Capable and Smart Decisions about Student Loans 2017 ISU Symposium on Undergraduate Research and Creative Expression Human Development and Family Studies Capable and Smart Decisions about Student Loans Amberly J. Ehret & Clinton G. Gudmunson

Introduction Between 2000 and 2014, the total volume of outstanding federal student debt nearly quadrupled to surpass $1.1 trillion The number of student loan borrowers more than doubled to 42 million Default rates among recent student loan borrowers rose to their highest levels in 20 years (Looney & Yannels, 2015)

Purpose Determine how financial capability and student loan decision making strategies impact financial efficacy and loan stress Identify ways to help students, parents, and practitioners counsel students better to increase their financial efficacy and reduce their stress related to student loans

Review of Literature Self-efficacy is ”an individual’s convictions (or confidence) about his or her abilities to mobilize the motivation, cognitive resources, and courses of action needed to successfully execute a specific task within a given context” (Mesurado, Richaud, & Mateo, 2016). Financial stress and loan stress leads to an increased likelihood of discontinuing college (Britt, Ammerman, Barrett, & Jones, 2017). Eustress is considered to be a “positive response to a stressor” whereas distress is a “negative response to a stressor” (O’Sullivan, 2011). People who experience a certain level of stress (good stress or eustress) are more productive in that particular moment and can produce more effectively than if stress is completely eliminated (Mesurado, Richaud, & Mateo, 2016).

Methodology Using data from the 2014-2015 National Student Financial Wellness Study from 50 universities in the United States, this study examines the impact of student loan decision making strategies and financial capability on financial efficacy and student loan stress using a hierarchical linear regression model Our sample is 5,892 students ages 18-24, who borrowed student- loans in survey year 2014

Independent Measures Student Loan Decision Making Strategies— Stem: When deciding how much money I will need to borrow for the school year, I: Borrow the maximum amount available in my aid package, regardless of the amount Use my budget and borrow only what I think I will need Try to borrow as little as possible Consider the total amount of debt I will graduate with Consider the amounts I have borrowed in the past Financial capability includes: financial knowledge, financial behavior, and financial stress.

Key Findings: Financial Efficacy Table 1 Regression models predicting financial efficacy and student loan stress (N=5,892)   Financial Efficacy Loan Stress Variables Model 1 Model 2 b (SE) β Student Loan Strategies Budgeted borrowings .032 (.026) .019 .051 (.025) .030* .197 (.035) .082*** .083 (.029) .035** Considered past loan amounts -.008 (.027) -.005 .003 .001 .148 (.037) .060*** .094 (.030) .038** Considered future debt load -.004 -.002 .005 .039* .041 .017 Borrowed least possible .054 .032* -.028 (.036) -.012 -.055 -.023† Borrowed maximum (.033) -.028* .015 (.032) .007 .329 (.045) .119*** .123 .044** Financial Capability Financial Knowledge Score .045 (.008) .073*** (.009) Financial Behavior .084 (.019) .058*** .114 (.021) .056*** Financial Stress -.298 (.015) -.266*** .925 (.017) .589*** Constant 2.772 (.048) 3.373 (.085) 3.507 (.065) .291 (.098) Model Summary F 6.545*** 34.449*** 29.343*** 221.268*** R2 .092 .065 .394 Model controls for gender (female=reference, male, transgender, and self-identified), class rank (freshmen=reference, sophomore, junior, senior, 5+ year), and parent education (mother and father). † p < .10 * p < .05, ** p < .01, *** p < .001

Key Findings: Financial Efficacy Table 1 Regression models predicting financial efficacy and student loan stress (N=5,892)   Financial Efficacy Loan Stress Variables Model 1 Model 2 b (SE) β Student Loan Strategies Budgeted borrowings .032 (.026) .019 .051 (.025) .030* .197 (.035) .082*** .083 (.029) .035** Considered past loan amounts -.008 (.027) -.005 .003 .001 .148 (.037) .060*** .094 (.030) .038** Considered future debt load -.004 -.002 .005 .039* .041 .017 Borrowed least possible .054 .032* -.028 (.036) -.012 -.055 -.023† Borrowed maximum (.033) -.028* .015 (.032) .007 .329 (.045) .119*** .123 .044** Financial Capability Financial Knowledge Score .045 (.008) .073*** (.009) Financial Behavior .084 (.019) .058*** .114 (.021) .056*** Financial Stress -.298 (.015) -.266*** .925 (.017) .589*** Constant 2.772 (.048) 3.373 (.085) 3.507 (.065) .291 (.098) Model Summary F 6.545*** 34.449*** 29.343*** 221.268*** R2 .092 .065 .394 Model controls for gender (female=reference, male, transgender, and self-identified), class rank (freshmen=reference, sophomore, junior, senior, 5+ year), and parent education (mother and father). † p < .10 * p < .05, ** p < .01, *** p < .001

Key Findings: Loan Stress Table 1 Regression models predicting financial efficacy and student loan stress (N=5,892)   Financial Efficacy Loan Stress Variables Model 1 Model 2 b (SE) β Student Loan Strategies Budgeted borrowings .032 (.026) .019 .051 (.025) .030* .197 (.035) .082*** .083 (.029) .035** Considered past loan amounts -.008 (.027) -.005 .003 .001 .148 (.037) .060*** .094 (.030) .038** Considered future debt load -.004 -.002 .005 .039* .041 .017 Borrowed least possible .054 .032* -.028 (.036) -.012 -.055 -.023† Borrowed maximum (.033) -.028* .015 (.032) .007 .329 (.045) .119*** .123 .044** Financial Capability Financial Knowledge Score .045 (.008) .073*** (.009) Financial Behavior .084 (.019) .058*** .114 (.021) .056*** Financial Stress -.298 (.015) -.266*** .925 (.017) .589*** Constant 2.772 (.048) 3.373 (.085) 3.507 (.065) .291 (.098) Model Summary F 6.545*** 34.449*** 29.343*** 221.268*** R2 .092 .065 .394 Model controls for gender (female=reference, male, transgender, and self-identified), class rank (freshmen=reference, sophomore, junior, senior, 5+ year), and parent education (mother and father). † p < .10 * p < .05, ** p < .01, *** p < .001

Key Findings: Loan Stress Table 1 Regression models predicting financial efficacy and student loan stress (N=5,892)   Financial Efficacy Loan Stress Variables Model 1 Model 2 b (SE) β Student Loan Strategies Budgeted borrowings .032 (.026) .019 .051 (.025) .030* .197 (.035) .082*** .083 (.029) .035** Considered past loan amounts -.008 (.027) -.005 .003 .001 .148 (.037) .060*** .094 (.030) .038** Considered future debt load -.004 -.002 .005 .039* .041 .017 Borrowed least possible .054 .032* -.028 (.036) -.012 -.055 -.023† Borrowed maximum (.033) -.028* .015 (.032) .007 .329 (.045) .119*** .123 .044** Financial Capability Financial Knowledge Score .045 (.008) .073*** (.009) Financial Behavior .084 (.019) .058*** .114 (.021) .056*** Financial Stress -.298 (.015) -.266*** .925 (.017) .589*** Constant 2.772 (.048) 3.373 (.085) 3.507 (.065) .291 (.098) Model Summary F 6.545*** 34.449*** 29.343*** 221.268*** R2 .092 .065 .394 Model controls for gender (female=reference, male, transgender, and self-identified), class rank (freshmen=reference, sophomore, junior, senior, 5+ year), and parent education (mother and father). † p < .10 * p < .05, ** p < .01, *** p < .001

Discussion Financial capability is more important than student loan decision making strategies related to financial efficacy and stress related to student loans Borrowing the maximum is a risky or adverse strategy All other strategies are positive strategies: “an active plan is better than no plan at all (defaulting to borrowing the maximum)” Stress due to budgeting and considering past loan amounts can be positive due to making students aware of their financial situation and knowledgeable about how much they need to borrow to pay for university expenses

Implications: Why is this study so important for students, parents, and financial counselors? Focus on making students more financially capable by encouraging positive financial behaviors, teaching financial knowledge skills, and helping to alleviate negative financial stress Then focus on utilizing positive student loan decision making strategies when considering borrowing a student loan (budget, least, past, and future) Create early intervention programs for students who have low financial knowledge, negative financial behaviors, or high financial stress

Questions, Comments, Concerns

Limitations and Future Research Cross-sectional survey Response rate of 11% Future Research We need to know more about loan stress and financial efficacy impacts Defaults Good choice of repayment plans Exit-counseling strategies Outcomes related to academics: GPA, graduating on time, majors, etc.

Acknowledgements The National Student Financial Wellness Study (NSFWS) was developed and administered by The Ohio State University in collaboration with co-investigators from Cuyahoga Community College, DePaul University, Iowa State University, Oberlin College, Ohio University, and Santa Fe College. More information on the study is available at go.osu.edu/nsfws. Dr. Clinton G. Gudmunson Dr. Suzanne Bartholomae Dr. Jonathan J. Fox Iowa State University: Human Development and Family Studies Department

References Britt, S. L., Ammerman, D. A., Barrett, S. F., & Jones, S. (2017). Student Loans, Financial Stress, and College Student Retention. Journal of Student Financial Aid,47(1), 25-37. Looney, A., & Yannelis, C. (2015). A Crisis in Student Loans?: How Changes in the Characteristics of Borrowers and in the Institutions They Attended Contributed to Rising Loan Defaults. Brookings Papers on Economic Activity,2015(2), 1-68. Mesurado, B., Richaud, M. C., & Mateo, N. J. (2016). Engagement, Flow, Self-Efficacy, and Eustress of University Students: A Cross-National Comparison Between the Philippines and Argentina. The Journal of Psychology,150(3), 281-299. O’Sullivan, G. (2011). The Relationship Between Hope, Eustress, Self-Efficacy, and Life Satisfaction Among Undergraduates. Social Indicators Research,101(1), 155-172.