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Financial literacy and student debt

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  • Nikolaos Artavanis
  • Soumya Karra

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.

Suggested Citation

  • Nikolaos Artavanis & Soumya Karra, 2020. "Financial literacy and student debt," The European Journal of Finance, Taylor & Francis Journals, vol. 26(4-5), pages 382-401, March.
    • Handle: RePEc:taf:eurjfi:v:26:y:2020:i:4-5:p:382-401
    DOI: 10.1080/1351847X.2019.1711435
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    Cited by:

    1. Elena Lagomarsino & Alessandro Spiganti, 2023. "Risk Aversion and the Size of Desired Debt," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 9(1), pages 369-396, March.
    2. Łukasz Kurowski, 2021. "Household’s Overindebtedness during the COVID-19 Crisis: The Role of Debt and Financial Literacy," Risks, MDPI, vol. 9(4), pages 1-19, March.
    3. Gerrans, Paul, 2021. "Undergraduate student financial education interventions: Medium term evidence of retention, decay, and confidence in financial literacy," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    4. Md. Faruk Abdullah & Muhammad Nazmul Hoque & Md. Habibur Rahman & Jamaliah Said, 2022. "Can Islamic Financial Literacy Minimize Bankruptcy Among the Muslims? An Exploratory Study in Malaysia," SAGE Open, , vol. 12(4), pages 21582440221, November.

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