,” says Jacks, who is president of the Knowledge Bureau, a financial education provider and publisher. The task force’s recommendations take those life events in to account, suggesting that money management skills be developed at specific times in a young person’s life, such as going to university or college and getting a student loan, and during early work experience or a summer job through YES. Jacks believes this is a good way to make financial literacy relevant to young people.

“If you’re still living at home being cared for by mom and dad even through you’re 25, you don’t have the same needs as someone 10 years later who has got a mortgage and two babies,” Jacks says.

Taking to the web

The task force’s recommendations are meant to be carried out in collaboration with existing efforts to teach Canadians about money management, Jacks says.

Those include the website getsmarteraboutmoney.ca, created by the Investor Education  Fund, which receives financial support from the Ontario Securities Commission. The site features an abundance of information about investing, saving and taking on debt, as well as blog posts by financial writers.

Source: The Investor Education Fund

Tom Hamza, president of the Investor Education Fund, says his website borrows a lot from marketing concepts to get people interested in learning about personal finance.

“You have to break down all the barriers you can to have people use the information,” he says.

Rather than simply explain it’s better to pay off credit cards in full each month or show a hypothetical example of how one person saved a lot more money for retirement by starting to contribute to the RRSP early in life, people can use calculators on getsmarteraboutmoney.ca to assess their own unique situation.

Another advantage to online finance tools is that users can do this anonymously and conveniently from home rather than going to a bank or financial adviser.

“Only when you get the right information in the right way at the right time do you have a chance of getting people to change their behaviour,” Hamza says.

He knows the Investor Education Fund’s efforts to change behaviour run up against the mission of other groups, such as banks offering credit cards, who want people to spend, spend, spend.

“We have to be better than them,” Hamza says.

He echoes Jacks’ sense that ‘teachable moments’ are the key to reaching people. Getsmarteraboutmoney.ca organizes information on its website by life event, such as having a baby, buying a car, and life after high school.

“Only when you get the right information in the right way at the right time do you have a chance of getting people to change their behaviour.” – Tom Hamza

“If you want to be talking to people, you’ve got to be talking to them when they immediately have an interest,” Hamza says. “In university and post-graduate studies when people have debt is a good time.”

Hamza says he knows young people looking for help with their money will look at a variety of websites. The Financial Consumer Agency of Canada also posts reliable information about mortgages, credit cards, and loans and there are other not-for-profits and individual bloggers offering up financial information and advice.

“It’s almost like they will aggregate and average [the information they find],” Hamza says.

That’s why it’s important to make the correct information easily accessible. Investor Education Fund plans to partner with the Financial Consumer Agency of Canada to offer online courses soon. The IEF and FCAC has already developed a workshop for post-secondary institutions called ‘The Financial Basics’ with the Toronto Star’s financial columnist Ellen Roseman.

Read on– Next Chapter: The trick: Behaving like a saver

The trick: behaving like a saver

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There are websites, workshops and a federal task force, but how much will these attempts to help actually improve the financial situations of young people?

Essentially, the challenge is to alter behaviour, which is not an easy task.

Information on the Internet or taught in workshops that rely on a person enrolling in them in the first place can only do so much, some say. Most of our existing solutions do not do enough to target behaviour.

Photo: Ora Morison

Saul Schwartz, a professor at Carleton University’s School of Public Policy and Administration, says the best way to change people’s behaviour is having some people avoid certain behaviours completely.

“Everybody has serious self-control issues,” Schwartz says. “What you need to essentially do is take the savings decision out of the hands of people who are doing the saving.”

The reflex to save

Schwartz advocates for what he calls “default savings programs,” through which the government could deposit tax refunds directly into a person’s savings account, for example, or an employee would automatically be enrolled in a savings plan when he or she took a new job.

“Once it’s happening automatically you don’t think about it. As soon as you have to think about it yourself, you spend money,” Schwartz says.

His belief is that teaching financial literacy can only go so far. At a certain point, Schwartz argues, even the most financially knowledgeable person will become powerless to their behavioural bias to spend.

The Task Force on Financial Literacy also mentions behavioural bias, saying existing financial literacy programs would do well to acknowledge this reality, especially when it comes to young people whose behaviour is likely to favour spending even more than someone who is close to retirement. (Listen below to hear Saul Schwartz speak about the Task Force on Financial Literacy.)

Easy money

Norah Foster believes this and other task force recommendations are right on the mark. In particular, she agrees with mandatory financial counselling for every student who receives a government student loan.

“People don’t know what they’re getting in to,” she says. “It just seems like easy money.”

Foster has seen first hand what can happen to students who receive a lump sum of cash from their student loans and give in to the temptation to spend.

“I meet students who can’t go back to school,” Foster says. “They almost have a degree … and they get themselves into financial problems. Their student loan has gone in to arrears.”

The task force falls short in other areas where young people are concerned, however, Foster says.

The recommendation that companies provide financial literacy training for new hires grates against her sense that the private sector will not readily participate in educational programs like that.

“I just don’t feel the companies are going to say that’s their responsibility,” Foster says.

Instead, Foster believes in teaching financial literacy in public schools, as it currently is in several provinces. This is the best way to impart financial lessons because it reaches everybody she says. Except, of course, today’s young adults who graduated high school before this curriculum was implemented.

Foster says her clients often tell her they wish they’d learned these lessons in class.

“They’re asking why didn’t I learn this is school?” Foster says.

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Saul Schwartzis a professor at the School of Public Policy and Administration at Carleton University.

Professor Saul Schwartz believes some members of Canada's Task Force on Financial Literacy may have been affected by a conflict of interest in making their recommendations. (Photo: Courtesy of Saul Schwartz)

He believes the federally appointed Task Force on Financial Literacy (led by a team of leaders from the financial industry, media, education sector, and not-for-profit groups) had a clear objective when it set out to advise the government on how to improve the money management skills of Canadians: above all, avoid regulation.

Listen here to Saul Schwartz’s critique of the task force:

 

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Read on — Next Chapter: Conclusions

Conclusions

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It is easy for young people to put off thinking about financial decisions, such as buying a house or saving for retirement, until they become an immediate priority. Indeed, it is probably very normal for these decisions to be secondary to the more immediate financial priorities in a young person’s life – finding a job, balancing a monthly budget, and especially paying off student debt.

But today’s 20- to 30-year-olds need guidance when it comes to all of these decisions – the ones that will have an effect in the near term and seemingly distant future. Traditionally, what guidance there was for young people came from their parents, but increasingly that is not enough.

Based on my research, I believe the greater number of young people graduating with higher levels of student debt, coupled with easy access to credit and an increasingly complex financial system – one that puts more onus on individuals, rather than their employer or government, to safeguard savings and future income – means young people need a more in depth understanding of how to manage their personal finances.

In my opinion, the best way to give them this understanding is through a mix of mandatory education and automatic saving, as well as behavioural incentives. Young people need to be convinced that they should learn these things, but mandatory counselling for anyone who receives a student loan or financial literacy curriculum in schools is important to make sure the basics are covered.

Developing mandatory programs should be the easy part. More challenging will be affecting young people’s behaviour. Professor Saul Schwartz believes removing the choice to spend through automatic saving is the best way to change behaviour, which I think could work in some cases. But more powerful would be a demographic of informed young people who understand why it is important to save and are motivated to do it. Automatic saving does not absolve a person from the responsibility to stick to a monthly budget or not get buried in credit card debt. If automatic saving can be a helpful tool, it should be paired with knowledge as well.

Campaigning for financial literacy

I believe changing attitudes and behaviours can actually be done through a simple, long-term campaign. Young people are aware that managing money is important, but I don’t think many really understand the risks they run if they do things that are seemingly innocuous for a young person with few immediate responsibilities. A campaign of TV, Internet and even bus stop ads to clearly explain what a credit score is, how to maintain a good one, and what can go wrong if you don’t, would go a long way. Showing personal stories of young people’s financial success and failure will show the real life benefits of managing your money responsibly, even at a young age. Click here to view the impressive example of money management success I found.

It might seem naïve to hope slogans and stories can actually change behaviour, but I believe it is an important first step to changing social attitudes.

At your service, on campus

To back this up, I think universities and colleges should be required to offer and advertise financial advice services. At the University of Waterloo, where Rick Kim attended, director of financial aid Maureen Jones says students can sit down with a financial aid officer and receive personalized advice on how to manage their income and loans to afford tuition and living expenses. The problem is, many students don’t use this service, or don’t come to the financial aid office until they are already behind on payments.

If more students knew about and used these services, even those without student loans, it would be a great way for them to find the personalized advice that they otherwise would have to pay a lot for through private financial advisors. Unlike private financial advisers or ones at bank branches, university or college financial aid officers should not have a conflict of interest or bias.

Forcing the issue

The Task Force on Financial Literacy’s recommendation for mandatory counselling for university and college students who receive government student loans is the best of the task force’s suggestions regarding young people. This would mitigate the “easy money” effect credit counsellor Norah Foster laments and would also correct for the lack of knowledge that is clear in university students who don’t even know when interest begins to accrue on their loans.

Mandatory counselling, as well as perhaps mandatory classes for all college and university students, would ensure that these students, who would have missed the curriculum now in place in several provinces’ elementary and high schools, receive base-level financial training.