Study Examines How Students' Financial Behavior Is Formed, and How It Affects Their Future

By Beckie Supiano (July 8, 2009)

For most traditional-age students, beginning college marks a new level of financial independence. It’s a time when key financial habits are formed, but relatively little is known about how that happens or what impact those habits have on a student’s future. A new longitudinal study aims to find out.

The study, "Arizona Pathways to Life Success for University Students," is following a group of 2,098 University of Arizona freshmen from the start of college onward to see how financial attitudes and behaviors developed in early adulthood relate to overall well-being and success.

The sample of students, all of whom began college in the fall of 2007, is fairly representative of their overall class, though women, in-state students, and minority groups are slightly overrepresented, and the group’s average GPA is slightly higher than that of their peers.

If the project receives enough financial support, it will continue until the students are in their 40s, says Soyeon Shim, a University of Arizona professor of family and consumer sciences, and the study’s lead investigator. That would enable the researchers to trace connections between the participants’ financial attitudes and behaviors and their overall well-being until they reach an age where most of their large financial decisions have been made.

One hypothesis the researchers plan to test is whether the financial relationships students have with their parents predict their financial relationship with a romantic partner later in life, she says. The study is interdisciplinary, bringing together insights from consumer sciences and developmental psychology.

“Money plays a central role in every aspect of what kids do,” Ms. Shim says, “and yet we haven’t spent time thinking about what this means.”

The first set of data was collected in the spring of 2008, during the students’ second semester. At that time, the students had an average credit-card debt of $169, average educational debt of $2,046, and average other debt of $512.

The research focused largely on the students’ financial habits and how they formed—finding that parental teaching was particularly important.

The researchers created a statistical model to assess how parental teaching, work experience, and high-school financial-literacy courses affected students' behavior. They found that parental teaching had a greater impact on students’ financial relationships with their parents, their own satisfaction with their financial behaviors, and their financial behaviors themselves than did the other two combined.

“Parents have a wonderful role to play in helping kids in this transitional time,” says Joyce Serido, an assistant research scientist and the study’s project manager. In fact, the researchers are encouraging the university to include a session in freshman orientation for parents on talking with their children about money.

The finding about parents is an encouraging one, Ms. Serido says, because their skills can be improved. And, she says, the research does not show a strong connection between parents’ income and students’ financial behavior. “It’s not about how much money you have, it’s how you manage it.”

But the findings aren’t all bad for students who don’t get good financial training at home, since having a job and taking financial-literacy courses do help, Ms. Serido says. “The more ways you get the good message, the more likely you’ll get results.”

Handling Money

On average, students in the survey reported that they had a “moderate understanding” of finances. They also reported having more financial knowledge than their peers. And when given a set of 15 true-or-false financial questions, they answered an average of 59 percent correctly.

The survey asked students about how they budget, borrow, save money, and pay bills. Based on the students’ responses, their behaviors were grouped into “positive” or “risky” categories. Risky financial behaviors included not paying bills on time, maxing out credit cards, and taking out payday loans. More than 70 percent of respondents reported engaging in at least one risky behavior in the last six months, and students who engaged in one risky behavior were more likely to engage in others. In particular, those who didn’t pay bills on time were more likely to not make full payments on credit cards, and those who maxed out their credit cards were more likely to take out a payday loan.

When it came to handling financial difficulties, the study found that 82 percent of the students used nonrisky strategies like cutting back spending on entertainment and food to cope with short-term money problems. Eighteen percent of students reported using a strategy the researchers deemed risky, such as reducing their course load, taking out a payday loan, or using one credit card to pay off another.

Over all, student respondents reported moderately high levels of well-being in their relationships with their friends and parents, health, academics and finances, but those who engaged in risky financial behaviors reported lower average levels than the rest of the sample. Only 73 percent of students who reported a risky financial behavior in the last six months said they were very likely to graduate from college, compared with 89 percent of those who did not engage in such behaviors.

Next Steps

Originally, the researchers planned to wait until the students’ senior year to collect their next round of data. But then the recession hit, and they realized they had an unexpected opportunity to measure its impact. An additional survey was given to some of the students in the spring of 2009, and those results should be released in the fall.

Also this fall, the researches will have a group of 100 of the students take a financial-education course to see whether that affects their behavior. All of the 2,000 students who can be reached will participate in a follow-up survey during their senior year.

Based on the first round of findings, the researchers suggest that parents should be better informed about how financial literacy and the example they set at home can contribute to their children’s success. They also advocate having financial-literacy programs in high schools focus on how money management affects overall well-being. And they suggest that high schoolers work as a way to learn financial lessons, though they caution that if teens work too much it can hurt their academic performance.

Support for the study comes from the National Endowment for Financial Education in partnership with the University of Arizona and the Take Charge America Institute for Consumer Financial Education and Research.

Source: http://chronicle.com/article/Study-Examines-Students/47358