An Insider's Guide to the Financial Expectations of First-Year College Students
Boston, September 2, 2012 - Based on Financial Literacy 101 surveys, we know that first-year students tend to be optimistic people. Even though attending college is a major financial commitment and we live in an uncertain economy, millions of students have just decided to give it a try - and by now they've acquired the student IDs and textbooks that prove it.
By graduation, students who borrowed to pay for school will have also acquired something else - an average of $25,000 or more in education loan debt. For perhaps a third of these students, their debt levels will be significantly higher. Still others will drop out before earning their degree, possibly acquiring substantial debts in the process. Whether or not they ultimately earn their degree, many of today's first-year students are making decisions that will shape their financial lives for a decade or more.
Few doubt the significant long-term benefits of a college degree, but that doesn't explain why some students choose a school that leaves them with $50,000 in debt versus $20,000 or why some graduates find themselves with $10,000 in credit card debt versus none.
After reviewing Financial Literacy 101 survey data, we've learned that there's a pattern among first-year students that could lead them to make financial decisions that they may regret later - most students expect to have considerably less debt and earn more money after graduation than they are statistically likely to.
For example, when surveying first-year students at four-year colleges, we've found that the vast majority - 3 out of 4 - expect to graduate with no credit card debt at all. Even more - 9 out of 10 - expect to graduate with under $500 in credit card debt. In fact, the average credit card debt of graduating college seniors is more like $4,000, with up to one in three students graduating with $10,000 or more. And don't forget, this is debt that's in addition to education loans.
We've also found that nearly half of these students expect to earn a starting salary of $55,000 per year or more -about one-third higher than the national average starting salary according to Georgetown's Center on Education and the Workforce. One third of students expect to earn $65,000 or more as their starting salary.
While it's true that some students will indeed graduate with low levels of credit card debt and others will earn $65,000 or more to start, the overall trend points to expectations about the future that are unlikely to be realized. Unfortunately, these expectations also inform a series of financial decisions, from their choice of school to their financial behavior while in school, that may increase the chances of unmanageable future debt.
Major financial decisions, from choosing a college to buying a home, are especially difficult since they depend on our ability to make predictions about the future. When buying a home, for example, we make decisions based on assumptions ranging from our ability to afford the mortgage payment to the rate of appreciation of one home versus another. Students make college financing decisions based on assumptions about the future as well, but there's an important difference - mortgage payments begin immediately while student debt payments are postponed. Behavioral economics research has demonstrated that this difference has a serious implication - from a student's point of view, "they" will not be repaying the debt. Rather, their future self, empowered with the earning potential of a college degree, will be the one picking up the tab.
Financial education can play an important role in helping students understand financial topics, but information alone is not the answer. After all, just about everyone knows that eating less and exercising more are the keys to maintaining a healthy weight, but anyone who's tried it knows that acting on that information is a totally different challenge. There's no reason to think that financial decision-making should be any different, and behavioral economists write book after book demonstrating how adept our brains are at justifying decisions that shortchange our future selves.
Financial Literacy 101 offers students more than "just the facts." Our approach focuses on the decision-making process, making the range of future outcomes highly relevant to students now. Financial Literacy 101 uses harm prevention approaches such as expectancy challenges and personalized feedback that have been proven effective in a variety of behavioral contexts, but they have not traditionally been applied to financial education. We're excited about these approaches and are working to design studies that can track their efficacy over time.
As someone who cares about the financial well-being of students on your campus, we encourage you to take full advantage of Financial Literacy 101 - including offering multiple courses over the entire student lifecycle. By expanding the reach and definition of financial education, we can all play a major role in maximizing the benefits of a college degree while minimizing the negative financial consequences experienced by too many students.
To learn more about bringing one of our services to your organization, please contact us.