Student Borrowing, Credit Card Use,
& Financial Literacy
Dr. Angela Lyons
University 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 Findings

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.
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 nonpayment of tuition and fees
The Consequences:
More than just students’ pocket books…

Academic performance


Degree completion



GPA
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 financial
education 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:
Mortgage
Auto
Loan
Debit and Credit Cards
Saving
Personal Finance
Investment
Retirement
www.bankrate.com
Track rates
Find the best card
Paying the minimum
Paying off balances
FICO Credit Score Estimator:
www.myfico.com/ficocreditscoreestimator
FICO Score Simulator:
Pay Bills on Time
Pay Down Balances on Credit Cards
Pay Down Delinquent Balances First
Seek New Credit
Transfer Credit Card Balances
Miss Payments
Max 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