Lack of Financial Literacy May Inhibit College Borrowing, Study Suggests
High school seniors who are less financially literate are less likely to decide to take out federal loans to pay for college—which could ultimately limit their educational progress and reduce the amount of money they're able to earn over the course of their lives.
That's according to a new study from Vanderbilt University and funded by the Lumina Foundation.
Researchers Angela Boatman and Brent Evans examined the financial literacy and borrowing habits of 5,000 high schoolers, community college students, and adults without college degrees. They were looking to understand which people were more loan averse—that is, more reluctant to borrow money to pay for higher education.
It turns out that those who had prior experience using payday loans (short-term loans that need to be paid back quickly), those with lower financial literacy, and those who knew less about federal student loan programs were less likely to take out a student loan, even when it might help them afford a college education.
"As the cost of college continues to rise, students are asked to weigh the cost of borrowing money for their education with the potential returns on that investment," Boatman said in a press release. "Student loans expand the opportunities to postsecondary education, but loan aversion may pose a barrier for many potential students." Boatman noted that college degrees are associated with higher incomes, so loan-averse students may be sacrificing longer-term financial security.
The connection between payday loans and loan aversion hints that loan-averse people are usually lower-income. The results of the second-ever financial literacy PISA, a global test also found that higher-income students were more financially literate than their lower-income peers. That suggests that higher-income students would generally feel more comfortable taking out the federal loans and making the financial decicisions necessary to access higher education and the opportunities that come along with it.
Income inequality in access to higher education has been demonstrated in other ways: The New York Times reported earlier this year that some colleges have more students from the top 1 percent than the bottom 60 percent of family incomes, for instance, and that wealthier students are more likely to pursue higher education than lower-income young people. The new Vanderbilt study helps elucidate a potential reason fewer lower-income students opt into higher education and highlights the connection between financial literacy and higher education.
More states have been setting standards for financial literacy in recent years. But experts have warned that it's worth being cautious when selecting financial literacy curricula, as many are created by for-profit companies and help funnel students toward particular banks or products—and that financial literacy shouldn't replace bigger-picture subjects like economics.
- Higher-Income Teens are More Financially Literate, Global Test Finds
- More States Set Financial Literacy Standards, Fewer Require Economics
- When It Comes to Financial Literacy Curricula, Buyer Beware
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