College Students Lack Financial Literacy and Student Loan Literacy

The U.S. Department of Education included three financial literacy questions and three student loan literacy questions on its most recent nationally-representative survey of college students. The survey demonstrated that most undergraduate and graduate students lack financial literacy and student loan literacy.

The quadrennial National Postsecondary Student Aid Study (NPSAS) surveys undergraduate and graduate students to understand how they paid for their postsecondary education. More than 89,000 undergraduate students and 24,000 graduate students at more than 1,800 colleges and universities participated in the 2015-16 NPSAS.

Most students got at least one question correct in each literacy test. But, only 13% of undergraduate students and 25% of graduate students got all six financial literacy and student loan literacy questions correct.

Impact of Education Level on Financial and Student Loan Literacy

Graduate students clearly outperformed undergraduate students on both tests.

More than a quarter (28%) of undergraduate students and nearly half (49%) of graduate students got all of the financial literacy questions correct. Almost two-fifths (39%) of undergraduate students and nearly half (47%) of graduate students got all of the student loan literacy questions correct.

More education corresponded to better performance at the undergraduate level too. Generally, students in Bachelor’s degree programs outperformed students in Associate’s degree and Certificate programs on the financial literacy test, but performed about the same on the student loan literacy test.

Impact of Education Quality on Financial and Student Loan Literacy

The type of college had an inverse correlation with student loan literacy, contradicting conventional wisdom.

• Students who enrolled at very selective institutions were less likely to answer the student loan literacy questions correctly. On the other hand, they were more likely to answer the financial literacy questions correctly.

• Students who enrolled at for-profit colleges had below-average performance on the financial literacy questions, but above-average performance on the student loan literacy questions.

Students with a higher college grade point average (GPA) had better performance on both the financial literacy and student loan literacy questions than students with a lower GPA.

Impact of Student Loan Debt on Student Loan Literacy

Students who borrowed to pay for their education performed somewhat better than students who did not borrow, with about 5% to 7% of students answering each student loan literacy question correctly.

The opposite was true of students whose parents borrowed Federal Parent PLUS loans.

Although student loan literacy generally did not change with the amount of student loan debt at graduation for undergraduate students, there were two exceptions. Students who did not borrow had significantly below-average performance on the student loan literacy questions. Students who borrowed more than $30,000 had significantly above-average performance on the student loan literacy questions. This was true at every undergraduate degree level.

Among graduate students, greater amounts of student loan debt borrowed for graduate school correlated with increases in student loan literacy. Students who graduated with six-figure student loan debt had significantly above-average student loan literacy.

Graduate students in PhD and professional degree programs (business, medicine and law) had above-average financial literacy but average student loan literacy. The main exception was law school students, who also had above-average student loan literacy. Students pursuing an MSW or MFA had significantly below average financial literacy.

Demographic Differences in Financial and Student Loan Literacy

Men were much more likely to answer the financial literacy questions correctly than women, but only slightly more likely to answer the student loan literacy questions correctly. This was true at both the undergraduate and graduate degree levels.

There were significant differences in performance on the financial literacy vs. the student loan literacy questions among different racial/ethnic groups. African-American students had below-average performance on financial literacy but above-average performance on student loan literacy. The opposite was true of Asian students. Hispanic students had below-average performance on both types of questions and White students had above-average performance on both types of questions.

Students who majored in STEM fields had above-average performance on the financial literacy questions and average performance on the student loan literacy questions. Students who majored in non-STEM fields had below-average performance on the financial literacy questions and average performance on the student loan literacy questions.

Pell Grant recipients had below-average performance on the financial literacy questions but above-average performance on the student loan literacy questions.