College Seniors' Personal Finance Knowledge and Practices
Markovich, Carl A., DeVaney, Sharon A., Journal of Family and Consumer Sciences
Abstract: A survey of 500 randomly selected college seniors at a large Midwestern university was conducted to learn about knowledge of personal finance and financial practices. Seniors in the School of Management were the most knowledgeable. Seniors with three or fewer credit cards tended to have smaller outstanding balances and were more likely than seniors with four or more cards to pay credit card bills in full each month. Most students agreed that a personal finance course would be of benefit.
Educators, financial counselors, and others have expressed concern about the ability of college students to manage their personal finances "Most recent grads strike out into the real world with no plan for making money, a highly developed sense of spending money, and a poorly developed sense of saving it" (Lowell, 1995, Preface). Students have been cautioned about the nightmare of an enormous debt load from credit cards and student loans (McEldowney, 1994).
In contrast, credit card issuers have found that targeting students pays off. New customers arrive on campus each semester; 67% of new credit card holders stick with their first card; and credit card companies say students remain less of a statistical risk than the general population (Vega,1995). With these concerns in mind, the current study was developed to examine the financial knowledge and financial practices of college seniors at a large Midwestern university.
Review of Literature
The difference in wages paid to college and high school graduates is an important incentive for obtaining a college education. In 1994 college graduates one to five years out of school averaged $12.93 in hourly wages compared to $7.48 for high school graduates who were also one to five years out of school (Phillips, 1996).
Moreover, salaries of college graduates vary by academic major, with pharmacists and engineers expected to receive the highest salaries and the sharpest increase in salaries (Sharpe, 1994).
Many college graduates will be faced with paying off student loans accumulated while obtaining their education. Failure to repay loans damages one's credit history and cheats other students of the opportunity to obtain a loan (Leonard, 1993). According to the U.S. Department of Education, the volume of student loans rose from $12.3 billion in 1990 to $23.1 billion in 1994 because of more borrowers and, in some cases, larger loans.
Since the Education Department began reporting default rates in 1988, the all-time high default rate of 22.4% was recorded in 1990. The most recent data shows that the 1994 default rate was 10.5%. "Nationally the default rate has dropped because rules now allow wages to be garnished or tax refunds withheld from defaulters" ("Defaults on Student Loans," 1997, p. A10).
There is a strong possibility that graduates will have outstanding credit card balances to pay. Howell and Howell (1995) found that a small but growing proportion of Mississippi college students were "in over their heads." Ruth Susswein of Bankcard Holders of America says, "There is no statistic that shows the problem as it truly exists. If your parent pays the bill, you're not showing up in the credit card company's files as having a problem" (Vega, 1995, p. 13).
If new graduates are coping with student loans and credit card balances, they may look for ways to minimize expenses. If they are not used to handling their own insurance (K. R. Sullivan, personal communication, April 19,1995), they may be tempted to cut corners on renter's, disability, health, and/or auto insurance. Graduates may be unaware of the need to establish an emergency fund of a few months' pay to guard against interruptions in income or other unexpected problems (Reese, 1991).
Financial advisors recommend young professionals save regularly, even in small amounts, to enable them to accomplish short- and long-term goals such as the purchase of a home or retirement. …