Financial Life Is Tough—Students Should Be Prepared

You already know what your goal in teaching personal finance is: to give students sufficient knowledge to make wise financial choices as they grow up. As adults, they will need to understand budgeting, saving, and credit, as well as shopping for mortgages, managing checking accounts, and preparing for retirement. But is it enough to teach them what the wise choices are? What if they take on too much debt simply by going to college? (Watch  a video clip of a recent presentation on the "higher education bubble.") Or, worse, they could experience a serious illness that devastates their finances. A 2009 Harvard University study found that more than 60 percent of personal bankruptcies are due to medical bills. (Other leading causes, according to the study, are job loss, mortgages, car notes, divorce, and excessive credit card debt.) You are giving students the tools to understand financial issues. Here are some tips for helping them also prepare for the possibility of unpleasant outcomes.

Life is unpredictable, and young people should have as many tools as possible to maneuver through an increasingly complicated world. Even those of us who feel we are prepared for the unexpected can be surprised. More than three-fourths of those who filed for bankruptcy in 2009 for medical reasons had medical insurance. There are many gaps that insurance does not fill. And when insurance does not pay for expensive medicines or medical procedures, consumers are forced to turn to their savings accounts, if they have them. But medical bills can quickly deplete savings, and illness can result in job loss, events that can leave people financially devastated, facing foreclosure or bankruptcy or worse.

Face it—most of us don't have a rich uncle or a trust fund to turn to when we have a financial crisis. But anyone can turn to nonprofit consumer financial counseling agencies, whose counselors are certified by the National Foundation for Credit Counseling (NFCC) and who offer their services at no charge. These agencies are equipped to give consumers knowledgeable advice and guidance on all kinds of tough financial issues, including debt, bankruptcy, and foreclosure.

Consumers have to be careful when they select an agency. Scott Scredon of CredAbility, a nonprofit financial counseling agency based in Atlanta, warns consumers against going to the companies that claim to repair credit or that offer consolidation loans. Billboards and the backs of magazines are full of advertisements from companies like these. They are usually for-profit enterprises that sometimes resort to unethical tactics and take advantage of unsuspecting consumers. "All nonprofits are members of the NFCC," Scredon said. He explained further that CredAbility is approved by the U.S. Department of Housing and Urban Development (HUD) to do housing counseling, which includes helping people qualify to buy their first home or helping them avoid foreclosure. "Consumers should make sure they work with an organization that is part of the NFCC or approved by HUD," he said.

Consumers can go to the NFCC website to find a nonprofit agency in their area.

The best way to teach students how agencies like CredAbility can help them through tough financial times is by going to the agency's website, which is full of information and resources. Among other offerings, the agency provides detailed information on filing for bankruptcy and what happens (or what should or could happen) before, during, and after filing. The site also has a robust section on financial education, including articles, courses, podcasts, and webinars on debt management and more.

Through the website, consumers can set up a counseling session with a certified financial counselor. They fill out detailed information about their finances and their situation. They are then contacted by a counselor who reviews the information and works with the consumer to discuss a plan of action.

Scredon offered a quick overview of what the agency can do when a consumer finds herself or himself overwhelmed with debt.

We scrutinize a consumer's expenses and make recommendations to help reduce as many expenses as possible. For example, a family of four or more may have a landline and several cell phones, so we may recommend that they eliminate the landline and make certain they qualify for the least expensive cell phone plan. If this isn't enough, often we can work with their creditors to negotiate lower interest rates in exchange for a long-term repayment plan. This enables the consumer to pay down their debt and ensures that the creditor gets paid.

Federal Reserve Chairman Ben Bernanke advocates often for early financial education, especially in light of the recent recession and financial crisis. He also feels that schools should even address such issues as bank runs, subprime mortgages, the financial crisis, recessions, and the role of the Fed and how monetary and fiscal policy work. It's never too early to prepare students for the financial complications many will face as adults.

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By Nancy Condon, editor of Extra Credit, Federal Reserve Bank of Atlanta
April 15, 2013