Does Borrowing for College Make Sense? Implications from a Mixed-Methods Research StudyELIZABETH KISS, KANSAS STATE UNIVERSITY

SOOHYUN CHO, SOUTH DAKOTA STATE UNIVERSITY

DAVID EVANS, PURDUE UNIVERSITY &

BARBARA O’NEILL , RUTGERS UNIVERSITY

Opening activity

Current Trends in Student Loan Use

Americans’ Debt by Type, 2003 – 2013

Number of Postsecondary Institutions in the U.S. that Award Federal Student Aid

Number of Students Enrolled in Postsecondary Institutions Annually

Two-Year Loan Default Rates

Percentage of Undergraduate Students Receiving Federal Student Loans

Average Amount of Federal Student Loans Received by Undergraduate Students

Graduation Rates by Race/Ethnicity

Graduation Gaps at University of Akron

Source: College Results Online 2013, IPEDS data

Cohort Default Rates by Sector

Borrowers and Defaulters

Theories

Two Schools of ThoughtRational / Prescriptive

◦Human Capital Theory

◦Theory of efficient human capital investment

Descriptive

◦Signal Theory

◦Status Attainment Model

Human Capital TheoryGary S. Becker (1993)

Provides rational for parents investing time and resources in their children

Individuals will make investments in human capital, as long as benefits exceed the costs

Human Capital TheoryTheodore W. Shultz (1961)

Examples of Human Capital:

◦Expenditures on education

◦Expenditures on health

◦ Internal migration for better job opportunities

Theory of Efficient Human Capital InvestmentBrown, Scholtz, & Seshadri (2012)

The importance of Expected Family Contribution (EFC)

Financial aid increases the educational attainment of children, whose parents do not contribute to their education (underinvest)

The larger the unmet EFC, the more difficult it is for the child to finance college.

Intergenerational ProblemInvestment in human capital is a multi-stage process, as well as intergenerational problem

Early vs. late investments are complimentary; Early human capital investment will increase investment at later stages.

Family income received early (birth to age 11) improves educational outcomes more than income received at later ages (ages 12-23).

Signaling/Credential TheoryMichael Spence (1973); Randall Collins (1971)

Education credentials can be used as a signal to the firm, indicating a certain level of ability that the individual may possess.

Status Attainment ModelBlau and Duncan (1967)

Status Attainment: the processes through which initial relative social position is associated with own social status attainment over time.

Wisconsin Longitudinal Study confirmed that parents’ socioeconomic status and educational expectations are passed onto their children (Sewell & Hauser, 1980)

Two Recent Surveys

NC 2172Behavioral Economics and Financial Decision-Making and Information Management Across the Lifespan

http://www.nimss.org/projects/15376

Participating institutions

◦ University of Delaware

◦ University of Florida

◦ University of Georgia

◦ University of Illinois

◦ Purdue University

◦ Iowa State University

◦ Kansas State University

◦ University of Maryland

◦ University of Missouri

◦ Rutgers University

◦ Pennsylvania State University

◦ University of Rhode Island

◦ South Dakota State University

◦ University of the Incarnate Word

◦ Utah State University

◦ Virginia Polytechnic Institute and State University

Online Experimental StudyMerges experimental design with online survey techniques

Explores survey participants responses based on how information about student loans is framed in hypothetical scenarios

◦ Gain/Loss

◦ Emotional Trigger

Will be able to inform discussions related to

◦ Wisdom of using student loans to pay for college

◦ Amount of student loans to take in order to pursue a college degree

Virtual Focus GroupsPros

Reduce costs◦ Staff◦ Travel◦ Materials◦ Equipment◦ Food

No Transcription Necessary!◦ Enough said

Cons

Lack of researcher control

Shortened responses

Technical difficulties

IRB compatibility

Virtual Focus Groups: MethodologySynchronous

Similar to chat room experience

All participants’ responses occur simultaneously

Real-time reactions

Asynchronous

Similar to discussion threads or email

Participants have time to think about responses

Virtual Focus Groups: MethodologyAsynchronous Online Focus Groups◦ Survey Sampling International Sample

◦ Land Grant University Samples

Demographics Survey

8 Question Discussion Thread (Response Required!)

Three weeks to complete

$25 Gift Card to Amazon.com

Virtual Focus Groups: ConclusionsCollegiality

Inexpensive

Diversity

Reminders

Other options—e.g. webinars, hangouts etc.

Student Loan Impacts: Enrollment, Careers, and Personal Decisions

College Enrollment DecisionsA precursor decision to taking out student loans is deciding what college to attend

Cost was definitely a consideration

◦ Tuition and fees

◦ State scholarship programs

◦ Financial aid packages

◦ Distance from home

Some students eliminated categories of schools (e.g., private, out-of-state) from consideration before applying

Career DecisionsStudents might select public sector jobs to qualify for loan forgiveness

Students might select stressful, high-paying jobs to earn more money to repay debt faster

Students might decide to attend graduate school to boost income-earning potential

HomeownershipMany young adults are delaying large dollar purchases (e.g., cars and houses)

Mortgage accessibility is a key constraint

◦Monthly student loan payment + PITI payment often exceeds 36% of gross monthly income

Difficult for “late start homeowners” to be mortgage free at retirement

EntrepreneurshipBusiness creation by young adults has fallen

Federal Reserve study: “significant negative correlation between changes in student loan debt and small business formation”

Like mortgages, bank loans are often difficult to obtain

Consumer debt income ratio: ALL debt payments (combined) should not exceed 15% to 20% of net pay

Wealth AccumulationStudy: couple with $53,000 in student loan debt has a wealth loss of nearly $208,000 compared to a “baseline” couple without debt

Nearly 2/3 of loss comes from lower retirement savings

More than 1/3 comes from lower home equity

Pew Research Center: young college-educated households with no student loan debt have about 7 times the net worth of households with debt

Retirement SavingsStudent loans hamper retirement savings

Late savers lose a decade or two of compound interest

◦ Save $5,000/year from age 22 to 67 (45 years) at 7% = $1,528,759

◦ Save $5,000/yr from age 37 to 67 (30 years) at 7% = $505,365

Key Take-away: Forgoing retirement savings in early adulthood to repay four-or five figure debt can translate into a six- or seven-figure shortfall later in life

◦ The “million-dollar mistake”

◦ Compound interest is NOT retroactive

Impacts on SocietyStudent loan debt affects many people beyond individual debtors

◦ Existing homeowners who want to move or trade up

◦ Social service agencies assisting financially stressed individuals and families

◦ Resilience of the U.S. economy to ride out downturns

◦ Increased intergenerational dependence within families

What will happen in the future when young adults elude their full wealth accumulation potential?

Implications for Educators Working with Students and Families

Pre-collegeBig Questions

◦To go or not to go

◦Where to attend

◦Funding options

To Go or Not To GoSignaling

Increase knowledge

Develop skills

Lifetime earnings

Employment opportunities

Work environment

Social opportunities

FIVE WAYS ED PAYShttp://youcango.collegeboard.org/sites/default/files/11b_4427_5waysedpays_eng_web_111107.pdf

Where to Attend

http://trends.collegeboard.org/college-pricing/figures-tables/average-published-undergraduate-charges-sector-2015-16

Funding OptionsCollege savings

Scholarships and grants

Current earnings

Federal education loans

Private education loans

Work-study programs

Tuition assistance from an employer

Military programs

During CollegeBalancing school and work

How much is enough

Pay as you go

Post-collegeRepayment options

Life decisions

Student Loan Decision-Making Resources

Video – Serious

Voices of Debt- The Student Loan Crisis: Don’t Major in Debt (11 minutes) https://www.youtube.com/watch?v=uPcSYrPx3Ao

Video – Serious

AJ+: Faces of the Student Debt Crisis in America

https://www.youtube.com/watch?v=_tV6L-wzfHY

Video – Serious

AJ+: Faces of the Student Debt Crisis in America

https://www.youtube.com/watch?v=_tV6L-wzfHY

Video – Humorous

College Humor: http://www.collegehumor.com/video/6707784/student-loan-stds

Documentary Film: Broke, Busted, and Disgusted

BROKE, BUSTED, AND DISGUSTED IS A DOCUMENTARY FILM ABOUT THE TRUE COST OF COLLEGE.

If you’re not concerned about the student debt issue in America, you’re not paying attention.

Our system of higher education, particularly the way it’s funded, is creating a generation of heavily indebted young adults. Many of whom will have children in college before they’re even close to paying off their loans.

They’re frustrated, stressed and sometimes unable to see the light at the end of the tunnel.

BUT IT DOESN’T HAVE TO BE THAT WAY.

To reverse this very dangerous course our country is on, please watch this important film and share it with people you care about.

Watch The Film: http://www.brokebusteddisgusted.com/ (53 minutes)

Student Loan CalculatorBankrate.com: http://www.bankrate.com/calculators/college-planning/loan-calculator.aspx

Student Loan CalculatorNew York Times: http://www.nytimes.com/interactive/2014/your-money/student-loan-repayment-calculator.html?ref=business&_r=3

Student Loan Debt Clock FinAid: http://www.finaid.org/loans/studentloandebtclock.phtml

(Outstanding debt balance as of February 9, 2016)

Student Loan and Education Resource List

Consumer Action: http://www.consumer-action.org/downloads/english/student_loan_guide.pdf

Five page PDF document

Lists dozens of resources organized by topics

◦ Getting Started

◦ Borrowers in Repayment

◦ Borrowers in Default

◦ Additional Resources and Research

Federal Student Aid (U.S. Department of Education)

“Minds can achieve anything. We make sure they get to college.”

Repayment EstimatorFederal Student Aid: https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action?sf26719344=1

Student Loan Repayment PlansFederal Student Aid: https://studentaid.ed.gov/sa/repay-loans/understand/plans?utm_source=twitter&utm_medium=social&utm_content=compare+your+monthly+student+loan+payment#estimator

Student Loan GlossaryFederal Student Aid: https://studentloans.gov/myDirectLoan/glossary.action

CFPB Student Loan Resourceshttp://www.consumerfinance.gov/students/

Paying for College

Repay Student Debt

Submit a Student Loan Complaint

Closing activity

Does Borrowing for College Make Sense? Implications from a Mixed-Methods Research StudyELIZABETH KISS, KANSAS STATE UNIVERSITY

SOOHYUN CHO, SOUTH DAKOTA STATE UNIVERSITY

DAVID EVANS, PURDUE UNIVERSITY &

BARBARA O’NEILL , RUTGERS UNIVERSITY