How Financial Literacy Affects College Admission, Retention, Graduation and Student Loan Defaults
Financial Literacy and Undergraduate Admission Rates:
According to the
NACAC study in 2006:
65% of public secondary school counselors at low-income schools believe that students and parents are discouraged from considering college as an option due to lack of knowledge about financial aid.
About half of low-income students with a high school grade-point average of at least 3.5 and an SAT score of at least 1,200 do not attend the best college they could have.
The
Pathways to College Act currently working its way through Congress exemplifies the need for education that focuses on paying for college, financial aid for higher education and the college admissions process in order to increase admission rates.
“Experts say that a lack of guidance and information about college has had a real effect on students in poor urban and rural schools.”
Public Chicago schools that implemented programs similar to those proposed in the act found:
6.5% increase in college enrollment. That increase in college enrollment was more than six times the rate of increase compared to the rest of the country. In addition, the number of African-American graduates going to college has decreased nationally by 6% over the last four years while the Chicago rate has increased by almost 8%.
- Of all the CPS (Chicago Public School) students who reported aspiring to a four-year degree, only 41 % enrolled in a four-year college.
- 46% of Latino students who wanted to earn a bachelor's degree actually applied and only
- 30% enrolled in a four-year college in the fall after graduation.
- Of the students who had the grades and test scores to attend a selective college, 29% went to a community college or skipped college entirely.
The Blue Star Financial Literacy Report released
May 2008, for the first time asked students about plans for further education before and after taking the financial literacy course. The increase of students planning to attend college jumped from 88.4% to 92.3%.
-As in findings of previous surveys, the great majority of students (72.3%) reported plans to attend a 4-year college or university. Another 13.4% indicated plans to attend a 2-year college or junior college. Students planning to attend a 4-year college/university had the highest scores; they had a pass rate of 78.6%. Mean scores and pass rates for all other subgroups were much lower.
-young people who studied the curriculum for as little as 10 hours significantly increased their understanding of money management, and financial behavior in the ensuing months.
-The behavior was that the percentage of students who save money for future needs increased from 9.5% to 28% after they studied the curriculum 3 months later, the number had grown to 36.5 %. Likewise, the percentage of students who said they “almost always” set goals for managing money nearly tripled, from 9% before the program, to 15 % immediately after the program and 24%, 3 months later.
-Also 42 % of students said before studying the HSFPP, they strongly agreed that they knew the difference between needs and wants; immediately after the program, the number grew to 67. The number rose further, to 80.5 %, in the three-month follow-up. Similarly, 19 % of students said they “almost always” felt confident about making financial decisions before studying the HSFPP. The number increased to 29% after the program, and three months later it had grown to 37.5 %.
Financial Literacy and College Retention and Graduation Rates:
“Many students come academically prepared for higher education, but are gambling their education on inadequate financial preparedness. Ask any of your students why they are leaving your institution and the number 1 answer will be financial reasons. . . “
“Should creating a training program on financial literacy be a priority in our over-worked world? Well, do the math to see if the work cost measures up to retaining a student in a cohort.
Cost of attrition:
- Enter your full time credit count and multiple by your per credit rate.
Example: 12 credits X $200 = $2,400 in tuition each semester
- Now enter your new freshman student enrollment:
Example: 1000 new students full time in 1 semester brings in $2.4 million gross revenue ($4.8 million a year)
- Now enter your attrition rate after one year and the actual number who left for financial reasons:
Example: 80% = loss of 200 students
100 left for financial reasons.
- Result: 100 students leave for financial reasons X $2,400 loss per semester X 6 semesters.
- Over the next three years, your institution has a gross loss of $1,440,000
If you implemented a financial literacy training program and kept 10 of those 100 students, you saved $144,000. Those are hard numbers to argue with! Assessing your program’s success will give you clear evidence that the work was worth it. Something your university’s staff can be proud of.”
Sitting Bull College implemented a
“Psychology of Student Success” program that included a financial literacy component as an important portion. Program was intended to increase retention rate which it did.
- Financial trouble is the #1 reason for college dropouts
-a recent nationwide study of 14,500 students enrolled in 15 different colleges found that 38% of college dropouts left for financial reasons vs. 28% for academic disqualification
-Also staggering is that the
U.S. Department of Education states that more than 30% of students leave college during their first year and almost 50% never graduate.
-They estimate that over 1.5 million college students were expected to drop out of college in 2008 due to fiscal concerns
-54% of students said the major reason they dropped out was they needed to go to work and make money. Another 31% said they couldn’t afford tuition and fees.
-69% of African Americans who enrolled in college but did not finish said that they left college because of high student loan debt as opposed to 43% of white students who cited the same reason.
Department of Education Statistics
· 9,000 students surveyed from 800 postsecondary institutions
· Approximately 3,300 did not successfully complete the program in which they were enrolled
· 14 percent of students who left cited financial reasons
· Only 2 percent cited academic reasons
Student Preparedness: Jump$tart Financial Literacy Survey
Percentage of questions answered correctly in 2008 by:
High school seniors 2008 -48.3%
College students 2008 –62.0%
College freshmen 2008 -59.4%
College seniors 2008 –65.0%*
In a 2003
study of Ohio State students, 27.7% of students in debt reported having neglected their academic work because of debt, and 20.5% had even dropped out or considered dropping out because of their debt. 22% of students in debt had reduced their class load because of their debt.
2008 Report
18.2% of students are in a bad financial position, and the pressure to earn extra money will probably interfere with studies.
28.7% have financial problems that are very distracting and troublesome.
Would like to talk with someone about:
30.2% getting loan
45.7% getting part-time job
41.5% summer employment
2009 Report
18.2% of students are in a bad financial position, and the pressure to earn extra money will probably interfere with studies.
29.3% have financial problems that are very distracting and troublesome.
Would like to talk with someone about:
31.5% getting loan
47.3% getting part-time job
44.3% summer employment
After doing initial research regarding their specific campus needs the University of Hawaii at Manoa implemented a financial education program that included 500 students and
found in the first year:
- 471 students learned new information about basic personal financial management.
- Workshop participants demonstrated greater awareness than non-participants on 13 of 20 indicators on a financial literacy assessment.
Financial Literacy and Student Loan Defaults:
• Default rates on federal student loans continued to climb in 2008, reaching a 9-year high of 6.7%.
• Department of Education the cohort default rate on federal student loans has climbed to 6.9% for FY08 from 5.2% in FY07
• DCL GEN 05-14 lists financial literacy as one of nine key elements to include in a default prevention and management plan
In 2001, in order to combat a 23% student loan default rate,
South Mountain Community College enacted a default prevention program that required student to take a Personal Money Management course to be eligible for loans.
Since putting the financial literacy course in place their default rate has fallen to 10%.
Part of the problem is that students coming in as freshmen don't understand smart borrowing habits."I don't think most of them really have a good grasp on fiscal management and financial literacy," Porter said. "We start at orientation trying to help them understand what financial aid is, what borrowing is and how to make good decisions."
Students can quickly pile on tens of thousands of dollars in debt, blithely unaware of how those student loans will burden them later in life. And those grads can remain blissfully unaware of their mistake, up until post-graduation bills start arriving in the mailbox.
-Young adults between the ages of 18 and 24 were also likely to say their (credit) knowledge was not good. Sixty-two percent said their knowledge of credit reports was fair or poor, while 78 percent said their knowledge of credit scores was fair or poor.
-41 percent of U.S. adults, or more than 92 million people living in America, gave themselves a grade of C, D, or F on their knowledge of personal finance.
-study showed that college graduates don't feel adequately prepared to handle their finances; they overwhelmingly agreed that there should be more financial counseling for student borrowers, and more than 60% said they only had a vague understanding of the debt they were accruing.
-Loans make up 51 % of federal aid today, versus grants, scholarships, and work-study.
- Adults with financial skills and knowledge are better at keeping more of the money that they make through better retirement planning, saving and avoiding debt problems.
-Fewer than 1 in four students feel that they know enough about personal finances. (Young Money poll)
-About half of entering college freshmen take out a loan to finance their education; and one-fifth of borrowers drop out.
-Borrowers who dropped out were twice as likely to be unemployed as graduates; and more than 10 times as likely to default on their student loans.
*Note: #1 reason students drop out of college - financial problems
-In the past 15 years, the average debt load for student loans has increased by over 50 percent, and the percentage of students who borrowed has increased.
-Of the borrowers who defaulted, 70% withdrew without completing their academic program
-Almost three in four surveyed say they don't bother reading the terms and conditions of their own credit cards.
A study by Wells Fargo found that new credit card holders has 46% less delinquencies when they completed just two 15-minute online “Practical Money Skills” lessons.
College Students and Young Adults:
- Overall average workers between the ages of 25 to 34 must spend 25 cents on every dollar earned on debt repayments. (11)
- People in the 18 to 24 age bracket spend nearly 30% of their monthly income just on debt repayment - double the percentage spent in 1992 (10% of net income is a recommended amount for debt obligation). (3)
- The number of 18 to 24-year-olds declaring bankruptcy has increased 96% in 10 years. (12)
According to the Jump$tart Coalition’s benchmark study completed in 2002:
-Bankruptcies for those under 25 yrs old has increased from 15,000 in 1995 to 150,000 in 2000
-For both the class of 2006 and the class of 2007, average debt of students graduating with loans rose from $18,976 to $20,098, a 6% increase.
Recognized Need for Financial Literacy
84% of undergraduates indicated they needed more education on financial management topics.
Over 50% of students at 4-year colleges lack the skills needed to perform tasks such as comparing credit card interest rates.
According to the
National Council on Economic Education (2005), 38 states now have personal finance standards built into their state education systems, and 21of these states require explicitly that the standards be implemented.
Jump$tart Coalition for Personal Financial Literacy administers a written 45-minute exam to 12th graders in schools across United States and reports the outcome. The test first was administered in 1997 and continued in 2000, 2002, and 2004. Each year students average a failing grade; mean score was 52.3% in 2004.
On
Scribd.com they discuss the 2006 annual back-to-school survey from Capital One, which states:
- 49% of teens are eager to learn more about money management however only 14% have taken a class on the topic
- only 18% of parents discussed back-to-school budgeting with their child, down 6% from 2005
- only 43% of parents have discussed the importance of needs vs. wants, compared with 64% who did so in 2005
- 32% of college students, when thinking about their freshman year, admit that they were “not at all” or “not very well prepared” for managing their money on campus. Only 20% of students claim to have been “very well prepared” for managing their money on campus
- 75% [of students] admit to having made mistakes with their money when they arrived on campus – biggest mistakes being: overspending on food -21%, entertainment -19%, and credit card spending – 16%
- When asked how closely they monitor their expenditures the results were: 39% -tracked their spending “very closely” and 14% said that they tracked their spending “not very closely” or “not at all closely”
Current Student Financial Literacy Levels and Credit Use
Also on
Scribd.com they also discussed a poll conducted on August 2006 by Harris Interactive stating:
Scribd.com lastly discussed the 2007 Sallie Mae Study:
-more than 50% of college students accumulated over $5,000 in credit card debt while in school. Of the 13,000 respondents, 33% piled on more than $10,000 in credit card debt while in college and only 19% said that they did not acquire any debt.
• 84% of undergraduates had at least one credit card, up from 76 % in 2004, last time the study was conducted. The average number of cards has grown to 4.6, and half of college students had four or more cards.
• average balance grew to $3,173, the highest in years the study has been conducted. Median debt grew from 2004’s $946 to $1,645. 21% of undergraduates had balances of between $3,000 and $7,000, also up from last study.
• Since 2004, students who arrived on campus as freshmen with a credit card already in-hand has increased from 23 % to 39 %.
• In spring of 2008, only 15 % of freshmen had a zero balance, down dramatically from 69 % in the fall of 2004. The median debt freshmen carried was $939, nearly triple the $373 in 2004.
• Seniors graduated with an average credit card debt of more than $4,100, up from $2,900 almost four years ago. Close to 20% of seniors carried balances greater than $7,000.
• 92% of undergraduate credit cardholders charged textbooks, school supplies, or other direct education expenses, up from 85 % when the study was last conducted, in 2004.
• (30%) put tuition on their credit card, an increase from 24 % in the previous study.
• Students who used credit cards to pay for direct education expenses estimated charging $2,200, more than double 2004’s average of $942.
• most common education expenses charged were textbooks (76%), school supplies (75%), and commuter costs (54%).
• Food (84%), clothing (70%), and cosmetics (69%) ranked at the top of other expenses charged.
• 60% experienced surprise at how high their balance had reached, and 40 % said they have charged items knowing they didn’t have the money to pay the bill.
• Only 17 % said they regularly paid off all cards each month, and another 1 % had parents, a spouse, or other family members paying the bill. The remaining 82 % carried balances and thus incurred finance charges each month.
· Only 2 % of undergraduates had no credit history; and only 15 % who had a credit history had no record of credit card ownership. 84% of this student population overall have credit cards, an increase of approximately 11 % since the fall of 2004, the last time the undergraduate study was conducted.
Student Credit Card Statistics and Research, a study performed by
Nellie Mae in August of 2007 says:
· The average outstanding balance on graduate student credit cards is $8,612, an increase of 10% from the 2003 average of $7,831.
· On average, older graduate students (age 30–59) carry $12,593 in credit card debt, almost twice as much as their younger counterparts (age 22–29) who carry an average debt of $6,479.
· As has been true in previous studies, students attending school in the Midwest region of the country tend to carry the highest credit card debt.
· The majority of graduate students, 67%, said they took out their first credit card as an undergraduate student.
· Although 93% of graduate student survey respondents try to keep their credit card debt under control by making at least the required minimum monthly payments, only 20% said they pay off their cards in full each month.
The
NACAC and the American School Counseling Association (ASCA) two years later recommend a ratio of 250:1. (Students to counselors)
This conclusion was based on the fact that school counselors at private schools spend an average of 56% of their time on postsecondary education counseling, and counselors in public schools spend an average of 23% of their time on postsecondary counseling (
NACAC, 2007).
According to the Jump$tart Coalition’s benchmark study completed in 2002:
-65% of those same students felt either somewhat sure” or “very sure” in their ability to manage their finances
Furthermore the study demonstrated the students’ knowledge regarding credit card debt:
-21% owe $3,000 - $7,000 on personal credit cards
-75% of credit card holders have one card maxed out
-64% were unaware of the interest rate on their credit cards
Salisbury University says: According to Lundquist Consulting, an industry group that tracks bankruptcy statistics, nearly 1 in every 53 households file for bankruptcy.
AFT.ORG has another reason why some students never graduate:
Students who started at community colleges took about a year and a half longer to complete a
bachelor’s degree than students who began at public four-year institutions (71 versus 55 months),
and almost two years longer than those who began at private colleges and universities (50 months).
In a recent survey of students (16 to 22 years old), 40 % said they probably would buy a pair of jeans
(or something similar) they really wanted, even if they did not have the money to pay for it. More than (22 percent) said they would pay for it with a credit card.
American Children, Teenagers and Young Adults:
- While teens believe when they get older that they will earn an average salary of $145,000. In reality, adults with a bachelor's degree earned an average of $54,689 in 2005. (13)
- The average 21-year-old in the U.S. will spend more than 2.2 million in their lifetime. (5)
- In 2007 a Charles Schwab survey on teens and money reported that only 45% of teens know how to use a credit card, while just 26% understood credit-card interest and fees.(4)
- Only 1 in 3 teens knows how to read a bank statement, balance a checkbook and pay bills. Barely 1 in 5 had an idea how to invest (4)
Financial Literacy Education:
- 40 states have personal finance standards or guidelines (up from 34 in 2004), 28 states with standards require them to be implemented, 9 states require testing of student knowledge on personal finance content and 7 states require students to take a personal finance course to graduate. (16)
- Entrepreneurship is much less integrated into the curriculum in the states. Just over a third of the states include the subject of entrepreneurship in their K-12 educational standards, and only a handful require it to be included as a component of a high school course required for graduation. (16)
· -Median cumulative debt among graduating Bachelor's degree recipients at 4-year undergraduate schools was $19,999 in 2007-08. 25% borrowed $30,526 or more, and 10% borrowed $44,668 or more. 9.5% of undergraduate students and 14.6% of undergraduate student borrowers graduating with a Bachelor's degree graduated with $40,000 or more in cumulative debt in 2007-08. This compares with 6.4% and 10.0%, respectively, for Bachelor's degree recipients graduating with $40,000 or more (2008 dollars) in cumulative debt in 2003-04.
· -Median additional debt is $25,000 for a Master's degree, $52,000 for a doctoral degree and $79,836 for a professional degree.
• Only 16.8 % of high school seniors and 19.2 % of college students feel that stocks are likely to have higher average returns than savings bonds, savings accounts and checking accounts over an 18 year period.
• Just 27.3 percent of high school seniors and 39 percent of college students realize that interest on a savings account is taxable if one’s income is high enough.
- recently cited in a working paper by the
Federal Reserve Bank of Richmond, students in states with a mandated financial education curriculum in high school have, on average, savings rates that are 4.5% higher than the population as a whole4 and 1.5% higher (five years down the road) than students not exposed to the mandate.
- 97% of students reported that financial education had been “valuable” or “very valuable”
-46 campuses of Louisiana Community and Technical College systems have added financial education to their curricula
- The
U.S. Department of Education explains this by noting that roughly 75% of U.S. college students work during school; 46% of them putting in more than 25 hours a week and 20% work full time