President Obama’s focus on college access and completion has drawn new attention to the retention rates of students—particularly those from low-income families, who have long been discouraged from earning college degrees. Higher-education researchers have extensively studied factors like financial aid, academic preparation, and socialization, but most of that research has overlooked a significant factor that can help such students succeed. That factor is financial education.
While many students have little or no experience with even the most basic personal finance before entering college, low-income students are even worse off, lagging behind their middle- and high-income counterparts.
The problem starts early: Most low-income high-school students aren’t educated, either at school or at home, about the complex finances involved in attending college. So they often choose not to go to college at all, simply because they are unable to navigate the financial-aid system and their parents cannot help them. And many of those who do go then drop out, default, or wind up in serious debt because they misunderstood their loan-repayment terms or took on more debt than they could handle. Students need help, and financial aid itself is only a part of it.
Despite that, most colleges and universities offer little, if any, meaningful financial education.
Fortunately, one solution already exists, in the form of Individual Development Accounts, or IDA’s. An IDA is a bundled financial tool that includes matched savings accounts, financial education, case management, and counseling. Through the Assets for Independence Act, the federal government provides grants to encourage nonprofit organizations to offer IDA’s. While the government provides part of the matched savings accounts and some overhead (15 percent), the nonprofit groups join with businesses and other groups to fully finance the IDA’s.
The accounts can be used for three primary purposes—postsecondary education, homeownership, and microenterprise. The federal policy has been in place for over a decade, but few colleges offer IDA’s or work with other nonprofit entities to do so. As a result, the postsecondary option remains underused.
The importance of financial education—and the barriers preventing this valuable grant program from improving the lives of low-income students—was clear from the results of my three-year national study of IDA’s, released last year (available at http://www.usc.edu/dept/chepa/IDApays). Using case studies of the institutions that have used the accounts, and comparing them with those that have not, I observed the significant role that financial education can play in providing students with the ability and confidence to manage their money and stay in college.
While IDA’s are one way to offer financial education, and we hope that more colleges will consider using them, our study also offered good reason for simply providing solid financial education on college campuses. What should colleges do to support that effort?
Establish a campuswide task force. Every college should organize a committee that includes staff members from the financial-aid, student-support, and academic-advising offices; faculty members from the business and education departments; and perhaps a representative of the campus credit union or bank, if applicable. Each member of the group can offer his or her expertise to develop a comprehensive financial-education plan for students.
Integrate financial education into the curriculum. As long as it is marginalized in the occasional workshop, financial education will never get the time and attention it needs to fundamentally change students’ knowledge and understanding. First-year orientation courses, for example, could easily incorporate financial education. So could some required general-education-requirement courses, like introductory math, business, and economics, since they’re topically aligned with financial education and are taken by many students.
Don’t forget extracurriculars and campus life. Campuses offer dozens of opportunities and venues for bringing financial education to students outside of the classroom, whether in residence halls, student groups, or orientation or leadership programs. Career centers can include financial education in the career-preparation courses they already offer, and counselors can draw on both campus and external resources to offer such workshops.
Increase educational offerings through campus services. The financial-aid office, the campus bank or credit union, and the academic-advising office should all offer financial-education services, using brochures, online resources, workshops, or expert speakers (and preferably all of those). Financial-aid officers should view themselves as educators, not just aid processors. They can provide financial referrals, teach students to be wary of alternative loan vendors, and help students learn to use online tools to calculate and understand debt burdens. If the financial-aid office provides a strong model for financial literacy, other groups on the campus are more likely to support and emulate that approach.
A few campuses use notable models of financial education. One is “Financial Literacy 101,” a customizable online financial-education course for college students developed by Decision Partners, a nonprofit student-education group, using federal grants. The National Endowment for Financial Education offers CashCourse, a free online program that covers topics like buying or leasing a car, studying abroad, handling peer pressure, and paying for social expenses like fraternity or sorority dues and spring break. The office of financial aid and scholarships at California State University at Northridge offers an array of opportunities for students to learn through individual counseling, online offerings, presentations, and other campus events. And Texas Tech University has improved the financial literacy of its students through Red to Black, an outreach arm of an academic program in personal financial planning.
But the seeming indifference of many other college leaders to financial education is out of touch with the attitudes of both the public and policy makers. Some policy makers and education leaders have become concerned about the high level of student debt and are attempting to rein in abusive lending practices. The recession has everyone concerned about financial issues, large and small.
Although federal policy cannot require colleges to teach personal finance in class, legislators and the public are sending a clear message that financial education is indeed part of the work of postsecondary institutions. In 2008 the President’s Advisory Council on Financial Literacy recommended that the U.S. Treasury establish an honor-roll program for innovative financial-education programs at postsecondary institutions. And many states are beginning to require financial education at the elementary and secondary levels.
Higher-education leaders should be concerned, and they should act to teach their students how to manage their money in college and beyond. The current state of affairs makes it easier for predatory lenders to reach uninformed students, and for credit companies to prey on students’ lack of knowledge and put poor students into greater debt and financial despair. Silence about money matters hurts everyone except those lucky enough to learn about personal finance from their parents or through some other means—perpetuating a vicious cycle that keeps a select few in the loop, while limiting the ability of low-income people to compete with their more affluent peers.
The status quo is unacceptable. If colleges want to improve low-income-student retention and graduation, things must change. Financial education, offered as early as middle school, can teach students about the concepts, services, and products that will help them make informed choices, avoid costly pitfalls, and find trustworthy assistance—all essential for improving their present and long-term financial well-being. It is truly essential education.
