At EverFi, we recently conducted a study set out to determine the most significant predictors of finance-related outcomes for incoming college students. Is it a college student’s ability to calculate compound interest? Maybe their readiness to rattle off the definition of an APR?
The answer is – yes.
Knowledge of finance-related topics make us better at managing our finances. But does this suggest knowledge-based education is enough for students to make it through college unscathed?
Too often, I have seen educators, researchers and policy-makers stop at level of knowledge-based education, pat themselves on their backs for figuring it all out, and moving on without a second thought.
Our investigation, which was conducted in collaboration with our colleagues at HigherOne, suggests that there is much more to the story (see full report here). We surveyed over 40,000 incoming college freshmen across the U.S. on a variety of financial topics such as banking, savings, credit cards and student loans. We discovered that there are a variety of student attitudes, behaviors and even planned behaviors that appear to also have a significant impact on (ir)responsible financial outcomes.
For example, one of the more troubling findings is that almost 80 percent of young adults reported worrying about debt and are experiencing debt-related stress. When this is paired with the finding that many students also acknowledged risky financial behaviors (e.g. having high levels of credit card debt, participating in risky loan behaviors – credit card cash advances / payday lending), we can see that these feelings of stress and risky behaviors create a sort of feedback loop where many students are getting themselves into a high risk cycle just as they’re starting out on their own.
A more in-depth component of the investigation found that student’s reported behaviors and attitudes consistently clustered up into meaningful groups, or factors. The seven factors were
- Cautious Financial Attitudes
- Indulgence for Status and Social Gain
- Utilitarian Financial Behavior
- Debt as a Necessity
- Possessions Providing Happiness
- Spending Compulsion
- Aversion to Debt
We then wanted to see if these factors could help us better identify and assist students at risk. To do this, the factors were analyzed to determine their level of impact on key financial outcomes.
- Being late on credit card payments;
- Following a budget;
- Structured savings;
- Likelihood to withdraw from college;
- High-risk debt behavior (credit card cash advances, payday lenders, etc.);
- Paying student loan on time;
- Paying student loans in full;
- Having a checking account; and
- Frequency of bank contact (visiting a bank branch or website).
The analysis revealed that most of student attitudes/behavior factors played a significant predictive role with at least one of these key outcomes. However, a few of the factors appear to be more robust in their ability to predict across many of the key outcomes. For example, the factor Cautious Financial Attitudes was found to predict an increased likelihood to follow a budget, decreased likelihood to withdraw from college, decreased likelihood to participate in high-risk debt behavior, and increased likelihood to have a checking account. On the other side of things, the Debt as Necessity factor had a significant negative impact on positive financial behaviors— having a checking account, paying student loans on time and in full, saving, and budgeting—and positive impact on negative financial behaviors—high-risk debt behaviors, withdrawal from college, and being late on credit card payment. Finally, the most significant predictor was Spending Compulsion, which most strongly predicted the very high-risk outcomes—not being affiliated with a bank, not paying loans on time and in full, high-risk debt (going to a payday lender or getting a credit card cash advance), and being late on credit card bills.
It is clear that since the economic downturn, educators, policy makers and researchers have brought financial literacy to the forefront of the discussion around our recovery. However, as already noted, much of this discussion revolves around knowledge-based programming, whereas this investigation suggests that’s only part of the story. We found that specific student attitudes and planned behaviors also play a significant predictive role on student finance-related outcomes. Consequently, if there is hope to scaffold future generations forward in terms of financial literacy, it is necessary to consider integrating attitudes and behaviors pertaining to responsible financial behavior, debt as necessity, and spending compulsion into financial literacy curriculum.