Recession Affected Students' Financial Attitudes and Behaviors

February 08, 2010

The economic downturn has had many negative effects, but for one group of researchers, it came with a silver lining: the chance to see how young adults respond to financial upheaval. Their findings, which show a rise in risky financial behaviors and a drop in self-reported well-being, were released Monday.

The researchers were working on a longitudinal study of college students' financial attitudes and behaviors when the recession unexpectedly provided a "natural laboratory" for measuring the students' response to tight times.

The larger study, "Arizona Pathways to Life Success for University Students," is following more than 2,000 University of Arizona undergraduates from the start of college onward to see how those attitudes and behaviors link to indications of well-being.

Students in the sample began college in 2007, and the first report from the study came out last summer. Initially, the researchers had planned to collect their next round of data in the students' senior year, but when the economy slumped, they decided to follow up with some of them sooner. Nearly 750 students from the original sample participated in the follow-up survey, which was conducted between February and April 2009.

A Widening Gap

In a new report, "Wave 1.5 Economic Impact Study: Financial Well-Being, Coping Behaviors and Trust Among Young Adults," the authors write that nearly all students in the follow-up group said the downturn had affected their families, their own finances, and their money management.

Women, members of minority groups, and students from lower-income families were disproportionately represented among those students affected most by the recession. In a free-response portion of the survey, students wrote about cutting back spending on entertainment and food, taking on more responsibility to pay for their education, and worrying about the university's budget and its impact on tuition and course availability.

The researchers found that students in the follow-up sample had higher debt levels than the baseline sample had reported. Among students with an unpaid credit-card balance, the average balance was $152, up from $95 in the earlier report. Among those with education debt, the average grew from $1,041 to $1,932. Although a larger amount of student-loan debt would be expected as students progress through college, the researchers found the gap between debt levels for white and minority students had widened.

Students in the follow-up sample had slightly improved financial knowledge, compared with the earlier sample, scoring an average of 66.7 percent on a test, compared with 66.2 percent. But when it came time to rate their own understanding of finances, the students gave themselves lower scores than the full sample had in the first survey. This loss of confidence could affect the financial decisions the students make in the future, said Soyeon Shim, professor of family and consumer sciences at the University of Arizona and principal investigator of the study. This is something future portions of the study will track, she said.

Over all, the follow-up sample reported a decrease in budgeting and saving compared with the earlier sample. Those who self-reported greater impact from the recession, however, said they had an increase in budgeting and a decrease in saving, suggesting they simply had less money to work with.

'Risky' Budget Decisions

More students reported engaging in what the researchers term "typical" financial coping strategies, like cutting back unnecessary spending. For example, 31 percent said they cut back on communication expenses. In particular, there was growth in using such strategies among higher-income students, narrowing the gap between high- and middle-income students for such behavior.

There was also a large jump in the use of "risky" coping strategies, like dropping a class, postponing health care, or using one credit card to pay off another, though relatively few students reported these behaviors.

Even though the number of students engaging in risky behaviors remains small, the researchers predict that habits formed in the college years will stay with the students over their lives, said Joyce Serido, assistant research scientist and co-principal investigator of the study. That means the impact of choices made in college could be magnified over a lifetime. Therefore, it is important for educators to help students make better financial decisions, like borrowing a reasonable amount to stay in school rather than dropping out because of the expense, Ms. Shim said.

Students in the follow-up sample reported lower levels of financial, physical, relational, and academic well-being over all. Though the researchers cannot be certain how much of this drop was related to the recession, they expected that students would generally report slightly higher well-being as sophomores, Ms. Shim said.

The researchers plan to survey the full group of students again in the fall of 2010, focusing especially on their postcollege plans. Those results should be available in the spring of 2011.