Study Uncovers Disconnect Between Financial Literacy and Knowledge About Student Loans

By Joelle Fredman, NASFAA Staff Reporter

Students who are the most financially literate are not necessarily those most knowledgeable about the student loan process. In fact, a new study found that students with less general knowledge about money actually have a greater understanding of the consequences of not repaying student loans.

The study, published by the RAND Corporation, analyzed data from the most recent National Postsecondary Student Aid Study (NPSAS:16), which for the first time included questions to measure students’ awareness of the consequences of not repaying student loans and income-driven repayment (IDR) plans. The study’s authors, Drew Anderson, Jonathan Conzelman, and T. Austin Lacey, found that the students who showed lower financial literacy scores —  which they found to be mostly black students, low-income students, and students attending for-profit institutions — also answered more questions correctly about student loans than their peers.

“Students from these groups who borrowed knew more about the consequences of not repaying loans and were more aware of repayment plan options than their peers at higher income levels who had not borrowed,” the authors wrote. “This demonstrates that general financial literacy and student loan literacy are two distinct constructs, and suggests that the experience of borrowing, including financial aid counseling, may lead to better understanding of student loan terms.”

Overall, the authors found that 28.2 percent of students answered all three questions measuring financial loan literacy correctly, which included topics such as inflation and interest. This figure was in line with what was previously known about young adults’ financial literacy rates from previous studies, the authors confirmed. With regard to student loan literacy, 14.7 percent of students correctly answered all of the questions related to the consequences of defaulting on a loan and about IDR plans. However, these groups of students were not the same.      

The authors found that the characteristics associated with general financial literacy, such as high incomes and grade point averages, were not necessarily associated with student loan literacy. For example, the odds that a student answered all of the questions related to financial literacy correctly was 0.7 times higher for a student attending a public institution. However, for questions related to student loan literacy, those attending for-profit institutions answered them all correctly at a rate of 1.8 times higher than students in public institutions.

The authors wrote that one reason behind this could be that those borrowers with high student loan literacy scores also borrow at much higher rates, and that the experience of federal borrowing, which includes loan counseling, may make students more aware of the consequences of not repaying student loans. However, they argued that there is still room for counseling improvement due to the low number of borrowers who were able to answer all of the questions related to student loans correctly.

The authors suggested that overall student loan literacy can be improved for college students through interventions throughout their college careers focused less on “traditional financial literacy topics” and more on topics more directly related to student loans, such as interest rates.

“Opting to focus on loans rather than topics less directly applicable to college students like investment options may see higher returns by way of improvement in students’ financial outcomes during or immediately after college,” the authors wrote. “Informational interventions to support decisions have a mixed record of success, and identifying and targeting gaps is therefore important to maximize the chances of making an impact.”


Publication Date: 7/19/2018

Theodore M | 7/20/2018 9:41:39 AM

Shocking that students who did not borrow are not familiar with Income Driven Repayment plans. I missed where this study was published, was it in the Journal of Duh?

Katie H | 7/19/2018 3:51:34 PM

Darcy, I agree. I read the statement above and had to reread it again to make sure I wasn't missing something...

Darcy J | 7/19/2018 11:51:08 AM

“Students from these groups who borrowed knew more about the consequences of not repaying loans and were more aware of repayment plan options than their peers at higher income levels who had not borrowed,”

That statement right there indicates a huge fallacy in their analysis of the data.

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