High school seniors who are less financially literate are less likely to decide to take out federal loans to pay for college鈥攚hich could ultimately limit their educational progress and reduce the amount of money they鈥檙e able to earn over the course of their lives.
That鈥檚 according to a from Vanderbilt University and funded by the Lumina Foundation.
Researchers Angela Boatman and Brent Evans examined the financial literacy and borrowing habits of 5,000 high schoolers, community college students, and adults without college degrees. They were looking to understand which people were more loan averse鈥攖hat is, more reluctant to borrow money to pay for higher education.
It turns out that those who had prior experience using payday loans (short-term loans that need to be paid back quickly), those with lower financial literacy, and those who knew less about federal student loan programs were less likely to take out a student loan, even when it might help them afford a college education.
鈥淎s the cost of college continues to rise, students are asked to weigh the cost of borrowing money for their education with the potential returns on that investment,鈥� Boatman said in a press release. 鈥淪tudent loans expand the opportunities to postsecondary education, but loan aversion may pose a barrier for many potential students.鈥� Boatman noted that college degrees are associated with higher incomes, so loan-averse students may be sacrificing longer-term financial security.
The connection between payday loans and loan aversion hints that loan-averse people are usually lower-income. The , a global test also found that higher-income students were more financially literate than their lower-income peers. That suggests that higher-income students would generally feel more comfortable taking out the federal loans and making the financial decisions necessary to access higher education and the opportunities that come along with it.
Income inequality in access to higher education has been demonstrated in other ways: The New York Times reported earlier this year that some colleges have of family incomes, for instance, and that wealthier students are more likely to pursue higher education than lower-income young people. The new Vanderbilt study helps elucidate a potential reason fewer lower-income students opt into higher education and highlights the connection between financial literacy and higher education.
More states have beenin recent years. But experts have warned that it鈥檚 worth being cautious when selecting financial literacy curricula, as many are and help funnel students toward particular banks or products鈥攁nd that financial literacy shouldn鈥檛 replace bigger-picture subjects like economics.
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