The financial decisions which students make during their college years can follow them into adult life. The decisions they make regarding how they handle their finances can also influence how they deal with their future finances. Thus it is important for students to learn to handle their finances responsibly from the time they enter college. Not only can their early mistakes cost them in the long term but are likely to establish patterns of financial mismanagement which they will repeat.
The National Endowment for Financial Education funded a landmark longitudinal research study conducted by the University of Arizona. The Arizona pathways to life success for university students (APLUS) resulted in some interesting findings. It showed that of the over 2000 students who took a financial literacy test, most reached a failing grade of just 59%, stressing the need for more emphasis to be placed on preparing students to deal with monetary responsibilities.
The study points out that college students have “grown up in an era of lenient attitudes to debt and increased consumerism” but concludes that it is critical that students learn to take an active and responsible role in managing their personal finances.
APLUS showed that there are three key factors which determine if a student is likely to avoid financial problems when handling their college finances. The most influential factor is the way in which parents teach their child about finance whilst bringing them up.
Parental involvement can influence the way the student views their own financial planning. Even if a parent has made irresponsible financial decisions these can be used as examples to teach the child to follow a more responsible path.
The two other key factors which influence a students financial dealings are formal finance teaching in high school, and if the student has work experience. This is borne out by the students who engage in work study programs handling their money more responsibly in college.
The study also revealed that of the students studied 72.5% of them had engaged in risky financial dealings in the previous six months, rather than finding a less costly alternative. Risky financial decisions included using pay day loans; borrowing on credit cards; failing to pay credit card balances; making late payments; maxing out credit cards; and using one credit card to pay another.
If these patterns of behaviour continue then they are more likely to be repeated throughout the course of the student’s adult life, thus leaving them constantly trying to catch up on debt and less likely to establish responsible savings.
A study by Sallie Mae revealed that only 17% of students pay off their monthly balance in full, thus already find themselves subject to paying interest which can accrue and lead to difficulties in clearing credit card debt.
A recent amendment introduced by the credit card reform act has made it more difficult for students to access credit cards unless they have a verified income or co-signer, and parents are showing reluctance to co-sign for credit which may help to reduce the dependence on credit which students previously developed.
The findings of APLUS are helpful in illustrating that more formal teaching of finance in schools is needed and that encouraging the student to take on part time work has great benefits. The key message is undoubtedly that parents need to discuss and educate their children more in finance and how to deal with it responsibly.