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