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November 7, 2018 The Skanner Portland & Seattle Page 9 Financial Literacy Most Students Borrow for College, But Are They Financially Literate? By Catherine Montalto and Anne McDaniel The Conversation his fall, many fam- ilies are preparing their children for the next academic challenge – a college ed- ucation. By and large, a college degree is viewed as an important credential for gainful employment and professional success. At the same time, college is costly, and college financ- ing strategies are com- plex. Students and their fam- ilies use multiple sourc- es to finance college ex- penses. Most students borrow for their educa- tion. Three out of five college students depend on student loans to fund their education. But do students know the ABCs of financial lit- eracy? T College finance options The college process be- gins with estimating the full cost of college atten- dance. This includes tui- tion, housing and living expenses, such as food, books, cellphone plans and transportation. The next step is to Catherine Montalto Anne McDaniel identify all resources available to pay college expenses, including the expected family contri- bution, scholarships and grants, college savings and wages from employ- ment – if students plan to work. amount once the recipi- ent is no longer enrolled full-time. Guidelines for respon- sible student loan use recommend minimizing the loan amount in order to have less debt to be re- paid. “ Decisions made by college students and their families regarding loans have direct and significant consequenc- es during adulthood Once college costs and available resources are carefully estimated, any shortfall in resources informs the need for borrowing. Scholarships and grants are awarded without strings attached. However, student loans come with an obligation to repay the borrowed Decisions made by col- lege students and their families regarding loans have direct and signif- icant consequences during adulthood. The inability to man- age student loan repay- ment along with other financial obligations (i.e., housing, food, utilities, transportation) has been shown to impact career choice, home ownership, marriage, additional ed- ucation, financial health and overall quality of life. So, how do students decide the amount to borrow? What rules of thumb or strategies are used? How is use of these strategies related to fi- nancial knowledge? How students make borrowing decisions We lead the Study on Collegiate Financial Wellness (SCFW), which surveys a random sam- ple of undergraduate students in order to un- derstand their financial behaviors, decisions and wellness. Data from our study provide insights to these questions. The 2014 SCFW study, with the most recent in- formation from nearly 19,000 college students studying at 51 public and private four-year and two-year institutions, found that the majority of college students with student loans use one or more strategies to min- imize the amount bor- rowed. For example, data from our study showed over half of student loan users tried to borrow as little as possible (52 percent). Additionally, 38 per- cent considered the to- tal amount of debt that they expected to grad- uate with. Thirty-three percent considered the amount that had bor- rowed in the past when deciding how much to borrow for the school year. But about 28 percent, almost three out of 10 students, reported bor- rowing the maximum amount available in their package. And about 17 percent of student loan users borrowed the max- imum available without also employing a strat- egy to minimize overall borrowing. Low financial knowledge The next question is, how well are students prepared to make these important decisions? The SCFW included two financial knowledge questions to test wheth- er respondents could understand the concepts of interest and inflation and had basic financial numeracy. These ques- tions assess basic con- cepts of financial literacy – the knowledge and skill needed to manage finan- cial resources effectively. Nearly 80 percent of the college student re- spondents answered the interest rate question correctly. But only 59 percent answered the inflation question cor- rectly. Just over half of the college students (53 percent) answered both questions correctly. Students who an- swered the interest rate question incorrectly don’t understand that in- terest is earned not only on money deposited in a savings account, but also on previously earned in- terest — a feature known as compounding – while students who answered the inflation question incorrectly don’t under- stand that rising infla- tion reduces the buying power of money. Interest and inflation both influ- ence how much our hard- earned money can buy. These results are simi- lar to previous research conducted in 2007-08 with 23-28 years old young adults. See FINANCE on page 11
