Crucial Choices: How Students’ Financial Decisions Affect Their Academic Success Jacqueline E. King October 31, 2005

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  • Crucial Choices: How Students Financial Decisions Affect Their Academic Success

    Jacqueline E. KingOctober 31, 2005

  • Beginning Postsecondary Students National Longitudinal StudyProduced by the U.S. Department of Education National Center for Education Statistics.Nationally-representative sample of 9,000 1995-96 first-time students, followed up in 1998 and 2001.Tracks persistence across institutions.

  • Income Groups Studied

  • Background Characteristics32% of beginning students41% of beginning students53% dependent 90% dependent(34% independent w/ dependents)60% female50% female48% non-white20% non-white44% age 20 or older15% age 20 or older35% married and/or w/ kids7% married and/or w/kidsLow-income Middle- and Upper-income(up to 150% of poverty)(300% of poverty or more)

  • Academic Background64% first-generation 33% first-generation13% alternative diploma3% alternative diploma5% no high school diploma2% no high school diploma56% delayed college entry23% delayed college entryLow-income Middle-and Upper-income(up to 150% of poverty)(300% of poverty or more)

  • Academic Preparation

  • Institution Choices

  • Financing Choices

  • Attendance Choices

  • Average Unmet Need

  • Employment Choices

  • Choices and PersistenceLow-income (63%) Middle- and Upper-income (75%)

  • Work and Borrowing Choices

  • Work and Borrowing Choices

  • Working: Penny Wise and Pound Foolish?Dick works 25 hours per week, takes 5 years to graduate.

    Year 5 Income (25 hrs/week @ $7.50 + summer work) = $10,800Cost of an extra year in college (educational expenses only) = $5,000

    Net gain = $5,800

  • Working: Penny Wise and Pound Foolish?Jane borrows and works 15 hours per week, takes 4 years to graduate.

    Year 5 Income as a graduate = $30,000Total cost of loan (borrowed $10k to work 15 hours per week at 7.25% interest with 10 year repayment) = $14,100

    Net gain = $15,900

  • Worksheet for Dick* Reflects 25 hours/week for 32 weeks and 40 hours/week for 16 weeks.

    Hourly Wage

    $_____/hour

    Earnings*

    1,440 hrs x $____

    Annual tuition + books & supplies

    Net Gain (earnings less tuition, books and supplies)

  • Worksheet for Jane* Reflects 10 hours/week for 32 week over 4 years.** Based on a 7.25% interest rate and standard 10-year repayment plan.

    Hourly wage

    $_____/hour

    Loan amount*

    320 hrs x $____/hr x 4 yrs =

    Loan cost**

    $1,408 per $1,000

    Starting Salary

    Net Gain (salary less total loan cost)

  • ConclusionsFull-time attendance and part-time work are the surest path to a degree.Borrowing can be a productive way to finance full-time attendance and part-time work.Low-income students who borrow and work part time persist at high rates.Even middle-income students choose to work and avoid student loans.

  • RecommendationsIntegrate academic and financial advising.Help students see the long-term academic and financial implications of their choices.Increase grant funding for low-income students--especially who borrow and work.Teach students about personal finance.There is no one-size-fits-all solution.

  • I studied 65% of the total beginning postsecondary student population for this report. I selected students by income and dependency status.

    For income, I used percentage of poverty line so I could account for family size. For a family of four, this would mean an income cut-off of $23,000. For the middle and upper-income group, it would be anyone above $45,000.

    Moderately rigorous curriculum =

    4 yrs of English3 yrs each of math (including Algebra II), social science, and science (including biology, chemistry, and physics)2 yrs foreign languageLow-income students save money by choosing programs of shorter duration--not lower cost.When comparing institutions of the same type, there is little difference in the price of institutions chosen by low-income and middle- and upper-income students.

    After all aid, including loans.Drop out rate for all low-income = 60%Drop out rate for all middle- and low-income = 75% Low-incMid- and Upper-income Borrowed, did not work 1310 Borrowed, worked 1-14 hours58 Borrowed, worked 15+1811 Did not borrow, did not work2121 Did not borrow, worked 1-14 hours68 Did not borrow, worked 15+3742

    Low-incMid- and Upper-income Borrowed, did not work 1310 Borrowed, worked 1-14 hours58 Borrowed, worked 15+1811 Did not borrow, did not work2121 Did not borrow, worked 1-14 hours68 Did not borrow, worked 15+3742

    If so many students are working, and working long hours has been proven to have a negative effect on students academic performance, its important to know if this is at least a wise financial strategy.

    Here are two scenarios that suggest it can be penny wise and pound foolish to work long hours, especially if one is not yet taking out student loans.

    Dick works 25 hours per week every year. As a result, it takes him 5 years to graduate. If he attends a public institution, he comes out about $5,800 ahead using this strategy. If he attended a private institution, hed come out in the red using this strategy. Students seem to understand this point -- a much larger proportion of students at private colleges graduate in four years.Jane borrows a modest amount, and uses the money she borrows to reduce her number of hours at work to 15. As a result, she graduates in four years. Even if we assign all of the costs of her $10,000 loan to her first year out of college, Jane comes out $10,000 ahead.

    I havent tried to make any assumptions about how Janes living expenses might differ from Dicks, but I think assigning all the loan costs to the first year out of college probably makes up for not inflating Janes living expenses.