Student Borrowing, Credit Card Use,

& Financial Literacy

Dr. Angela LyonsUniversity of Illinois

Preview of Coming Attractions…

Research

Best Practices

Creating a Financial Education Action Plan

Where Do We Go From Here?

Anecdotal Evidence

from Students

Financial Trends on College Campuses

Rising college costs

Dramatic growth in student loan amounts

Financial aid has not kept pace with rising costs

Increase in financially independent students

Fewer parents are helping to cover cost

Significant increase in private loan amounts

Growth in credit card usage

Trends in College Students’ Credit Usage

Over 80% have at least one card.

Majority obtain card prior to college or during freshman year.

10-15% have 4 or more cards.

More than 50% repay balances in full.

16% have balances > $1000.

5% report balances > $5000.

Part 1: Research

University of Illinois (UIUC) online study

Focus groups with Illinois community college students

Focus groups with state and national experts

Online study with Midwest college students (10 campuses – almost 30,000 responses)

Financial socialization of students – new study!

The Sample

Data was collected on 10 Midwest campuses (February 2003)

About 168,000 students invited to participate (18% response rate)

26,896 valid responses

The Survey

Current Credit Usage Credit cards Financial aid Other debt

Financial Education Needs Preferences for receiving info Importance of financial education Level of financial knowledge

Demographic Information Year, age, gender, ethnicity, GPA, credit hours, etc. Info on parents Consequences of credit

The majority of students appear to be using credit responsibly and are not accumulating large amounts of debt.

However, there are identifiable groups that are more “at risk” than others for misusing and mismanaging credit.

The Findings

Defining “Financially At Risk”

Four characteristics:

Credit card balance of $1000 or more

Delinquent on payments by 2 months or more

Reached limit on credit cards

Does not pay balance in full each month

Who is Financially At Risk?

Students having difficulty managing their credit cards are having financial difficulties in general.

At-risk students are more likely to receive need-based financial aid, hold other types of debt, and be financially independent.

At-risk students are more likely to have lower grade point averages, to be working more hours, and to report higher earnings.

How students acquire their cards has a significant impact on credit management (aggressive marketing practices by credit card companies have likely contributed to rise in credit card debt).

Groups who have traditionally had difficulty obtaining credit may be at greater risk (i.e. women, minorities, and low-income).

Students are less likely to be at risk if they have taken a personal finance course.

Other groups to consider…

First-year and transfer students

First generation college students

Graduating seniors

Students who have hold on their financial aid refunds

Students who apply for emergency loans because they have spent their financial aid

Students who have been dropped for non-payment of tuition and fees

The Consequences:More than just students’ pocket books…

Academic performance GPA

Degree completion Reduced number of credit hours Dropped out for a semester

Health Mental health (ability to concentrate) Physical health (losing sleep or physical discomfort)

Does “financial strain” affect degree completion?

Large credit card balances significantly increase the likelihood of poor academic performance.

1 in 3 students report that financial situation is “likely” or “somewhat likely” to affect ability to complete degree.

16% reduced number of credit hours because of their financial situation.

6% dropped out for a semester.

Of those financially at-risk, 27% reduced number of credit hours 12% dropped out for a semester

Does “financial strain” contribute to poor health?

As a result of financial situation….

1 in 3 students have difficulty concentrating on their studies.

1 in 4 have lost sleep or experienced physical discomfort.

About 50% of “financially strained” students report health problems.

Preliminary Two-Stage Probit Models

Measures of academic performance, degree completion, and health:

GPA below 3.0 Reduced credit hours Dropped out for a semester Mental health (ability to concentrate) Physical health (losing sleep or physical discomfort)

Three measures of financial strain (instrumented):

Credit card balance of $1000 or more Delinquent on payments by 2 months or more Reached limit on credit cards

Results

Large credit card balances significantly increase the likelihood of poor academic performance and poor health and decrease the likelihood of degree completion.

The magnitude of the effect is largest for academic performance.

Findings are robust across all 3 measures of “financial strain.”

Findings are robust for total sample and students who have credit cards.

IMPLICATION: Consequences go beyond students’ finances

NEW RESEARCH!Financial Socialization of Students

Process of “financial socialization” and the role parents play

Motivation: Financial trends on college campuses Focusing too much on financially at-risk students Research on consumer socialization

Ongoing study: data from UIUC…and UGA, LSU, UIC

Online Financial Fitness Quiz and Focus Groups

Data

Survey 3,061 student invited to participate (20% response rate) 580 valid responses from UIUC (2,745 all campuses) Financial Fitness Quiz (10 financial behaviors) For each behavior, scale from 1 to 5 (1=always and 5=never) Financially at risk if Financial Fitness Score 3 (10% of sample) Demographics: academic year, ethnicity, gender, parents’ marital status,

school funding sources, most significant influence about money

Focus Groups 7 focus groups; 4 at-risk and 3 not at-risk 47 students total from UIUC (108 from all campuses) Challenges recruiting “at-risk” students

Key Findings

Not-at-risk students used more caution and had an aversion to credit cards

Lack of personal responsibility for those at risk (avoiding and postponing)

Differences in family structure

Family income didn’t matter for those not at risk

Financial socialization occurred at very early age for those not at risk Emphasis on saving and setting financial goals Purchasing behavior and “needs” tests Responsible for finances and managing money at an early age Saving vs. accumulating debt (saving established in childhood) Parents “bailing out” their children

Not-at-risk students understood the value of money and worried more about money

Needs vs. wants (Delayed gratification vs. instant gratification; tracking and budgeting vs. impulse shopping)

Verbal vs. non-verbal communication with parents (not-at-risk had vivid, positive memories; at risk had few, if any, memories and these memories were usually parents unhappy about finances)

Not at-risk students had more constructive financial discussions with parents while growing up; viewed as educational and not intrusive

Contradictory financial behaviors from parents of at-risk students

A Word of Caution…

Read media stories carefully.

Look at the student samples being used.

Avoid focusing only on students who are financially at-risk.

Think beyond students’ finances.

Part 2: Best Practices

Rationale for Financial Education on College Campuses

Without a support system, students may perform poorly, drop out, or delay graduation to cope with financial problems.

Some students may be positioning themselves for financial failure prior to graduation.

Students with high debts and delinquent payment history may have difficulty getting good jobs because employers are checking credit reports.

Effective Financial Education Programs for Students

Students learn best when they are “financially engaged” (i.e. practical, real world experience).

Programs must be interactive.

Information must have personal relevance.

Need to find “teachable moments” for college students.

Students need to see “the bigger picture” and the value of being financially responsible.

Examples of Successful Programs

Texas Tech University Red to Black

www.orgs.ttu.edu/r2b/

University of Georgia Peer Financial Counseling

www.uga.edu/osfa/pfc/

Montana State University Student Advocates for Financial Education

www.familyfinance.montana.edu/financePrograms.html

Iowa State University Financial Counseling Center

www.fcs.iastate.edu/financial

Utah State University Family Life Center

www.usu.edu/flc/

Brigham Young University (Financial Path to Graduation)

What can you do to provide financial education given your

resource constraints?

If resources were not a constraint,what would your ideal financialeducation program look like?

Key Questions to Ask:

What challenges do you face in providing financial education?

How can you overcome these challenges?

Who are your potential partners?

What financial and non-financial resources are available to you and your partners?

Challenges Facing Campus Administrators

Marketing to students.

Organizing a program with limited time, resources, and expertise.

Staffing, training, and scope of services.

Identifying financial and non-financial resources.

Recognizing potential partners.

Program evaluation.

(What’s working and what isn’t?)

Marketing to Students

Students are listening to the radio station WIIFM.

Jobs!!! Jobs!!! Jobs!!!

Use stories, testimonials, recent news headlines.

Get students involved in the process so they have “buy in” to the program.

Connect with student organizations.

Use the Web effectively!

Delivery Methods

New student orientation (students AND parents) Life skills course Workshops and seminars Student organizations High schools and community groups The Internet

Emerging issues: workshops vs. formal courses prevention vs. intervention peers vs. financial professionals evaluation (what’s working?)

Potential Partners

Campus partners Office of student affairs Student health services Career center Student business services Residence life Student organizations Athletic organizations Parent associations Alumni associations

Cooperative Extension

Consumer Credit Counseling Agencies

Partnering with other campuses to offer training sessions

Community colleges

Financial institutions such as credit unions, banks, credit card companies (a word of caution though…)

Where to look for resources?

Cooperative Extension

National Council for Economic Education (NCEE)

State government (Governor’s Office of Consumer Affairs, Office of Banks and Real Estate, State Student Finance Commission)

Campus resources (business schools, alumni)

Investor Protection Trust and State Securities Regulators

www.investorprotection.org

Where Do We Go From Here?(Open Discussion)

A Financial Education Toolkit

Time Value of Money

The earlier you save, the more $

$’s you will have.

Cool Million calculator:

www.myfico.com/CreditEducation/Calculators/Millionaire.aspx

Other Calculators:

MortgageAutoLoanDebit and Credit CardsSavingPersonal FinanceInvestmentRetirement

www.bankrate.com

Track ratesFind the best card

Paying the minimumPaying off balances

FICO Credit Score Estimator:

www.myfico.com/ficocreditscoreestimator

FICO Score Simulator:

Pay Bills on TimePay Down Balances on Credit CardsPay Down Delinquent Balances FirstSeek New CreditTransfer Credit Card BalancesMiss PaymentsMax Out Credit Cards

**Exercises 13.1 and 13.2**

Reading a Credit Report

www.annualcreditreport.com

Sample Credit Report:

http://experian.com/credit_report_basics/pdf/samplecreditreport1.pdf

Federal Trade Commission

Identity Theft Hotline

1-877-IDTHEFT (438-4338)

www.consumer.gov/idtheft