Throw Me a Financial Line, I’m Drowning- Incorporating Financial Literacy in Your FYE Program

1. Throw Me a Financial Line, I’m Drowning- Incorporating Financial Literacy in Your FYE Program Linda Fossen, Associate Vice President for Enrollment Planning linda.fossen@utb.edu Julie Ann Larson, Professor The University of Texas at Brownsville/Texas Southmost College Brownsville, Texas julie.larson@utb.edu

2. Financial Literacy Defined Financial literacy is the ability to make informed decisions and judgments regarding the use and management of money.

3. College Students’ Financial Literacy-the Grim Statistics • The Third Annual Back-to-School Survey from Capital One (July 29, 2003) found that: • Eighty-seven percent of college students and ninety percent of high school students rely on their parents for financial guidance. • Ninety-eight percent of college students and ninety percent of high school students say their learned about money management thorough their own experiences with money. • Seventy percent of college students surveyed say their parents have not given them tips or advice about spending money wisely. • Seventy-two percent of college students have a regular full-time of part-time job. • College students borrowed in the 90s what they did in the 60s, 70s, and 80s combined. • Bankruptcies filed by those 18-25 were 150,000 in 2000, a ten-fold increase in five years.

4. Grim Statistics (continued) • A 2001 credit card usage analysis by Nellie Mae found that: • Eighty-three percent of undergraduate students have at least one credit card, a twenty-four percent increase over 1998. • Twenty-one percent of undergraduates who have credit cards, have high-level balances between $3,000 and $7,000- a sixty-one percent increase over the 2000 population. • Those who attended private, four-year colleges burrowed most (average of $21,000), followed by those who attended public four-year colleges (average of $17,000), next were those who attended vocational/technical schools (average of $15,000) and those borrowing the least attended public two-year institutions (average of $8,000). • Students attending graduate school borrow, on average, an additional $31,700 beyond their undergraduate borrowing, an increase of fifty-one percent since 1997. • Seventy-two percent of the respondents report having used credit cards to help finance their education.

5. Grim Statistics (continued) • According to the Cambridge Consumer Credit Index, sixty- four percent of people with educational loans said that the loans prevented them from making other major purchases such as a house or a car. • The 2004 Student Monitor Financial Service Study shows that college students on average earn $4,500 per year- this is in addition to an average of $267.00 a month that sixty-four percent of students receive from home.

6. Grim Statistics (continued) • Jump$tart Coalition 2002 Personal Finance Survey • 2002 National Benchmark Study of 4,024 high school seniors. • Average score was fifty percent- a failing grade. • Sixty-eight percent of high school students received failing scores. • Of the student surveyed, only fifteen percent said that they had taken a portion of a course (at least once a week) in money management or personal finance. • Thirty-five percent said they were either “not too sure” or “not sure at all” about their ability to manage money. • National Endowment for Financial Education (NEFE) National Financial Literacy Survey • Savings are down and bankruptcies are up. • Fifty-five of college students acquire their first credit card during their first year of college, and eighty-three of college students have at least one credit card. • Graduating students have a average of $20, 402 in combined educational and credit card balances. • Twenty percent of graduating college students have $10,000 or more in non-school related credit card debt. • Twenty percent of college students with credit cards roll over debt each month.

7. Why College Students’ Financial Skills Matter • Credit usage is high. • A recent study at Iowa State University found that the average college student owned three credit cards, with an average balance of $1,000. • Most respondents said that they didn’t feel like they were spending real money when they used credit cards or student loan funds. • Fifty-eight percent were unhappy about the size of their loans and fifty-five percent worried about whether they could make the payments. • University administrators state that they lose more students to credit card debt than to academic failure. • In light of these statistics, Citibank believes it’s critical for young people to develop financial literacy skills early in their college career. The college years are an opportunity for students to learn about personal management and responsibility.

8. Why College Students’ Financial Skills Matter (continued) • Spending habits affect a lifetime • Most high school students have spending money either from earnings or allowances. But with little need to pay for living expenses, many teens develop spending habits that become unrealistic when they must support themselves. • Once young adults become accustomed to high spending lifestyles it can be hard for them to develop new habits that contribute to long-term financial well-being. • In a recent survey conducted at Iowa State University, over forty percent of the students between the ages of 16 and 22 said they would buy a pair of jeans (or something similar) they really wanted even if they did not have the money to pay for it. More than twenty-two percent said that they would pay for it with a credit card.

9. Why College Students’ Financial Skills Matter (continued) • Current financial literacy is low. • The low level of financial literacy has attracted a great deal of attention. • Federal agencies, most notably the Federal Reserve and the Treasury, have formed departments, research groups and even inter-agency task forces to address problems related to financial literacy. • Numerous studies and surveys have been done to measure and track financial literacy among consumers of all ages and in many countries. • Virtually all studies and surveys come to the same conclusion- financial literacy is unacceptably low and is showing little improvement. • Inadequate knowledge of financial literacy may lead to student loan default.

10. Student Loan Default-Help Me, I’m Drowning • Graduation • In a study of California borrowers, failure to complete the academic program was one of the strongest predictors of defaults among all types of students. (Woo 2003) • In a study of Texas A&M University students, borrowers who did not graduate had a nearly fourteen percent default rate while borrowers who did graduate had a less than two percent default rate. The study further indicated that borrowers who obtain degrees have a low default rate no matter what the type of degree. (Steiner and Teszler 2003) • Poor academic performance is the number one reason for student departure and departure before degree completion is the number one reason for loan defaults. (Vockwein and Cabrua 1998) • To the extent that graduation opens employment opportunities and raises earnings, successful retention programs will lower an institution’s default rates. (Knapp and Seaks 1992)

11. Student Loan Default (continued) • Grade Point Average (GPA) • As GPA raises, the probability of default falls. Woo found that a half grade point increase in GPA reduced the rate of default by fourteen percent. (Woo 2002) • A study of borrowers at a two-year public institution found that low GPA (less than 2.0) was associate with a higher default rate. (Christman 2000) • Academically successful students tend to have lower student loans at graduation. (National Association of Student Financial Aid Administrators Study 2003) • Continuous Enrollment • Students who are continuously enrolled are less likely to default than students who drop out. (Podgursky 2002) • Students who withdraw from school for administrative or academic reasons have a higher default rate than students who withdraw for work-related reasons. (Steiner and Teszler 2003)

12. Student Loan Default (continued) • College Major • A college major in a scientific, engineering, or agricultural discipline lowers the default probability by over four percent among two-year, four-year, and university borrowers. (Volkwien and Szelest 1995) • Borrowers who change majors once or twice have lower default rates, whereas those who change majors more than twice have higher default rates. (Steiner and Teszler 2003) • The greater the incongruence between a student’s undergraduate major and his or her current employment, the higher the risk factor for default. (Flint 1997)

13. Student Loan Default (continued) • Attendance Factors • The default rates of borrowers decrease as their length of time at college increases: students enrolled only 1-4 semesters have a higher default rate than students enrolled for a longer period of time, and students with 110 or fewer hours of credit have a higher default rate than students with 111 or more hours. (Steiner and Teszler 2003) • Borrowers who leave school after two to five years have a low default rates whereas borrowers who leave after one year or less default at a rate of fourteen percent. (Steiner and Teszler 2003) • Extending attendance beyond five years has a negative impact on default- undergraduate borrowers who have six or more years between the time they first attended school and their most recent departure have a relatively high default rate. This holds true even among students who are successful at completing their studies; even among borrowers who graduate, those who take six or more years have considerably higher default rates than those who graduate in five years or less. (Steiner and Teszler 2003) • At two-year public institutions, borrowers enrolled for less than two semesters had a higher default rate than those enrolled for longer periods of time. (Christman 2000)

14. Student Loan Default (continued) • Number of hours failed • The more hours which borrowers at Texas A&M University fail, the more likely they are to default later. (Steiner and Teszler 2003) • In a national study of two-year public school students, borrowers who failed any hours also had a higher default rate. (Christman 2000) • Class Level • Students whose last level while enrolled was a freshmen, sophomore, or junior were more likely to default than seniors or graduates, perhaps because seniors are closer to graduation (a college success factor variable known to be associated with lower rates of default) than students at lower levels. (Thein and Herr 2001)

15. Student Loan Default (continued) • “Dorm” Living • In the study of Texas A&M borrowers, it was found that the greater the number of semesters that a borrower spent in a dorm, the lower the default rate. This may indicate greater integration into the institution, which is associated with success, which is in turn associated with loan repayment. (Steiner and Teszler 2003) • Student Employment • The influence of working in college lowers default by seven percent for non-White borrowers, but had no influence on White borrowers. (Volkwein et al. 1998)

16. Throw Me a Financial Line- Solutions to the Crisis • Building Financial Literacy • College is the first chance for many college young adults to make significant decisions on their own. • When young adults learn and practice sound financial skills during their college years, they build a foundation for a lifetime of financial well-being. • College faculty and staff can draw form their knowledge and resources to help students build money management skills that will start them on the path to financial literacy. • Financial education has been shown not only to enhance students’ knowledge levels, but also to have lasting impact on their financial behaviors. • Giving college students a solid grounding in basic financial skills helps them avoid dropping out of college for financial reasons. • Many college students have not received any formal education on how to manage their financial lives. • College administrators are in a great position to help college students learn the financial skills they need to live and work- and earn, spend and save-during school and after graduation. • By providing freshman, sophomores and even juniors – with basic guidelines for managing finances, administrators can help make education in personal financial management part of the college learning experience.

17. Throw Me a Financial Line (continued) • USA Funds to the rescue • USA Funds is the nation’s leading student-loan guarantor. • It is a nonprofit corporation that supports access to education by providing financial and other valued services to those who pursue, provide or promote education. • USA Funds annually guarantees education loans totaling more than $13.9 billion for students and parents throughout the nation. • Life Skills is a life line • For students to survive in school and beyond they must have essential life skills. • Life Skills presents to students the skills they will need to successfully complete their studies in a minimal amount of time and with a manageable amount of debt. • The Life Skills course consists of five independent, yet interrelated instructional modules. Each of these modules reflects a specific instructional goal. • Each module is designed as an one-hour workshop.

18. Life Skills (continued) • Course Overview • Module 1: Get a Grip on Your Finances: Smart Spending for Students. This module is designed to teach students strategies for managing their money wisely while they are in school. • Module 2: Seek Out Financial Aid: Funding Resources and Financial Obligations. This module is designed to teach students strategies for obtaining financial aid and help them grasp the accompanying rights, obligations, and responsibilities. • Module 3: Work Hard But Smart: How to be Successful in School and Graduate on Time. This module is designed to teach students strategies for succeeding in college and completing their degree in a timely manner.

19. Life Skills (continued) • Module 4: Take Control of Your Future: Finishing School and Repaying Your Loans. This module is designed to teach students to set reasonable career expectations, understand the importance of student-loan repayment, and develop strategies that will help them repay their student loans. • Module 5: Now That You Are About to Graduate: Taking Control of Your Life. This module is designed to prepare students for employment, help them live within their means and reinforce students’ loan-payment options, responsibilities, and obligations.

20. Life Skills (continued) • What’s included in each module? • A training manual • A student skills book • PowerPoint presentational slides • Interactive CD-Rom skill building activities for students • A video

21. Life Skills (continued) • Suggested Ways to Use Life Skills • Freshmen seminar programs • Freshmen/transfer orientation • Consumer education • Residence hall programs • Exit counseling • Adult re-entry programs • Summer bridge programs • Student success programs

22. My Favorite Exercise • Needing Vs. Wanting: Do I Really Know the Difference? • Can you distinguish between the things you need to accomplish your goals from the things you merely want? Identify recent purchases of things you need versus things you want. Begin by listing the last 10 purchases you spent money on or purchased during the past week. Then, identify the purchases as either needs or wants by placing an “n” or “w” next to each purchase. Also indicate how much each item cost. • Review your list. Be honest with yourself by answering the following questions: • Did you buy more things that you wanted or needed? • Did you spend more money on things you wanted or needed? • Do you think are more likely to spend money on needs to wants? • Where did you tend to purchase the items on your list? • How much of your spending was a function of “retail therapy”?

23. Challenge Questions • What are goals? A. Things that are nice to have and gratify some desire or urge. B. Necessities for your everyday living such as food, housing, and books for school. C. Desires and plans to achieve a specific outcome. D. Something you think about but don’t accomplish.

24. Questions (continued) • What are needs? A. Things that are nice to have and gratify some desire or urge. B. Necessities for your everyday living such as food, housing and books for school. C. Desires and plans to achieve a specific outcome. D. Something that you think about but don’t accomplish.

25. Questions (continued) • What are wants? A. Things that are nice to have and gratify some desire or want. B. Necessities for everyday living, such as food, housing, and books for school. C. Desires and plans to achieve a specific outcome. D. Something you think about accomplishing but don’t.

26. Questions (continued) • Which of the following is one of the four basic principles you need to know in order to survive financially while in school? A. Have fun now, this is the only time in life you will be free. B. Don’t waste time thinking about money when you don’t have any. C. Use student loans only for the “fun stuff” like a new car or a great trip during spring break. D. Know how to strategically manage where your money goes.

27. Questions (continued) • Which of the following is a credit card DON’T? A. Don’t get a second or third card. One card is enough. B. Don’t pay more than the minimum balance required. C. Don’t pay any attention to the fine print on the credit card application: all credit cards are the same. D. Don’t be afraid to let the credit card company increase your spending limit: the more you can buy the greater your life will be

28. Concluding Thoughts… • When young people head off to college, will they have the personal finance skills necessary to manage their money and plan for the future? • Not according to this presentation. • Not according to the Jump$tart Coalition for Personal Financial Literacy- just ten percent of youth are graduating from high school with any kind of instruction in personal finance. • This leaves young people ill-prepared for the increased financial responsibilities that students take on when they go to college. • New college students are inundated with credit card offers, as they take on student loans, sign leases, and make numerous purchases. They are making decisions that can negatively impact their future in terms of their financial life.

29. Concluding Thoughts (continued) • It is important to keep in mind, when discussing the financial attitudes and skills of today’s college student, that they do face greater financial pressures and responsibilities than students did 15 or 20 years ago. Rising costs of tuition, and other education and living expenses can create a level of financial stress not experienced by previous generations. And society’s general acceptance of credit as a means of paying for goods and services may lead some to develop unrealistic expectations in terms of the life they will be able to lead upon graduation.

30. Concluding Thoughts (continued) • All of these reasons make it all the more critical for college students to receive the basic education they need to put their financial life in perspective and to understand their role and responsibilities in managing their finances to achieve their life goals. • Help me I’m drowning… are you willing to throw your students a financial life line.