Do Personal Finance Classes Help You Pay Student Loans?
Introduction
Plenty of evidence supports the idea that Americans could use more financial education in their lives. High student loan debt, low savings rates, and a stream of personal finance books highlight the need. Many states are considering requiring schools to teach personal finance classes. But does more personal finance education actually make people better at managing their student loans? A recent study sheds light on this issue.
Image Description: A college student attending a personal finance class, learning about managing student loans.
The Impact of Personal Finance Education
The study, conducted by Daniel Mangrum, a Ph.D. candidate in the department of economics at Vanderbilt University, estimates the impact of personal finance education on repayment rates for federal student loans. Mangrum's study found that students from states with personal finance education mandates were more likely to start paying down their student loan balances within a year. Specifically, students subject to personal finance class mandates had up to 2.5% higher one-year repayment rates. The effect was stronger for first-generation and low-income students, who had 5% higher repayment rates after being exposed to personal finance classes.
Image Description: A bar graph showing the improvement in student loan repayment rates for students who took personal finance classes.
Reasons for Improvement
One reason for the improvement may be because many personal finance classes require students to apply for federal student aid. As a result, students who take these classes may be better at navigating the complex federal loan system and managing their resulting debt.
"Right when these students are taking these classes, they're also applying to college, and the classes are helping them understand how to go about applying for federal aid," Mangrum said.
Image Description: A student filling out the Free Application for Federal Student Aid (FAFSA) form, guided by insights from a personal finance class.
How the Study Was Conducted
Mangrum used data from the College Scorecard, a federal website that grades universities on student loan repayments. He tracked how many students came from states that require personal finance classes and calculated how variations in the makeup of the student body affected repayment rates.
Image Description: An infographic explaining the methodology used in the study to analyze the impact of personal finance education on student loan repayment rates.
Is It Cost-Effective?
While the results of the study show some improvement, Mangrum suggests that personal finance classes might not be the most cost-effective way to improve student loan repayment rates. The results, at most a 5% improvement for certain students, are modest. Implementing personal finance classes can be expensive, and adjusting state standards can crowd out other potential curricula. It might be more cost-effective to simplify the federal loan system.
Image Description: A classroom setting with a teacher discussing the costs and benefits of personal finance education.
How Parents Can Help
Parents can play a crucial role in helping their children manage student loans by encouraging them to fill out the Free Application for Federal Student Aid (FAFSA), which provides access to many forms of financial help for college. Those with federal loans may want to look into income-based repayment plans. Depending on the students' profession, they may qualify for loan forgiveness. Loans can also be discharged if the student becomes disabled.
Image Description: Parents helping their child fill out the FAFSA form, providing support and guidance for managing student loans.
Conclusion
Personal finance classes can help improve student loan repayment rates, especially for first-generation and low-income students. However, their overall impact is modest, and there may be more cost-effective ways to help students manage their debt. Encouraging financial literacy and simplifying the federal loan system are crucial steps toward improving student loan repayment outcomes.
Image Description: A group of students celebrating their improved financial literacy and ability to manage student loans.
