Financial Literacy and Student Debt: Survey of College Students

Hipolito Davila

Department of Finance, Auburn University, Auburn, Alabama, U.S.A.

hzd0025@auburn.edu

Jitka Hilliard 1

Department of Finance, Auburn University, Auburn, Alabama, U.S.A.

jzh0023@auburn.edu

ORCID: 0000-0001-8777-1331

Draft May 12, 2024

Abstract: The rising cost of higher education has resulted in an increased reliance on student loans to
finance college, leading to student loan debt becoming a major financial burden for many young adults.
Our study, conducted at a major state university in the Southeast, examines student indebtedness and
its correlation with financial literacy. Surveying undergraduate and graduate students in the spring of
2024, we found that students with higher levels of student debt have significantly lower financial literacy.
Students with high debt levels ($100,000 or more) especially lack adequate financial understanding.
Improving financial literacy among high school and college students is imperative to address student
loan debt and promote their financial well-being. This research underscores the importance of informed
decision-making and the need for greater financial literacy among young adults.

Keywords: Financial literacy, Student loans

1
Corresponding author

Electronic copy available at: https://ssrn.com/abstract=4836687

1. Introduction
A significant portion (67%) of Generation Z, today's college students born between 1996 and
2010, cites affordability as their primary concern regarding higher education (Hub). By the
end of 2023, student loan debt had reached approximately $1.727 trillion, equivalent to about
6.31% of the GDP, making it the second largest source of household debt in the U.S.A.
following mortgages (Yannelis and Tracey 2022). According to Student Loan Debt Statistics,
34% of adults aged 18 to 29 report having student loan debt (Hanson 2024), with the
average borrower at a public university accumulating $32,637 in debt to obtain a bachelor's
degree.

Although student loans have undoubtedly increased access to quality education for many
students, not all graduates secure jobs post-graduation that enable them to repay their debts.
Additionally, the availability of student loans has led to increased demand for university
education. Several studies have documented that the expansion of credit through student
loans has allowed universities to raise tuition fees at rates exceeding inflation (Lucca,
Nadauld et al. 2019, Kargar and Mann 2023).

Even before the COVID-19 pandemic, student loan delinquencies were on the rise. Federal
student loans, which account for over 90% of all student loans, do not require a credit check
(Aid 2023). These high-risk loans were guaranteed by the Federal Family Education Loan
(FFEL) Program until its discontinuation in 2010, after which Wall Street banks ceased
securitizing them.

While attempts have been made by the federal government to address the student loan
crisis, progress has been limited. The Obama administration advocated for the government
to cover the average cost of community college and cap loan payments at 10% of a
borrower's income (Administration 2015). During the COVID-19 pandemic, student loan
payments were suspended, and the interest rate was set to 0% from March 13, 2020, until
September 1, 2023, as part of the COVID-19 Emergency Relief and Federal Student Aid (Aid
2023). Although the Biden administration proposed forgiving up to $10,000 in federal student
loans and up to $20,000 for Pell Grant recipients, the U.S. Supreme Court ruled in June 2023
that the president lacked the authority to implement this plan (States 2023). Subsequently,
the Biden administration introduced another plan called Saving on a Valuable Education

Electronic copy available at: https://ssrn.com/abstract=4836687

(SAVE), which allows eligible borrowers to reduce their monthly payments, shorten the
maximum repayment period, and avoid some interest charges.

Default rates on student loans were between 10% and 11.5% from 2016 to 2020. However,
due to COVID-19-related forbearance, the three-year federal student loan default rate was
effectively 0.0% in 2023 (Welding 2023). Nevertheless, with the conclusion of this relief
program, default rates are expected to rise. In fact, 11.2% of adults with student loan debt
report that they could not make at least one payment year-to-date, indicating delinquency.
Additionally, with increasing interest rates, many borrowers, even those current on their
payments, face growing student loan balances.

Defaulting on a student loan has severe financial consequences for borrowers, affecting their
credit scores, making borrowing either impossible or prohibitively expensive, and sometimes
resulting in wage garnishment. In addition, unlike other consumer loans, student loans are
usually non-dischargeable and therefore cannot be eliminated through personal bankruptcy
(Looney and Yannelis 2022). Thus, it is unsurprising that young adults are concerned about
their student loan debts.

In this paper, we investigate student indebtedness among students of a major state

university and its correlation with financial literacy. Our findings are based on a survey
administered to undergraduate and graduate students on the campus of a major state public
university in the spring of 2024.

Our paper contributes to several strands of literature, particularly in the area of student loans
and financial literacy. Numerous studies have shown that student loans increased college
enrollment, especially the enrolment of low-income students (Leslie and Brinkman 1987, Sun
and Yannelis 2016). Some studies (Hansen 1983), however, are less optimistic about the
effect of loans on the enrollment of poorer students.

While previous research has primarily focused on the role of student loans in facilitating
access to higher education and their impact on parental decisions and student behavior
during later high school years, our study offers a different perspective. We examine the state
of student loans across the student population, the characteristics of a typical public
university borrower, and especially how financially literate borrowers are.

Electronic copy available at: https://ssrn.com/abstract=4836687

Financial literacy, the ability to understand and manage one's finances effectively, is
essential for making informed financial decisions. Research consistently shows low levels of
financial literacy among the U.S. population and worldwide (Bernheim 1995, Hilgert 2003,
Lusardi 2008, Lusardi 2011, Lusardi 2014). Empirical studies demonstrate that financial
literacy is strongly associated with various sociodemographic and personal characteristics
such as gender, education, race, age, and income levels, with studies on youth, including
high school and college students, showing particularly low levels of financial literacy within
these groups (Chen 1998, Mandell 2008, Lusardi, Mitchell et al. 2010, Shim, Barber et al.
2010, BenDavid-Hadar 2015, Chan, Huang et al. 2017, Annabi, González-Ramírez et al.
2018).

Inadequate financial literacy has been linked to suboptimal financial decision-making in

several ways. Individuals with low levels of financial literacy tend to have lower wealth, plan
less for retirement, incur higher transaction costs, pay higher interest rates on mortgages,
and are less likely to participate in the stock market (Moore 2003, Campbell 2006, Lusardi
2007, Lusardi 2008, Stango 2009, Christelis 2010, Lusardi 2011, Lusardi 2011, van Rooij
2011, Gerardi, Goette et al. 2013, Lusardi and de Bassa Scheresberg 2013, O'Neill and Xiao
2015).

Lusardi and Tufano (Lusardi and Tufano 2015) examined the relationship between financial
literacy and indebtedness. They found that individuals with higher levels of financial literacy
were more likely to make informed borrowing decisions, resulting in lower borrowing costs.
Moreover, other studies document that financial literacy affects how students perceive their
student loans. For example, Markle (Markle 2019) found that students with higher financial
literacy are more likely to view their student loans positively as an optimal financial decision
and are less concerned about their ability to repay the loan. Family background also plays a
crucial role in students' financial literacy (Shim, Barber et al. 2010, Xue and Chao 2015), with
many students choosing not to borrow due to a lack of understanding of loans, fear of debt,
or underestimation of the value of a college education (Perna 2006, George-Jackson and
Gast 2015, Xue and Chao 2015, McCabe and Jackson 2016, Ackert, Kelani et al. 2022).
Artavanis and Karra (Artavanis and Karra 2021) documented that students with low financial
literacy are more likely to underestimate future student loan payments and, consequently,
are more vulnerable to default.

Electronic copy available at: https://ssrn.com/abstract=4836687

In essence, research indicates that financial literacy is crucial for making well-informed
financial decisions, including student loans. It is imperative for students taking out loans to
grasp both the positive and negative consequences of this decision, understand loan
repayment, and recognize how the loan will impact their future borrowing capacity.

Based on our survey, we find that students with student loans have significantly lower
financial literacy than students without loans. Furthermore, students with high levels of
student debt tend to have even lower financial literacy than those with lower levels of debt.

An alarming discovery is that fewer than 17% of students burdened with high student debt
feel adequately prepared by their major to repay their loans. Consequently, it's not surprising
that they experience significantly more stress due to their debt.

The paper is organized as follows. Section 2 describes the survey administered to the
students, and provides statistics on the collected data, including the statistics on
respondents. Results and regression models are summarized in Section 3. Section 4
discusses the implications of our findings and concludes the paper.

2. Data
The data come from a survey administered to full-time students attending a major state
university in Southeast U.S. with an enrollment of about 31,000 students. The survey was
carried out in March-April 2024. The survey is anonymous and consists of three parts. The
first part covers basic background variables such as gender, age, expected graduation year,
and college.

The second part assesses information about student loans and the students' investment
behavior. We ask whether the student has a student loan and the approximate size of the
loan. We categorize loans into four size groups: under $10,000, $10,000 to $50,000, $50,000
to $100,000, and above $100,000. For the population of students that have a student loan,
we further ask two questions: (1) "Do you feel that major prepared you to pay off your student
loan?" and (2) "How stressed do you feel about paying off the loan?" (1 the least stressed to
10 the most stressed). In this part, we also ask questions about the investment behavior of
students. However, the responses to these questions are not used in this study.

Electronic copy available at: https://ssrn.com/abstract=4836687

The third part tests the financial literacy of respondents. Lusardi and Mitchell designed a
standard set of questions that evaluate the understanding of different concepts of investment
decisions and saving, such as interest rates, inflation, and risk diversification (Lusardi 2008,
Lusardi 2011, Lusardi 2011). These questions are short, simple, relevant in day-to-day life,
capture the understanding of general concepts, and allow for the differentiation of financial
knowledge. Answers to these questions allow to quantitatively evaluate the financial literacy
of respondents. In more recent studies, additional questions were added to surveys. These
questions concern compound interest, mortgages, and bonds.

In this study, we use a set of six multiple-choice questions used by the FINRA Foundation
and administered periodically to the U.S. population. The financial literacy questions are
shown in Table 1.

------------------------------------------ Table 1 ----------------------------------------------

Table 2 shows summary statistics for variables from the survey used in this study. In total,
353 students responded to the survey. The sample is almost evenly divided between males
and females, 45.3% and 54.1%, respectively (about half percent did not disclose their
gender, Panel A). Most students were Caucasian (88.4%), 5.4% Black or African American,
and 4% Asian. Other races were represented collectively by 2.3%. Almost 94% of
respondents were undergraduate students and students of the College of Business (83.0%),
College of Liberal Arts (5.0%) or Engineering (2.8%). The respondents were freshmen
(7.1%), sophomores (8.5%), juniors (45.1%), and seniors (39.4%).

------------------------------------------ Table 2 ----------------------------------------------

Based on our survey data, 26.3% of students (Panel B) report having a student loan. The
majority of respondents with student loans borrow between $10,000 and $50,000 (36.2% of
borrowers), and about 5.7% of students borrow over $100,000 (representing 1.82% in the
overall sample and 1.81% for undergraduate students).

The national average of undergraduate (graduate) students with federal student loans is 29%
and 7.3% from private sources. In our survey, 31.72% of undergraduate students report
having a student loan. This number is comparable with the national average since students
using private lenders are likely to use federal loans as well.

Electronic copy available at: https://ssrn.com/abstract=4836687

Panel C summarizes answers to financial literacy questions. Overall, the performance on
financial literacy questions is poor. Only about 14.5% of respondents answer all financial
literacy questions correctly. Assuming that a financially literate individual is an individual who
answers at least four out of these six questions correctly, only 46% of students are financially
literate. It is comparable to the findings of Artavanis and Karra who estimated a financially
literate student population of around 40% using a survey in a major public university in
Massachusetts ((Artavanis and Karra 2021).

The distribution of correct and incorrect answers is different across questions. The easiest
questions seem to be questions concerning simple interest, diversification, and inflation. For
example, only about one-third of respondents failed to provide a correct answer to the
questions on simple interest, and about half to the questions about risk and diversification,
and inflation and purchasing power. Questions with the least correct answers are questions
about compound interest (36.8%) and bond prices (39.9%). The question about compound
interest requires more mathematical skills and is also used to evaluate the numeracy of
respondents (see, for example, (Almenberg and Widmark 2011) linking financial literacy with
numeracy skills. Question about bond prices requires at least basic familiarity with bonds and
therefore may be difficult, especially for young people from other than business backgrounds.

3. Results
The main purpose of this paper is to evaluate the financial literacy of students with student
loans. Panel A of Table 3 reports the mean of correct answers for financial literacy questions
among students with and without student loans. Students with student loans have, on
average, lower financial literacy than students without student loans. Students with loans
answered, on average, 2.62 questions correctly compared to 3.12 correct answers among
students without student loans. The difference is significant at the 5% level.

------------------------------------------ Table 3 ----------------------------------------------

Panel B shows the financial literacy among a population of students with different sizes of
student loans, their perception of being prepared by their major to pay off the loan, and the
stress associated with having a loan. Students with larger loans tend to have lower financial
literacy than students with smaller loans. The difference, however, is not significant. Students
with higher student loans feel significantly less prepared by their major to pay off their debt

Electronic copy available at: https://ssrn.com/abstract=4836687

and significantly more stressed about their loans. We also observe that students of the
College of Business have significantly higher financial literacy. This observation should not
be surprising since they study business and should be familiar with financial concepts.

To examine how financial literacy affects the likelihood of a student having a student loan, we
estimate a probit regression:

(1) 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1 × 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖 + ∑𝑛𝑛𝑘𝑘=1 𝛾𝛾𝑘𝑘 × 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 + 𝜀𝜀𝑖𝑖 ,

where 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖 takes a value of 1 if a student has a student loan or 0 if the student does not
have a loan. 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖 proxies for the financial literacy of the respondent. We use
two measures of financial literacy: (1) the number of correct answers and (2) a dummy
variable which is equal to 1 if a respondent answers at least 4 out of 6 questions correctly, 0
otherwise. The 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 refers to the characteristics of the respondent disclosed in the
survey. They include gender, race, graduation year, and college. The subscript i refers to the
individual respondent, 𝜀𝜀𝑖𝑖 is a random error term.

Table 4 summarizes the results of the probit regression. Models (1) and (2) use only data on
undergraduate students, and models (3) and (4) use data on all, i.e., undergraduate and
graduate students. The results are consistent across all models and financial literacy
measures. Our main finding is that students with higher financial literacy are significantly less
likely to have a student loan. This result is robust to different measures of financial literacy.
Specifically, the marginal effect of one additional correct answer is associated with a 2.5%
lower probability of having a student loan for undergraduate students and financially literate
undergraduate students are 13.1% less likely to have a student loan.

------------------------------------------ Table 4 ----------------------------------------------

The probit regression also indicates that Black or African American students are significantly
more likely to have a student loan. Specifically, Black or African American students are 28%
more likely to have student debt. This finding may be related to the generally lower income of
minorities. However, we are not able to control for income since students did not report
family income in the survey. Therefore, the effect of family income may be reflected in
variables depicting race.

Electronic copy available at: https://ssrn.com/abstract=4836687

We also find that business students are significantly more likely to have student debt, even
after we control for financial literacy. In fact, students of the College of Business are 16%
more likely to have student debt. Business students have usually good job prospects after
finishing their undergraduate studies. Specifically, 68% of the students from the surveyed
University had full-time employment and 14% continued graduate education six months after
their graduation in 2023. Therefore, taking a student loan to study business appears to be a
rational decision.

4. Conclusion
The escalating cost of higher education has led to an increased dependence on student
loans to finance college education, resulting in student loan debt becoming a significant
financial burden for many young adults.

In our study, we surveyed students from a major state university in the Southeast about
student debt and assessed their financial literacy. Nearly one-third of the students reported
having student debt. We found that financial literacy was significantly lower among students
with student debt, particularly those with high levels of debt (exceeding $100,000). Moreover,
students with higher student loans report significantly more stress about their debt and feel
significantly less prepared by their major to manage their student debt.

These results are concerning as they indicate that some students may not fully grasp the
implications of taking out student loans when they initiate them. Furthermore, they may have
incorrect expectations about their university education. Taking out a student loan is a
complex decision and may be overwhelming, especially for young people. They must
consider the benefits of university education and the expected income after graduation,
balanced against the responsibility of future loan repayments. Students with higher levels of
financial literacy are more likely to make informed decisions and reap the benefits of their
loans. Therefore, it is imperative to prioritize efforts to improve financial literacy among high
school and college students to address student loan debt and promote their financial well-
being.

Electronic copy available at: https://ssrn.com/abstract=4836687

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Table 1: Financial literacy questions
The table shows questions used to quantitatively evaluate the financial literacy of respondents.
Questions are adopted from the National Financial Capability Study administered periodically by
FINRA Foundation to the U.S. population.

Topic Question Possible answers

Risk and Buying a single company's stock a. True
diversification usually provides a safer return than a b. False
stock mutual fund. c. Don't know
d. Prefer not to say

Inflation and Imagine that the interest rate on your a. More than today
purchasing savings account was 1% per year, b. Exactly the same
power and inflation was 2% per year. After 1 c. Less than today
year, how much would you be able to d. Don't know
buy with the money in this account? e. Prefer not to say

Bond price If interest rates rise, what will typically a. They will rise
happen to bond prices? b. They will fall
c. They will stay the same
d. There is no relationship between
bond prices and interest rates
e. Don't know
f. Prefer not to say

Interest rate Suppose you had $100 in a savings a. More than $102
account and the interest rate was 2% b. Exactly $102
per year. After 5 years, how much do c. Less than $102
you think you would have in the d. Don't know
account if you left the money to e. Prefer not to say
grow?

Compound Suppose you owe $1,000 on a loan, a. Less than 2 years

interest and the interest rate you are charged b. At least 2 years but less than 5
is 20% per year compounded years
annually. If you didn’t pay anything c. At least 5 years but less than 10
off, at this interest rate, how many years
years would it take for the amount d. At least 10 years
you owe to double? e. Don't know
f. Prefer not to say

Mortgage A 15-year mortgage typically requires a. True

higher monthly payments than a 30- b. False
year mortgage, but the total interest c. Don't know
paid over the life of the loan will be d. Prefer not to say
less.

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Electronic copy available at: https://ssrn.com/abstract=4836687

Table 2: Descriptive statistics
The table shows descriptive statistics of variables used in the study. Data were collected from
the survey of university students.

Panel A: Demographic variables

Gender Male 45.33%
Female 54.11%
Prefer not to say 0.57%
Race Caucasian 88.39%
Black or African American 5.38%
Asian 3.97%
Others 2.26%
Student type Undergraduate 93.66%
Graduate 6.34%
College College of Business or 85.55%
Engineering
Others 14.45%
Graduation year Freshman 7.07%
Sophomore 8.50%
Junior 45.05%
Senior 39.38%

Panel B: Student loans

Do you have a student loan? No student loans 73.64%
Under $10,000 6.97%
$10,000 to $50,000 12.42%
$50,000 to $100,000 5.15%
Over $100,000 1.82%
Did the major prepare you to pay your Yes 44.55%
loan?
No 23.64%
Unsure 31.82%

Panel C: Financial literacy

Risk and diversification Correct 46.18%
Inflation and purchasing power Correct 54.67%
Bond price Correct 39.94%
Interest rate Correct 64.59%
Compound interest Correct 36.83%
Mortgage Correct 53.82%
All correct 14.45%
At least 4 correct 46.18%

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Electronic copy available at: https://ssrn.com/abstract=4836687

Table 3: Means of variables among different populations of students based on student
loans

Number of correct Students Loan stress

financial literacy feeling
questions prepared
Panel A: Student loans (All student population)
No student loans 3.12
Students with loans 2.62
Difference 0.50**

Panel B: Colleges (All student population)

College of business 3.00
Other colleges 2.15
Difference 0.85***

Panel C: Loan size (only population of students with student loans)

(1) $Under $10,000 2,91 56.52% 4.21
(2) $10,000 to $50,000 2.88 48.78% 5.63
(3) $50,000 to $100,000 2.88 64.70% 6.76
(4) Over $100,000 1.83 16.66% 7.00
Difference (1)-(5) 1.08 39.89%** -2.78**

Panel D: Financial literate (only population of students with student loans)

Yes 4.79 50.00% 4.71
No 1.47 41.67% 5.68
Difference 3.32*** 8.33% -0.97*

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Electronic copy available at: https://ssrn.com/abstract=4836687

Table 4: Likelihood of a student having a student loan
The table reports the results of probit regression according to equation (1):

𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽1 × 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖 + ∑𝑛𝑛𝑘𝑘=1 𝛾𝛾𝑘𝑘 × 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖 + 𝜀𝜀𝑖𝑖 ,

where 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖 _takes a value of 1 if a student has a student loan or 0 if the student does not have
a loan. 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖 proxies for the financial literacy of the respondent. We control for
gender, race, graduation year, and college.

Undergraduate students All students

Model (1) Model (2) Model (1) Model (2)
Female 0.0855 0.0553 0.0281 0.0007
Black 1.0322*** 0.9974*** 0.9569*** 0.9372***
Asian -0.6351 -0.6330 -0.7108 -0.7034
Graduation year -0.1460 -0.1453 -0.1388 -0.1375
College of business 0.5730*** 0.5664*** 0.6035*** 0.6063***
Correct answers -0.0852*** -0.0900**
Financial literate -0.4654*** -0.4820***
Const. -0.5520 -0.5737 -0.5473 -0.5860
N 331 331 353 353
Pseudo R2 0.0665 0.0753 0.0670 33.20
Chi2 27.52 31.13 29.33 0.0758

16

Electronic copy available at: https://ssrn.com/abstract=4836687