The White-Knuckle Ride to Financial Literacy: Understanding your Student Loans

By Samuel Seitz

Financial literacy, or the lack thereof, among student borrowers is one of the factors driving America’s student-debt crisis. Financial literacy, as defined by the Government Accountability Office, is the ability “to make informed judgements and to take effective actions regarding the current and future use and management of money. It includes the ability to understand financial choices, plan for the future, spend wisely, and manage the challenges associated with life events such as job loss, saving for retirement, or paying for a child’s education.” As a subcomponent of financial literacy, student loan literacy includes understanding various college finance options, interest rates, and repayment plans. While a survey of the literature suggests that student loan literacy is lacking, we know less about the challenges students face as they prepare to pay for college. The Rockefeller Institute conducted focus groups of current students to host discussions and interviews, and we found that student loan literacy is lacking in the places that should be the leading sources of financial education, namely households, high schools, and higher education institutions.

A Portrait of Financial Literacy in the United States

Research suggests that financial literacy among Americans generally is low. A national survey from the Financial Industry Regulatory Authority’s (FINRA) Investor Education Foundation found that 66 percent of Americans could not answer more than three out of five questions correctly on a financial literacy quiz. With respect to college students, a 2006 study spanning multiple institutions found the average financial fitness score on a five-point scale was 2.2. Similarly, the Jump$tart Coalition for Personal Financial Literacy found that high school seniors consistently average a failing grade of 52 percent on financial literacy tests. Overall, these studies suggest that knowledge of basic financial concepts such as budgeting, debt avoidance, responsible borrowing, or managing a credit card, are low among prospective student-loan borrowers.

Though college students as a whole have low levels of financial literacy, levels are even lower among first-generation college students and college freshman. A survey of more than 150 first-year students found that first-generation students are more reliant on student loans and believe they can afford higher education only by incurring debt.[1] As the authors conclude, “first generation students, more so than continuing generation students, lack the necessary decision-making skills needed in the student loan process.”

…parents at low-resource schools generally did not want their children to take out loans, citing uncertainty about whether the benefits of borrowing would exceed the costs.

A multi-state survey of more than 500 first-year college students found that “over one fourth… [were] not participants in the financial system, over one third [did] not know how much credit card or student loan debt that they currently owe, and they overestimate[d] their future earnings by more than 20 percent.” By comparison, fewer than 15 percent of non-freshmen students did not know how much loan debt they have. Other studies indicate that college freshman overestimate their income out of college by more than 50 percent. These findings are significant given that students who overestimate their out-of-college income are more willing to incur debt.

When prospective college students acquire sufficient financial literacy is important, too. Research suggests that “financial knowledge and financial skills obtained at a young age act as a catalyst for sensible financial behavior.”[2] Thus, financial education is important not just for students but for parents. A multi-state study found that students overwhelmingly reported “that their parents influenced their money management behaviors.” Indeed, a majority of students score higher on financial literacy tests when their parents are highly educated or involved in their higher education decision process. Parents also convey messages about whether it is necessary to take loans. A multi-state study of 15 public high schools found that parents at low-resource schools generally did not want their children to take out loans, citing uncertainty about whether the benefits of borrowing would exceed the costs.[3]

Even though there are many programs that seek to integrate financial literacy into early development, parental participation is often “not foreseen or the tasks assigned to parents in these programs do not fully reflect their pivotal role in the child’s financial socialization process.”[4] In other words, it is left up to the child to educate themselves on complex financial concepts or seek out those who can educate them. In the absence of more significant involvement from parents, high schools should be a logical place to turn.

Despite policymakers’ best intentions, policies designed to increase student loan literacy in high schools have done little to help students internalize responsible borrowing habits. National statistics from the FINRA foundation point out that while financial education is available in schools it is often underused. In 2018, FINRA’s nationwide survey found eight percent of people knew about financial education offered by their school or workplace but didn’t participate, 20 percent participated, 58 percent had no education offered, and 13 percent didn’t know.

To better understand what students actually know about college loans, interns from the Rockefeller Institute of Government’s Center for Law and Policy Solutions conducted focus groups with students on three different SUNY campuses. We supplemented the focus groups with several interviews of experts in the field who have extensive knowledge on financial literacy research and programs. The data bring life to the existing literature by elevating students’ voices in the national conversation about student debt. Overall, we find that financial literacy related to student loans is lacking in the places that should be the leading sources of financial education—namely households, high schools, and higher education.

Households

Overall, the vast majority of students we spoke to reported feeling pressure from parents to attend college immediately out of high school, though most did not discuss finances with them. “My parents told me they would kick me out if I didn’t [go to college],” one participant said.[5] For others, going to college seemed like the only choice. “I come from a family [where] everyone… went to college,” one participant explained, “so I just came into this world thinking you’re going to go to college.[6]  First-generation students felt similar pressure. “None of my parents graduated college,” said one participant:

Both left or dropped out. And the dominate narrative… was we couldn’t get the social mobility they wanted because they didn’t have the degree—they didn’t have the education—and they wanted what was best for me and my sister… [M]y parents overall were like you’re going to college because we didn’t do that and we want to make sure you have a better life than we do.

For others, going to college seemed like a natural progression after high school. As one first generation student stated:

There was no other option. It was always like you got to go to college, get your education, and that was it, that was kind of like part of the timeline. Like how you went to middle school to high school, that’s how high school to college felt for me. And I didn’t really understand it. It was just something I was doing because that’s what was told to me from when I was young.[7]

Despite the expectation to go to college,[8] we found that many parents did not discuss family finances with their children. The parent-child financial relationships that we observed from the focus groups were one of two: financially absent parents on the one hand and snowplow parents on the other. Financially absent parents had little to no involvement on the financial side of their children’s college process, leaving the student to sort through everything alone. “I don’t know when [my parents] started saving or if they saved,” one participant observed. “They don’t really talk to me about money. They’re just like don’t worry, we got you.”[9] Another added: “[My mom] took care of a lot of stuff and didn’t really tell me much until I kind of inquired on my own like Oh, what’s FASFA … that’s when I started to try and piece together how things work.”[10]

Regardless of the parent-child financial relationship, our research suggests the outcome is the same—a college student who is financially illiterate on student loan practices.

By comparison, snowplow parents—i.e., parents who constantly force life’s obstacles out of the way of their children—took on all of the financial responsibility associated with paying (and sometimes even applying) for college, leaving their child entirely out of the process. In the latter instance, some parents gained knowledge by putting multiple kids through college. Thus, one student spoke of his experience as the youngest of four:

[My parents] figured it out a little bit more for the next kid and the next kid, and then for me… I left everything in their hands. They were like experts at applying to colleges and finding scholarships. I think without my parents, and without my parents having had that experience with a bunch of different kids applying to different colleges, they probably wouldn’t have been able to get me as good of a situation.[11]

Even though these snowplow parents often mean well, one financial aid officer noted how this type of parenting “doesn’t really serve the student that well… We’re trying to resolve the financial issue and the student is clueless because they weren’t involved in the process.”[12] Children of financially absent parents are equally disadvantaged. One student who filled out the FAFSA on his own recalled how intimidating the process was:

You read some of the terminology and it’s like what am I even reading? And you have to sign all of these things like you will go to prison, if you lie here! And I’m like I don’t even know what I’m doing right now![13]

Regardless of the parent-child financial relationship, our research suggests the outcome is the same—a college student who is financially illiterate on student loan practices.

High school

When students were asked if they felt well-informed about college finance options in high school there was an overwhelmingly negative response. Generally, students expressed disapproval of their high school guidance counselors. As one student observed, “The guidance counselors could have all the information but sometimes if you don’t reach out to them and tell them they’re not going to open the drawer and give you all the keys … [they] wait till students actually want to come to them.”[14] Others expressed feeling discriminated against. According to one participant, guidance counselors:

have select people that they tell select information to… Counselors have their favorites. I know that from my own kids. I put two kids through [a local district]… no one talked to one of my kids about their opportunities. Nobody talked to them about filling out any scholarship applications. None of that. Not a word.

Policy experts tend to agree that the information provided to high school students is limited. As one researcher observed: “There isn’t any hand holding. There isn’t any one-on-one counseling… There isn’t even remotely enough early education. It’s almost all at the time of application which is just ridiculous.”[15] Similarly, a representative from New York City’s Financial Empowerment Office in the Department of Consumer and Worker Protection noted how “at a high school level, the resources that are available to really guide people through this really critical process—it’s not enough.”[16] Moreover, she pointed out, the student-to-counselor ratio is at a severe imbalance, resulting in some students being neglected or receiving little one-on-one attention.

“There isn’t even remotely enough early education. It’s almost all at the time of application which is just ridiculous.”

If households and high schools have failed to educate students about taking loans, can higher education step in to right the wrongs of financial illiteracy? The final stop in a student’s journey of financial literacy, and the source of much confusion and frustration, is college itself.

Higher Education

Colleges have a unique opportunity to educate faculty, staff, and students on financial concepts. Students in our focus groups reported feeling uninformed and upset over the lack of transparency at the college level, however. One student reported that she and her father walked out of the financial aid office with a loan and didn’t even realize it.[17] Another student voiced his frustration regarding a general lack of information:

[A]ll the scholarships that I could have applied for I was never told about… it was only through my own discovery of exploring everything that I found the scholarships that were actually useful to cover almost all my [costs]… I missed all the deadlines because no one told me.[18]

The system can be especially daunting for international students. As one participant stated:

I’m not from America… I don’t know how the loan system here works… [I don’t know] how to take out loans, how to get scholarships and whatnot … There honestly is nothing. You’re never told when the scholarships are put there for you.[19]

From a non-student perspective, one financial aid officer pointed out that by the time students get to college it’s “too late” to start thinking about financial literacy.[20] “They don’t understand saving, balancing the checkbook,” or managing credit card debt. However, he also seemed to think that students were disinterested in learning about the different resources available to them. “[T]here’s a lot of information out there,” he explained. “Unfortunately, no one wants to take the time to read it.”[21] After speaking to people on both sides of the issue, it appears that students and financial aid officers cite each other as a barrier to becoming financially literate.

Need for Standardization and Simplification

Talking with students suggests that the journey to becoming financially literate is a difficult one, in part because of the vast amount of resources and information needed to make financially informed decisions. Throughout the course of our research, policy experts and practitioners pointed us to their preferred resource as the best resource for boosting student loan literacy. Yet no two people cited the same source. Reducing the burden of acquiring financially literacy is thus the first step to reducing the student-debt crisis in America.

Several policies can help reduce the burden of financial knowledge. One policy expert, for example, suggested “making the FAFSA easier so that you have to file it fewer times in your life.”[22] He also suggested automatically enrolling students in income-based repayment programs. An income-based repayment plans lower monthly bills based on income and family size. However, they require enrollment and yearly recertification of income. Although these plans guard “against missing payments and going into default,” most students don’t know about them, or “forget to recertify” their income.[23] Automatic enrollment would reduce the administrative barriers that can prevent students from taking advantage of these programs.

Conclusion

Reaching students to improve financial literacy before they get to college is critical. As one financial educator observed, it is never too early to begin financial literacy training because the concepts students need to know hold constant throughout their lives: “Should I save? How much should I save? Am I doing the right things?”[24]

The Save for College Program managed by NYC Kids RISE is a good example of the kinds of early interventions that can help families prepare for college. The program provides scholarship accounts to pay for educational expenses and provides parents information on how to create a college savings plan. “[I]f it is our expectation that kids who want to go to college should be able to go to college… it’s reasonable to say that it is our responsibility to ensure they have the knowledge to do that,” one policy expert explained.[25] By lowering the burden of financial knowledge, and offering early financial literacy training, we can prepare students to meet the financial challenges of going to college and beyond.

ABOUT THE AUTHOR

Samuel Seitz is a senior at University at Albany studying political science with a concentration in public law and a minor in criminal justice, and a Fall 2019 Center for Law and Policy Solutions intern.


The endnotes beginning “FG” and “Interview” below refer to tables 1 and 2 in part 1 of this series.

[1] Jason Lee and John Mueller, “Student Loan Debt Literacy: A Comparison of First-Generation and Continuing-Generation College Students,” Journal of College Student Development 55, no. 7 (2014): 714-719.

[2] Geert Van Campenhout, “Revaluing the Role of Parents as Financial Socialization Agents in Youth Financial Literacy Programs,” Journal of Consumer Affairs 49, no. 1 (March 2015): 186–222, https://doi.org/10.1111/joca.12064.

[3] Laura W. Perna, “Understanding High School Students’ Willingness to Borrow to Pay College Prices,” Research in Higher Education 49, no. 7 (December 2008): 589–606, https://doi.org/10.1007/s11162-008-9095-6.

[4] Van Campenhout, “Revaluing the Role of Parents,” 186-222.

[5] FG_11112019.

[6] FG_11062019.

[7] FG_11062019.

[8] Interview #05_11222019.

[9] FG_11062019.

[10] FG_11062019.

[11] FG_11062019.

[12] Interview #02_11132019.

[13] FG_11112019.

[14] FG_11062019.

[15] Interview #01_11042019.

[16] Interview #06_11252019.

[17] FG_11062019.

[18] FG_11062019.

[19] FG_11182019.

[20] Interview # 02_11132019.

[21] Interview # 02_11132019.

[22] Interview #04_11182019.

[23] Interview #04_11182019.

[24] Interview #05_11222019.

[25] Interview #01_11042019.

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