Financial literacy and student debt

Nikolaos Artavanis and Soumya Karra

The European Journal of Finance, 2020, vol. 26, issue 4-5, 382-401

Abstract: Using a large sample of over 1000 students from a major, land-grant, public university in Massachusetts, we examine the financial literacy level of college students, and its implications on the repayment of student debt. We find low levels of financial literacy (39.5%), particularly among female (26%), minority (24%) and first-generation (33%) students. Based on survey responses, we show that students with a deficit in financial literacy are more likely to underestimate future student loan payments; 38.2% of low-literacy students underestimate future payments by more than $1000 annually, while high financial literacy reduces the probability of significant payment underestimation by 17–18 percentage points. Furthermore, we find evidence of a financial literacy wage gap as students with low financial literacy expect significantly lower starting salaries than their high-literacy peers. As a result, low-literacy students are more vulnerable to unexpected, adverse shocks on their payment-to-income ratios that can impair their future creditworthiness and undermine their ability to service debt post-graduation.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:26:y:2020:i:4-5:p:382-401

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DOI: 10.1080/1351847X.2019.1711435

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