The Role of Community Colleges in Promoting Financial Literacy: A Proposed Model. William L. Black, Ph.D., CPA, Raritan Valley Community College

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1 The Role of Community Colleges in Promoting Financial Literacy: A Proposed Model William L. Black, Ph.D., CPA, Raritan Valley Community College Abstract Financial impediments to success in college are a growing concern among college administrators, scholars, governmental agencies, and policymakers. Many deficiencies with regard to financial matters, such as poor budgeting skills, lack of knowledge of financial aid resources, working too many hours while enrolled in college and poor credit management have contributed to low persistence among community college students. This paper proposes a model for community colleges to follow in addressing the problem of financial literacy. Elements of this model includes requiring students to take a personal finance course as part of their general education requirements, staffing advising/counseling departments with financial counselors, infusing financial education into freshman orientation programs, collaborating with local business to deliver financial workshops and seminars, engaging students to promote financial literacy, and developing college web sites to provide financial education to students. Introduction Financial impediments to success in college are a growing concern among college administrators, scholars, governmental agencies, and policymakers. College students today face increasing financial pressures as they endeavor to balance study, work, family, and planning for their futures. Lyons (2003) found that one in three students reported his/her financial situation was likely or somewhat likely to affect the ability to complete a college degree. This paper will examine some statistics regarding financial barriers to success faced by many community college students, and will discuss government initiatives to improve financial literacy among young Americans. Best practices at colleges and universities with regard to financial education will be discussed, and a model will be proposed for how community colleges might address the problem of financial literacy among its students. Growing Financial Stresses During College In a study performed by the Community College Survey of Student Engagement (CCSSE), 45% of community college students participating in the survey indicated that finances were critical to their continued enrollment in college (Cooper, 2010). As a result of the financial

2 pressures many students face, 45% of students attending 4-year colleges work more than 20 hours per week. Among those attending community colleges, 60% work more than 20 hours, with 25% working more than 35 hours per week (Harnisch, 2010). According to the Public Agenda (Johnson & Ott, 2009), the leading cause of students leaving college is the inability to balance work with college study. The increasing cost of a college education combined with decreasing grant aid has forced many students to rely on employment to meet their college expenses. However, in their Institute of Higher Education report, Cunningham and Santiago (2008) point out that many students have an aversion to borrowing, quite often relying on employment income to cover college costs so as to avoid debt after graduation. Students at community colleges were found to be less likely to borrow than their counterparts at other institution types. Cunningham and Santiago also found that community college students who chose not to borrow to fund their education were more likely to leave college without a degree than those who did borrow. According to a National Center for Education statistics report (U.S. Department of Education, 2008), an estimated two million students enrolled in college who were eligible for Pell Grants in 2007 did not apply for them. A study by the Institute for College Access and Success (2009) found that two-thirds of those taking out private loans did not exhaust more affordable and flexible federal financial aid first. It can be argued that a greater understanding of the appropriate ways to use debt to finance one s education, versus relying on current income, may serve to increase graduation rates among community college students. Financial education initiatives at community colleges should endeavor to inform students and parents about the right balance of debt versus the benefits of a college education. There are some disturbing trends regarding inappropriate uses of debt among college students today. Recent studies have shown that the median credit card debt for college freshmen 2

3 has tripled from 2004 to 2008, while graduating seniors carried an average of over $4,000 in credit card debt in 2008 (Harnisch, 2010). Many used their credit cards to charge tuition and other direct education expenses. Thirty percent of student credit card holders in 2008 put tuition on their credit cards, and 92% charged other direct education expenses such as text books, schools supplies, etc., instead of using less expensive financial aid to cover these expenses. Those who used credit cards to charge direct education expenses averaged $2,200 of education charges in 2009, almost double the level from Undergraduate students averaged 4.6 credit cards each in 2009, and only 17% paid their credit cards off each month (Sallie Mae, 2010). It is clear that students need to develop budgeting skills to properly plan their education costs. Gutter and Copur (2011) surveyed nearly 16,000 college students ages 18 and over from 15 college campuses in the U.S. and found that 52% did not budget their expenses, and 48% reported no savings. The percentage of students who maxed out on their credit cards was 13%, and 28% made late payments on credit cards. Only 31% paid off their credit card balances in full each month. Two-thirds of college seniors who graduated in 2010 carried student loan debt, with an average balance of $25,250, a 35% increase from An estimated 22% of this debt was composed of private loans (Reed, 2011) issued by private banks and lenders. Considered one of the riskiest forms of borrowing for college, most private loans have variable interest rates that are highest for those who are least able to pay off the loans. Furthermore, these loans lack the consumer protections and flexible payment options of federal loans. The combination of credit card debt and private borrowing to finance college puts college students at greater risk for financial problems after graduation. 3

4 The Jump$tart Coalition for Personal Financial Literacy is a non-profit organization that consists of a coalition of over 150 major corporate, non-profit, government, academic, and other entities that share an interest in advancing financial literacy among students from early childhood through college. This organization started measuring financial literacy among students in 1997 and has since published results of biennial surveys where students are queried on the basic principles of personal finance. Results of the latest survey in 2008 showed that many college students lack basic knowledge in finance. The percentage of questions answered correctly by students in this survey is detailed in the table below. Based on the results of this survey, the Jump$tart report concludes that 75 percent of young students lack the basic skills needed to make good financial decisions (Mandell, 2008). Table 1: Percentage of 2008 Jump$tart Survey Questions Answered Correctly Percent High School Seniors 48.3 College Students 62.0 College Freshmen 59.4 College Seniors 65.0 A Government Call to Action Recognizing the problem of financial literacy among the nation s youth, federal and state government agencies have introduced a significant amount of legislation and initiatives to promote financial education and increase financial literacy. The United States Government Accountability Office (2004) defines financial literacy as... the ability to make informed judgments and take effective actions regarding the current and future use and management of money. 4

5 The President s Advisory Council on Financial Literacy (2008) defines financial education as: the process by which people improve their understanding of financial products, services and concepts, so they are empowered to make informed choices, avoid pitfalls, know where to go for help and take other actions to improve their present and long-term financial well-being (p. 35). In 2003, Congress created the Financial Literacy and Education Commission, which serves as a central hub for over 20 federal agencies that promote financial education. In 2006, a national strategy was developed (Financial Literacy and Education Commission, 2006) that addressed specific problem areas, including saving, budgeting, home ownership, consumer protection, and developing and maintaining credit. The Commission also identified targeted sectors for financial education, including seniors, unbanked and multicultural populations, K-12 and post-secondary students. With regard to post-secondary students, the strategy called on colleges and universities to find ways to raise financial literacy levels with the objective of helping students avoid financial hardship due to the mismanagement of credit and money. The national strategy provided a framework to raise financial literacy through suggested materials, delivery approaches, and dissemination channels. Also in 2003, the President s Advisory Council on Financial Literacy was created. The council created a series of programs to promote financial literacy, entrepreneurism, and responsible consumer practices. Among its recommendations, the council called for mandating financial education for all K-12 students and creating a post-secondary honor roll to recognize colleges that are providing quality financial education to its students (Harnisch, 2010). In 2010, the Obama administration created the President s Advisory Council on Financial Capability, whose mission is to create financial stability in the economy by helping Americans to 5

6 understand financial matters and make informed financial decisions. One of the central themes of the Council is that financial education should take place in American schools. Of critical importance for students is to determine whether and how to pursue higher education and how to finance this investment (United States Department of Treasury, 2010). The Council has noted that while there are abundant financial literacy programs for K-12 and college students, there is little research on the effectiveness of these programs and their impact on financial behavior. At the state level, many states have mandated financial education as part of K-12 curriculum requirements. While 44 states currently have some form of personal finance content standards in place, only 15 states require a course in personal finance (Harnisch, 2010). Most research on the value of financial education has been at the K-12 level and has largely been inconclusive as to the effectiveness of financial education in improving consumer behavior. A study by Peng and Bartholomae (2007) showed no significant relationship between taking a finance course in high school and investment knowledge and savings behavior later in life, whereas participation in a personal finance course in college was shown to improve these measures. This is not surprising, as most young people make their first decisions regarding borrowing, budgeting, saving, and obtaining credit cards after graduating from high school. Having these hands on experiences in financial matters would serve to reinforce the learning of classroom content. In 2008, the President Advisory Council on Financial Literacy Annual Report (2008) recommended that additional research be conducted into the feasibility of requiring college students to take a course in financial literacy or pass a competency test as a condition of receiving government-backed student loans. In 2012, the Obama administration proposed requiring colleges to report how much students will need to pay for college on top of the financial aid they receive, what they will owe 6

7 after graduation, and whether students who have graduated from their colleges are earning enough money to repay their loans. The intent of this initiative is to allow families to better understand how a college ranks against its competitors on important metrics like graduation rates, what a degree actually costs, and how much debt the student can expect to have after graduation. A one-page shopping sheet would be created under the initiative, where students can readily compare colleges on these metrics. To make the most of this data and to properly plan their finances after graduation, college students will need a solid understanding of debt and budgeting. Financial Education: Best Practices at U.S. Colleges A number of colleges and universities have taken steps to promote financial literacy among its students by employing innovative approaches. Tidewater Community College in Norfolk, Virginia requires all students applying for financial aid to prepare a personal budget showing current income and expenses, along with an estimated future budget for the initial years after graduation. This future budget is to include plans on how the loan will be repaid. This requires students to research the potential salaries of their intended fields in order to develop a repayment plan (Jacobs, 2011). Brigham Young University likewise requires students to file a financial plan with the financial aid office before their loan eligibility is certified and has an advising and counseling structure whereby academic planning and financial planning proceed on parallel tracks (Low, 2009). The University of Arizona has in place a student-run group named Credit Wise Cats whose mission is to educate other students about good spending habits and financial planning. This mission is achieved through group workshops and one-on-one meetings. Iowa State University has also instituted a student-run clinic for financial counseling and uses the internet 7

8 extensively to promote financial literacy. s with weekly financial tips are sent out to students, addressing topics such as obtaining credit, credit cards, managing student loans, and investing, along with information about campus and community financial services and workshops. Over 40,000 people have signed up to receive these tips at the college during a three year period (Oleson, 2004). At Raritan Valley College in New Jersey, a student organization named Students In Free Enterprise (SIFE) enlists qualified faculty and representatives from a local credit union to deliver seminars on budgeting, investing, and managing credit. They have also partnered with TIAA-CREF in their Financially Empowering Gen Y Project, where SIFE teams from across the United States develop creative, sustainable programs that encourage Gen Y members (typically considered those who were born in the 1980s and now range in age from 18 to 32) to take control of their financial well-being. Raritan Valley s SIFE is among 25 competing teams tasked with combining basic economic concepts with an entrepreneurial approach to increase their peers financial aptitude in fun and innovative ways. The club conducts seminars covering topics that range from how credit is established and how to use a credit card, to budgeting basics. The Student Money Management Center at the University of North Texas also runs a web site for financial education and offers one-on-one counseling and group educational sessions targeted at freshmen, graduating seniors, and other groups. These educational sessions cover money management topics such as budgeting, apartment leases, credit cards, credit reports, college and living expenses, car buying, and student loan repayment strategies. The Center works closely with the financial aid office at the university and administers loan programs to help students with unanticipated expenses that threaten their continued enrollment in school (Low, 2009). 8

9 Masuo et al. (2007) at the University of Hawaii at Manoa had a unique approach to designing a financial literacy program at their university. Initially, students were surveyed regarding the types of financial information they were interested in, and faculty and staff involved with financial education or counseling at the university were surveyed on their areas of interest along with their preferred presentation and delivery methods. They found that students were most interested in investing for the future, avoiding credit problems, financial security after graduation, and budgeting income and expenses. Faculty and staff were most interested in budgeting and avoiding credit problems, as well as student loan management and avoiding ID theft. Students and faculty/staff alike preferred to receive financial information as part of a financial aid interview, free food event, as part of extra credit in their classes, as part of the new student orientation program, or on a web site. The authors then went about identifying a team of faculty and staff, and developed programs where students and faculty/staff, based on their survey responses, were matched according to common interests. Financial workshops were developed for new student orientation, freshman seminars, and dormitory programs. Additionally, 12 business curricula were reviewed for relevance and quality of materials, and peer education programs were instituted. In evaluating their financial literacy program, the authors found that participating students gained new financial knowledge and demonstrated greater financial awareness than those students who did not participate. Westchester Community College in New York has created the Center for Financial and Economic Education through a donation from the JPMorgan Foundation. The Center offers financial literacy programs focused on financial planning, budgeting, saving, investing, and managing credit, which is directed at students, faculty, staff, secondary school teachers, and community residents. Southeast Community College in Nebraska also used outside funding 9

10 through the Nebraska Financial Education Coalition, a group of nearly 100 Nebraska organizations working to promote financial literacy, to organize a Money Smart Week for over 340 community college students. Organizations within the coalition, along with college staff, held various events where financial topics were presented. These included a Financial Aid Day where counseling was provided to students on student loans, grants, scholarships, and other financial aid options. Sessions were held on the importance of checking and savings accounts, house and life insurance, and principles of investing. A Budgeting for Food workshop was held, where students learned how to plan meals to save time and money. The Internal Revenue Service and other community volunteers presented tax filing procedures as well as information on the free tax services available, and the student activities staff collaborated with a local credit union to offer a credit counseling session. Various games were held that covered financial education topics, including Jeopardy, Financial Football, and Do You Think Like a Millionaire (U.S. Fed News Service, 2011). A number of colleges across the nation, including Southwestern Oregon Community College in Oregon, use a free online resource from the National Endowment for Financial Education called CashCourse to structure web sites that promote financial literacy. Approximately 146 colleges throughout the nation have created financial education web sites using the customizable CashCourse architecture (U.S. Fed News Service, 2008). A Proposed Model for Community Colleges to Address Financial Literacy Harnisch (2010) posits that state colleges and universities, including community colleges, are in a good position to provide financial education leadership to campus communities. By providing financial literacy programs and services, state colleges can help students understand how to finance college and would serve to foster good spending habits. He also contends that 10

11 state colleges can contribute to their community-based, public missions by preparing a new generation of financially literate individuals. As taxpayer-funded colleges with public purpose missions, state colleges can extend financial education not only to students, but to faculty, staff, and the community at large. In her literature review of financial-aid strategies that community colleges can employ to improve student retention and accelerate the completion of community college degrees, Cooper (2010) identified four strategies that should be considered: 1) provide more intensive financial aid counseling to ensure that students understand the sources of aid available to which they are entitled, 2) offering financial literacy programs to educate students on the importance of finances in making decisions, 3) offering financial incentives to students who complete their programs in a timely manner and earn good grades, and 4) offering emergency aid to those students who encounter financial problems while enrolled at their colleges. Drawing on the studies and best practices cited in this paper, along with this author s personal observations, what follows is a proposed model for community colleges to follow in addressing the problem of financial literacy among community college students: 1. Community colleges were among the first to deliver personal finance courses, as many of their students were in their later 20s and early 30s who had postponed college and were seeking to learn the basics of personal finance (Blanton, 2011). As noted in Peng and Bartholomae s (2007) study, personal finance courses are effective in influencing future financial behavior of graduates, more so than when delivered at the high school level. While academic personal finance courses are offered at most community colleges, there is little enrollment in these classes due to the fact that it is not required in any of the academic degrees offered and is not part of the general education requirements. Most 11

12 personal finance classes are offered in the continuing education (non-credit) departments of community colleges. While the President s Advisory Council on Financial Literacy Annual Report (2008) recommended that additional research be conducted into the feasibility of requiring college students to take a course in financial literacy or pass a competency test as a condition of receiving government-backed student loans, community colleges should endeavor to make a course in personal finance a requirement for all students as part of the general education curricula. 2. While all community colleges have financial aid offices with advisors that help students navigate the many financial aid alternatives, many students do not fill out the required application (Free Application for Federal Student Aid, or FAFSA) for public funds, perhaps because they are unaware of financial aid opportunities or are hesitant to borrow. Furthermore, many students do not exhaust financial aid opportunities before taking out private loans, or they use current income to fund college, often leading to low persistence. Community colleges should strive to integrate financial counseling into services outside of the financial aid office. Financial counselors should be available in the general advising and counseling departments to address matters of poor student performance related to personal financial situations. Applications for admission should request that applicants indicate how they plan on funding their college education, and based on responses to these questions, s should be sent directing students to the financial aid office or to financial advisors as appropriate. 3. Freshman orientation programs should incorporate a discussion on funding sources available for college, along with information on how to take advantage of resources within the college to make sound financial decisions. This information should likewise be 12

13 shared with parents of students, and parents should be encouraged to discuss financial matters with the appropriate college staff. 4. Given their community-based mission, community colleges should reach out to local businesses, such as credit unions, banks, and CPA s, to collaborate on the delivery of financial education directed at students, faculty, staff, and the community at large. Colleges should also reach out to national organizations such as the IRS to present financial topics to the community. With the limited resources that most community colleges have, they should strive to obtain federal and corporate funding to deliver financial seminars, workshops, and student events; similar to the best practices colleges cited previously. 5. Efforts should be made to engage students in promoting financial literacy. This can be in the form of student organizations that provide peer financial counseling to fellow students, as is done in the University of Arizona and Iowa State. Student organizations, such as student government associations or business clubs, can also work with faculty and local businesses to deliver seminars and workshops in financial education, as is done at Raritan Valley Community College. 6. As a condition for financial aid, students should be required to prepare personal budgets showing current income and expenses, along with estimated future budgets for the initial years after graduation, as is done in Tidewater Community College and Brigham Young. These future budgets should include plans on how their loans will be repaid. Financial aid counselors should be made available to help students with this process. 7. Community colleges should develop web sites that promote financial literacy. There are many free online resources to help students with financial aid matters, spending budgets, 13

14 saving, and investing that can be linked into from these web sites. As is done in Iowa State, weekly s with financial tips can be sent out to students to stimulate an interest in financial literacy. Free, customizable resources such as CashCourse can be used to structure web sites promoting financial education. 8. A mechanism should be in place in community colleges to offer emergency aid to those students who encounter financial problems while enrolled at their colleges. References Blanton, K. (2011). Personal Finance Instruction at U.S. Colleges and Universities. Financial Security Project at Boston College. Retrieved from Cooper. M.A. (2010). Student Support Services at Community Colleges: A Strategy for Increasing Student Persistence and Attainment. Paper presented at the White House Summit on Community Colleges October 5, Retrieved from Cunningham, A.F., Santiago, D.A. (2008). Student Aversion to Borrowing: Who Borrows and Who Doesn t. A Report by the Institute for Higher Education Policy and Excelencia in Education, December Retrieved from Financial Literacy and Education Commission. (2006). Taking ownership of the future: The national strategy for financial literacy Washington, DC: U.S. Department of the Treasury. Gutter, M., & Copur, Z. (2011). Financial behaviors and financial well-being of college students: Evidence from a national survey. Journal of Family and Economic Issues, 32(4), Harnisch, T.L., (2010). Boosting Financial Literacy in America: A Role for State Colleges and Universities. Perspectives: American Association of State Colleges and Universities, Fall Retrieved from Jacobs, J. (2011). College 101: Financial Literacy. Community College Spotlight. Blog published by the Hechinger Report. Retrieved from 14

15 Jump$tart Coalition for Personal Financial Literacy. Retrieved from Kezar, A. (2010). The importance of financial literacy. About Campus, 14(6), Low, L. (2009). Financial Literacy and College Success at Minority-Serving Institutions. Paper presented at the 2009 IHEP Symposium, February 26, Lyons, A.C. (2003). Credit practices and financial education needs of Midwest college students. Champaign, IL: Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign. Oleson, M. (2004). Using Technology to Provide Financial Education. Journal of Extension 42(5). Retrieved from Mandell, L. (2008). The Financial Literacy of Young American Adults: Results of the 2008 National Jump$tart Coalition Survey of High School Seniors and College Students. Jump$tart Coalition for Personal Financial Literacy. Masuo, D. M., PhD., Kutara, P., Wall, R., & Cheang, M. (2007). Financial information project: Assessing the financial interests of college students. Journal of Family and Consumer Sciences, 99(3), Retrieved from Peng, T.C., Bartholomae, S., Fox, J.J., & Cravener, G. (2007). The impact of personal finance education delivered in high school and college courses. Journal of Family and Economic Issues 28 (2), President s Advisory Council on Financial Literacy (2008) Annual Report to the President. Washington, DC: U.S. Department of the Treasury. Johnson, J., Ott, A.N. (200). With Their Whole Lives Ahead of Them: Myths and Realities About Why So Many Students Fail to Finish College. Public Agenda, Retrieved from Reed, M. (2011). Student Debt and the Class of The Project on Student Debt, December Retrieved from Sallie Mae. (2010). How Undergraduate Students Use Credit Cards: Sallie Mae s National Study of Usage Rates and Trends, Retrieved from The Institute for College Access and Success. (2009). Statement on College Board s Trend Report. Retrieved from 15

16 U.S. Department of Education, National Center for Education Statistics. (2008). The Condition of Education Retrieved from U.S. Department of Treasury, (2010). Key Themes for President s Advisory Council on Financial Capability (PACFC). Retrieved from U.S. Fed News Service. (2011). Southeast Community College Participates in Nebraska Money Smart Wee Activities. U.S. Fed News Service Including US State News, December 8, U.S. Fed News Service. (2008). Southwestern Oregon Community College, National Endowment for Financial Education Partner to Educate Students on finance. U.S. Fed News Service Including US State News, September 26, U.S. Government Accountability Office, (2004). The Federal Government s Role in Improving Financial Literacy U.S. Government Accountability Office. Retrieved from 16