Financial capability of student loan holders who are college students, graduates, or dropouts

• Author: Nilton Porto,Jing Jian Xiao,Irene McIvor Mason
• DOI: http://doi.org/10.1111/joca.12336
• Published date: 01 December 2020
• Date: 01 December 2020

PRACTICAL APPLICATION

Financial capability of student loan holders

who are college students, graduates, or

dropouts

Jing Jian Xiao | Nilton Porto | Irene McIvor Mason

Human Development and Family

Science, University of Rhode Island,

Kingston, Rhode Island

Correspondence

Jing Jian Xiao, Human Development and

Family Science, University of Rhode

Island, Kingston, RI.

Email: xiao@uri.edu

Abstract

Effective consumer financial education provides relevant

information to meet special needs of targeted audiences.

The purpose of this study is to examine differences in

financial capability among student loan holders who are

college students, graduates, and dropouts. Using data from

the 2015 U.S. National Financial Capability Study, the

results show that student loan holders who have com-

pleted their education program have higher scores in all

financial capability indicators than college students and

dropouts. Further analyses show differences in specific

financial knowledge items among college students, gradu-

ates, and dropouts. In addition, college graduates are more

likely to perform several specific desirable financial behav-

iors than college students and dropouts. The findings sug-

gest that financial educators should emphasize action

taking when they provide financial education for student

loan holders who are college students and dropouts.

KEYWORDS

financial capability, financial literacy, financial behavior

1|INTRODUCTION

Student loan holding is a current important policy issue in the U.S. Research shows that

between 2000 and 2014, student loan debt nearly quadrupled to surpass $1.1 trillion, the num-

ber of student loan borrowers more than doubled to reach 42 million, and default rates among

Received: 12 May 2019 Revised: 12 September 2020 Accepted: 21 September 2020

DOI: 10.1111/joca.12336

© 2020 American Council on Consumer Interests

J Consum Aff. 2020;54:1383–1401. wileyonlinelibrary.com/journal/joca 1383

recent student loan borrowers rose to the highest levels in 20 years (Looney and

Yannelis, 2015). According to the 2015 National Financial Capability Study (Lin et al., 2016),

26% of the U.S. population hold student loans. Many student loan holders lack knowledge about

their loans. Only 35% of the loan holders knew if their loan repayment plan is income-based and

19% did not know; 53% did not estimate the monthly repayment cost of their student loans when

they were offered loans. Among those who borrowed student loans to attend colleges/universities,

28% did not complete the degree/program (Lin et al., 2016). As suggested by previous research,

effective financial education programs should focus on specific needs of students (Bartholomae

and Fox, 2006; Alsemgeest, 2015). To encourage repayment of student loans after graduating or

dropping out of colleges/universities, consumer educators should better inform these student loan

holders through effective targeted financial education programs including online exit counseling

at the time of graduation. To achieve this goal, knowledge creators and knowledge distributors

should work together creatively (Hill, 2019). As the first step, we have researched differences in

financial capability among student loan holders with various educationattainments.

The purpose of this study is to examine differences of financial capability among three types

of student loan holders: college students, graduates, and dropouts. The research question is:

What are differences in financial capability factors in the three groups of student loan holders?

Financial capability can be broadly considered “a multi-dimensional concept that encompasses

a combination of knowledge, resources, access, and habits”(Lin et al., 2016, 2). In this study, a

narrower definition is used in which financial capability is defined as the ability to apply finan-

cial knowledge and engage in desirable financial behavior for achieving financial wellbeing

(Xiao and O'Neill, 2016; Xiao and Porto, 2017).

Following previous research (Xiao and Porto, 2017), four indicators and one index are used to

measure financialcapability: objective financial knowledge, subjective financial knowledge, desir-

able financial behavior, and perceived financial capability. The index of financial capability is a

sum of Z-values of the four indicators of financial capability.The findings of this study have direct

implications for consumer educators and policy makers for developing effective educational pro-

grams tailored to meet diverse needs of these student loan holders. Specifically, any differences

found among the three types of student loan holders will be informative for policy makers when

they make relevant policies for promoting consumer financial capability and wellbeing. Detailed

analyses of group differences in terms of specific knowledge items and behaviors will inform con-

sumer educators to tailor their education materials and approaches to address the diverse needs

of three types of student loan holders with various education completion statuses.

2|LITERATURE REVIEW

Research on student loan issues has been conducted from a variety of perspectives, such as cost

and benefits of student loan borrowing (Avery and Turner, 2012), predictions of loan default

(Flint, 1997), legal debates of student loan options (Miller, 2004), and disparities of student loan

burdens (Houle, 2014). Researchers have also studied topics such as college financing (Cigno

and Luporini, 2009), education policy (Lochner and Monge-Naranjo, 2015), and general trends

of student loans (Chapman, 2006; Looney and Yannelis, 2015; Burr, 2016).

One line of research studying consumer behavior of student loan holding shows that student

loan holding is an important factor contributing to the stress of college students. Among college

students, student loan debt is positively associated with financial anxiety (Archuleta

et al., 2013). College students are more likely to experience financial stress when they have

1384 XIAO ET AL.