The underdeveloped state of financial literacy among many college and university attendees poses a serious challenge both to the students and their educational institutions.
For students, limited understanding of personal financial management can be particularly costly at a time when 69% of them1 are assuming debt obligations to pay for their education, and those obligations are averaging $28,4002 at graduation. And for institutions of higher learning, from a business perspective, financial problems that may be due to low student financial literacy result in higher dropout and loan default rates.
“Financial problems are the number one reason students aren’t able to complete their degree, and students who leave without a degree are four times as likely to default on their loans,” according to Mary Johnson, Vice President for Financial Literacy and Student Aid Policy for financial systems solutions provider Higher One.
More broadly, educational institutions care about the ultimate success of their students after graduation, and financial literacy is key. A 2014 Gallup study3 found that the overall well-being of college graduates correlates to the level of debt they took on to finance their education.
Defining financial literacy
So what constitutes financial literacy? One academic researcher4 describes it as “the ability to use knowledge and skills to manage financial resources effectively for lifetime financial security.”
Increasingly, colleges and universities are taking on the mission of helping their students achieve financial literacy. One reason, according to Bill Ford, Senior Vice President and Senior Relationship Manager in the Specialized Industries group of Bank of America Merrill Lynch, is that “parents are asking universities, ‘What’s your value proposition to support the high cost of tuition?’”
Part of the response, he says, can be: “We’re training students to be smart about managing their funds to make sure they get their money’s worth.”
Financial literacy is critical to the success of graduates entering the work force, adds Jonathan Millard, Public Sector Banking Senior Vice President and Market Leader, Bank of America Merrill Lynch. “Most institutions of higher learning regularly engage students about subjects beyond academics that will impact their lives going forward, such as good citizenship and community service,” he points out. “Efforts at promoting student financial literacy are consistent with that broader educational focus.”
One barometer of colleges and universities’ interest in financial literacy is the number of applications submitted to Higher One’s annual “Financial Literacy Counts” grants program, which doubled to 130 last year.
Grant applicants propose financial literacy efforts covering the financial aid process, understanding sustainable ratios of student debt service amounts to anticipated post-graduation earnings, consumer debt minimization, budgeting, savings and investing, and identity theft protection, among other subjects.
The Financial Literacy Challenge
One study of student financial literacy6 concluded that “most students and segments of the adult population are not prepared to take on financial decision-making. They have deficiencies in financial knowledge, and experience which impacts decisions about saving, investments, retirement planning, and wealth accumulation.”
Another study7, conducted over a three-year period averaging more than 50,000 students each year, revealed a decline in “responsible financial behavior.” Specifically, students are less and less likely to pay credit card bills on time, pay off credit card principal balances monthly, review bills before paying them, adhere to a budget, save money and balance their checkbooks. While the majority say they still do most of those things, that will no longer be true in a few years if current trends aren’t reversed.
No perfect model
The Coalition of Higher Education Assistance Organizations (COHEAO) recently surveyed the financial literacy program landscape and highlighted patterns and best practices5. “There is no singular perfect operational model for a campus financial literacy program,” the report states.
Before trying to identify the best model for them, institutions need to assess the particular characteristics and needs of their own students. That can entail determining the:
- Frequency of emergency loan requests
- Timeliness of bill payment
- Categories of requests for financial resources being received
- Number of students with financial holds on their accounts
- Loan default rate for graduates.
Having this data in hand at the outset “will help ensure that the program focus is timely and relevant,” according to the COHEAO report.
Below are the five “most prevalent” financial literacy program models that, according to COHEAO, have achieved success.
Classroom-based programs are one approach taken at Howard University. The historic Washington, DC institution developed its first financial literacy curriculum back in 1999, according to Debby Lindsey-Taliefero, an economics professor there who has been intimately involved in the school’s financial literacy efforts. One challenge with classroom-based programs is customizing content to individual students’ needs, she says.
Howard’s pioneering efforts to tackle the financial literacy challenge came to the attention of Congress in 2002, the year then-president H. Patrick Swygert was asked to testify at a hearing held by the Senate Banking Committee.
“I truly believe that, as educators, we have an inherent obligation to educate, nurture, train and prepare our students for life’s many challenges,” including the financial ones, he testified. Swygert’s testimony touched on the degree to which minority students are at greater risk due to the effects of long-term economic stress in their communities.
Financial literacy education efforts at Howard today occur in multiple settings — as sections of business and economics classes, as workshops and as a component of freshman orientation programs. At present, however, individual efforts evolve from a decentralized structure.
Across the country in Orange County, CA, to attack the challenge in a coordinated fashion, Chapman University recently approved funding for a full-time Director of Financial Literacy. The impetus to establish the position came from Chapman’s Vice Chancellor for Enrollment and Financial Aid.
“The financial aid people are very concerned that our students are successful in this area,” says Harold Hewitt, Jr., Chapman’s Executive Vice President and Chief Operating Officer.
Expanding the audience
A faculty member of Chapman’s Argyros School of Business & Economics has already incorporated tools from the Better Money Habits website into an accounting class for non-accounting majors. The university’s goal for the new financial literacy director is to expose many more students to the subject matter. How that is accomplished will be up to the person hired for the job, Hewitt says. It will probably involve a wide variety of instructional formats.
The enumerated skills and experience required of the successful job candidate reveal one key premise of the effort: Students reject attempts to force-feed them a financial education. There will be no mandatory workshops, classes or any other form of instruction. Also, “We’re trying to get away from the ‘come to this meeting and we’ll give you a free pizza approach,’” Hewitt says.
The job will be given to a highly creative person with an ability to connect with students via social media. “The person is going to have to sell the relevance of this material,” he explains.
Tips for success
Following are some general tips on connecting with students to create that “sales” opportunity:
- Begin with a task force. Gaining buy-in for a substantial financial literacy effort requires involving all constituencies in a collaborative effort to build the program from the start. Those include administrative leadership (ideally including the president or provost, or a representative from those offices), student affairs, financial aid, career services, library, alumni affairs, faculty and student leaders.
- Harness competitive instincts. Competitions and contests to promote participation in learning opportunities can take many forms and be fueled by social media. Examples include having student teams compete for the greatest number of students recruited to participate in a financial literacy event, and awards to individuals who develop the most creative solution to a financial challenge.
- Seek external partners. Businesses in your area may see benefit in sponsoring financial literacy events and publicizing them broadly as part of their community service awareness program. Leveraging such resources both for financial and publicity support can build student awareness and engagement. In addition, seek out free resources offered through financial and other institutions, such as $tart with Change, Higher One’s online community aimed at helping students with money management.
- Recruit prominent advocates. Find students, university staff and community leaders who many students respect, and who are passionate about financial education, to serve as publicists and cheerleaders for your program.
As with any substantial undertaking, the effectiveness of a financial literacy promotion effort can be improved over time. That requires establishing performance metrics at the outset so that the necessary data can be gathered and analyzed after sufficient time has elapsed. Indicators of success can range from something as basic as program participation, to reductions in student loan default rates.
Whatever metrics are used, patience, persistence and tactical adjustments are essential. “You have to be in it for the long haul,” says Howard University’s Lindsey-Taliefero.
Given the high stakes, progress and ultimate success may be the only acceptable outcomes for all concerned. The good news is excellent resources are available to help make it happen.
Bringing Relevance to Financial Education
It takes a lot of knowledge to become financially literate — but it doesn’t need to be absorbed in one sitting. For example, most students will, justifiably, be more interested in debt management tactics than estate planning.
That’s the principle behind BetterMoneyHabits.com, a free interactive multimedia website powered by Bank of America in partnership with Khan Academy. “The site works because people access the information when it’s relevant to them,” notes Andrew Plepler, leader of the bank’s social responsibility efforts.
One of the main goals of the website is to “connect information to people's goals and situations — so information is easily accessible when and where people need it.”8
Many of the bank’s financial centers employ personal finance experts who can serve as a resource to colleges and universities in their financial literacy promotion efforts. Bank of America’s commitment to this cause stems from its overall mission to “make financial lives better,” Plepler says.
For more information about millennial money matters and insights into the “money mindset” of many parents of millennials, check out the latest Bank of America/USA TODAY Better Money Habits Millennial Report. http://about.bankofamerica.com/assets/pdf/bmh-millennials-report-spring-2015.pdf
1The Institute for College Access & Success, “Student Debt and the Class of 2013,” November 2014.
3Great Jobs, Great Lives: The 2014 Gallup-Purdue Index Report
4Lewis Mandell, Ph.D., The Financial Literacy of Young American Adults: Results of the 2008 National Jump$tart Coalition Survey of High School Seniors and College Students, 2009.
5COHEAO, Financial Literacy in Higher Education: The Most Successful Models and Methods for Gaining Traction, March 2014.
6Lindsey-Taliefero et al., “A Review of Howard University’s Financial Literacy Curriculum,” American Journal of Business Education, 2011.
7Money Matters on Campus: How College Students Behave Financially and Plan for the Future. Study sponsored by Higher One and conducted by EverFi, 2015.
- A lack of financial knowledge can result in student money problems, which correlate with higher dropout and loan default rates.
- Increasingly, colleges and universities are taking on the mission of helping their students achieve financial literacy.
- Successful financial literacy programs range from interactive online programs to game-based education to individual counseling.