Financial Literacy

Financial Literacy 1 APA Format

Running head: Financial Literacy

Financial Literacy Basil Donato, undergraduate student Joseph Indelicato, LCSW Ph.D. TOURO COLLEGE SCHOOL OF HEALTH SCIENCES

Financial Literacy 2

ABSTRACT (MAX 250 WORDS)

In the United States student loan debt has reached one trillion dollars. The increase in student loan debt correlates with an increase in the number of student loans in default. This study was conducted to determine the financial literacy of college students enrolled in a pre-professional setting. The information obtained was analyzed to uncover trends in student loan debt and default rates regarding student loans and repayment. A convenience sample of Touro College’s School of Health Sciences students were given a survey containing questions relating to demographics, and current habits such as level of education, spending and income. Subjects also answered loan repayment questions relating to expected monthly payment and time permitted to repay loan in full. Once the risk factors are known a further more efficient form of education can be mandated to students designed to teach the characteristics of loans, explain the ramifications of student loan default. Abstract should have some results in it.

Financial Literacy 3

Financial Literacy Introduction

In the United States student loan debt has reached one trillion dollars. The increase in student loan debt correlates with an increase in the number of student loans in default. The cause of this recent escalation in student loan default is still yet to be answered. The student loan crisis may be even worse than it previously appeared: Not only are college students graduating with more debt than ever, but their risk of defaulting on their loans is higher than ever. (FICO Labs). Background The research conducted found few articles measuring the financial knowledge of college students related to student loans. Most studies evaluate subject’s behavior regarding credit card debt or current spending habits later relating to credit card debt. “Few studies have focused on the college student population. College students represent a considerable population and their level of financial literacy will soon impact the overall economy. The US Census Bureau estimates that 15.5 million students were enrolled in US higher-education institutions in 2000. But only three studies have examined college students specifically.1” Few studies have focused on the college population and even less if any have focused on applying this knowledge to student loans. The cost of tuition, student loan interest rates, an unstable job market and a lack of financial literacy put current college students at an increased risk for student loan default. Emerging adults have been found to engage in more risk-taking behaviors

Financial Literacy 4 (Nelson and Barry 2005; Todesco 2005). These behaviors may include poor financial decision making. There is a lack of current research in this area.

Information that does exist is related to general financial knowledge and financial planning such as retirement. A study published in The Journal of American Academy of business found “These results alone indicate that students are not aware that they lack the skills necessary to make sound financial decisions. Eighty percent felt they were knowledgeable regarding management of their own money and 53% indicated that they had the skill necessary to plan their retirement.” The purpose of this study is to discover the financial literacy of college students and identify characteristics that may affect their financial understanding. A study was conducted to measure financial literacy of college students, determine variables related to various levels of financial understanding and examine relationships between different levels of understanding and potential for loan default. A survey was conducted with a convenience sample of Touro College Students enrolled in a pre-professional program to measure their financial knowledge. The results were analyzed to determine if students have the financial intelligence to comprehend the stipulations of their loan contracts. The Hypotheses are: 1. College students are not knowledgeable on the monthly costs of repaying their loans.

2. College students are unaware of interest rates on their loans.

Financial Literacy 5 3. College students are unaware of how much they will owe after completing their education.

Methodology Seventy six college students completed surveys at Touro College’s School of Health Science, Bay Shore New York. The study consisted of using a forty one question survey to obtain information see appendix 1. The comprehensive questions related to common personal and familial habits and characteristics that influence financial understanding. Along with demographical questions such as gender, age, and race were common questions related to financial aid, student loans and default rates. Also included in the survey were financial questions related to each responder’s future field.

Results The results show respondents claim to be more stable in their financial situations and understanding than they actually are. This is supported by 74.7% of respondents completing their own financial aid material. 62.7 % respondents rate themselves as having a comfortable to generous financial situation and 55.3% claim to have extensive financial Knowledge.

Financial Literacy 6 Of those who answered 63.2% have at least two student loans 27.3% have for or more loans. Still 21.2% do not know how many loans they have. The lack of knowledge relating to number of loans and Interest rates of those loans is much higher than anticipated. When questioned on the interest rate of loans an average of 41.3% are unaware of their current rate. Similarly, 67.7% could not answer what percent of their loan is public and 53.2% of respondents did not know what percent of their loan is private. The survey contains a blank space where respondents could fill in their anticipated monthly payment. Answered values ranged from $0.00 to $5000.00 per month. Only nineteen percent of realize they will be paying over one thousand dollars a month when considering both interest and principal.

Discussion “These results alone indicate that students are not aware that they lack the skills necessary to make sound financial decisions. 2” The figures show students are agreeing to loans without understanding the potential ramifications. Other studies have shown Eighty percent felt they were knowledgeable regarding management of their own money and 53% indicated that they had the skill necessary to plan their retirement. 3” These ideas are simply a misconception of financial understanding. Another study “...surveyed 924 students at 14 college campuses. Their comprehensive survey asked questions on general financial knowledge, savings and borrowing, insurance and investments. They concluded that college students do not have adequate knowledge of personal finance. 4” , 67.7% could not answer what percent of their loan is public and 53.2% of respondents did not

Financial Literacy 7 know what percent of their loan is private.

The interest rates of public loans are known

to be about half of what private interest rates are. This lack of knowledge enforces students do not understand the terms of their loans and are agreeing to loans that are essentially upside down from the start. The term “upside down” is common in the housing market and refers to where a home's value is less than the amount owed. The interest rates of public loans are known to be about half of what private interest rates are. This lack of knowledge enforces students do not understand the terms of their loans and are agreeing to loans that are essentially upside down from the start. The term “upside down” is common in the housing market and refers to where a home's value is less than the amount owed. Only 19 percent of students realized that they would be paying over a thousand dollars a month in repayment. This shows students are under estimating the monthly repayment amount necessary to pay their loan back in time. Students also have no concept of the time allowed to repay the loan. This misunderstanding could be attributed to their underestimation of the cost and overestimating how fast they can repay. The prerequisites for taking out a student loan are essentially nothing compared to the consequences of student loan default. Currently a student must sit with financial aid personnel and complete paperwork, after signing a few documents they are free to go. Upon completion of a student’s final semester but before graduation again they must sit with a financial aid counselor for a session known as exit counseling. These current precautions are doing little to educate students on the potential life altering problems caused by student loan default. In order minimize and prevent future student loan default some further education is needed. This education should be designed to explain what the

Financial Literacy 8 paperwork from the lender to borrower means and how to interpret given information. More frequent mailing of notices regarding student loan rates and accrued amounts may also be beneficial to the borrower. Hopefully the education will allow students to understand the information provided by the lenders, allowing them to interpret it properly and make educated decisions regarding their financial future.

References 1.Volpe, Ronald P, Haiyang Chen and Joseph J Pavlicko,1996, “Personal Investment Literacy Among College Students”, Financial Practice and Education,(Fall/Winter), 8694.

Financial Literacy 9 Chen,, H., and Volpe, R.,1998, “An Analysis of Personal Financial Literacy Among College Students “, Financial Services Review, &:2, 107-128. Danes, Sharon M., and Tahira K Hira, 1987, “Money Management Knowledge of College Students,” The Journal of Student Financial Aid, (Winter) 17:1, 4-16 2. Bianco, C. A., & Bosco, S. M. (2012). Financial (IL)literacy of College Students. Journal of American Academy of Business, 18(1), 75-82. Retrieved from 3. Bianco, C. A., & Bosco, S. M. (2012). Financial (IL)literacy of College Students. Journal of American Academy of Business, 18(1), 75-82. Retrieved from 4. Chen,, H., and Volpe, R.,1998, “An Analysis of Personal Financial Literacy Among College Students “, Financial Services Review, &:2, 107-128.