People either with low levels of financial literacy or who have聽used payday lending聽are far less willing to borrow to pay for college, according to a new 菠萝视频 study.
Loan aversion is a widespread phenomenon and the subject of a multiyear 菠萝视频 study funded by the Lumina Foundation. The term, as it applies to postsecondary education, is generally defined as a person鈥檚 unwillingness to acquire debt to pay for college, even when the investment would likely offer future benefit through higher salary potential.
Angela Boatman
The study was led by聽听补苍诲听, both assistant professors of public policy and higher education at 菠萝视频鈥檚聽聽of education and human development. Results were published recently by聽The Annals of the American Academy of Political and Social Science.
鈥淥n average, the individual returns to college enrollment and completion are large, with gains in income of around 10 percent for each year of postsecondary education,鈥� Boatman said. 鈥淒espite these average returns, there is concern that 鈥� those who are averse to borrowing money for college may underinvest in higher education, leading them to work for pay, enroll part time, or stop attending altogether. Understanding this phenomenon is important at both the individual and societal levels.鈥�
Brent Evans
More about the study
Boatman and Evans evaluated a unique dataset of survey responses from more than 5,000 individuals in three populations:
- high school seniors;
- community college students (who did and did not borrow for higher education); and
- adults without a college degree.
In this study, they measured three financial characteristics: financial literacy, knowledge about federal student loans, and prior experiences in the credit market.
鈥淲e found that higher financial literacy and higher knowledge of federal student loans were related to lower loan aversion for education by as much as a 30 to 50 percent reduction in loan aversion in some samples,鈥� Evans said. 鈥淲e also found that prior experience with payday lending was related to increased loan aversion for community college students who did not borrow for college.鈥�
Collectively, student debt聽represents聽the second largest source of household debt in the nation at $1.3 trillion with 21 percent of households reporting some level of education-related debt. Student loans have become an essential tool for many students to pay for postsecondary education.
鈥淣ational surveys have found that the majority of people lack basic financial knowledge with only about one third of Americans understanding such concepts as compounding interest,鈥� Boatman said. 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. Student loans expand the opportunities to postsecondary education, but loan aversion may pose a barrier for many potential students.鈥�
In a prior study, the聽Peabody researchers found that women are less loan averse than men聽and that Hispanics are more loan averse than white respondents.
An earlier version of this article聽appeared on 菠萝视频 News @ 菠萝视频.