NC2172 Update: Behavioral Economics and Financial Decision-

Making and Information Management Across the Lifespan http://www.lgu.umd.edu/lgu_v2/homepages/home.cfm?trackID=15376

Michael S. Gutter, University of Florida Jinhee Kim, University of Maryland Barbara O’Neill, Rutgers University

NC2172 • North Central Multistate Research Project • Multi-state research group composed of Extension specialists and teaching/research

faculty: http://www.lgu.umd.edu/lgu_v2/homepages/member.cfm?trackID=15376

• 10/1/13-9/30/18 research theme: Behavioral Economics and Financial Decision-Making and Information Management Across the Lifespan

• The goal is to better understand consumers financial decision-making across the lifespan.

• NC 1172 “The Complex Nature of Saving: Psychological and Economic Factors” 10/2008

to 09/2013

• Our previous research and additional studies over the past two decades clearly show that psychological factors play a powerful role in influencing consumer decisions.

NC 2172 Need: While conventional consumer education focuses on providing rational consumers with information, information management research clearly shows that how consumers acquire and process information may not always be optimal. Objectives 1. Determine motivators that affect economic decision-making in specific decision situations across the life-span of households

2. Determine barriers that affect economic decision-making in specific decision situations across the lifespan of households

3. Determine how motivators and barriers to economic decision-making can be manipulated in specific decision situations across the life-span of households

4. Suggest strategies that can be used to improve consumer financial decision-making

NC 2172 Methods • Our study uses the behavioral life cycle model framework to

examine factors influencing the consumer decision making process.

• Our initial hypotheses focus on key factors such as the role of, mental accounting, economic socialization, framing, self-control, the role of information, on decisions related to retirement, home ownership, student loan usage.

• This study proposes use of mixed methods to achieving its various objectives.

Implications

• Results will inform efforts to improve financial decision-making

http://www.lgu.umd.edu/lgu_v2/homepages/outline.cfm?trackID=15376

Initial NC2172 Deliverables: Student Loan Literature Review and Loan

Repayment Refereed Journal Articles (FCSRJ)

Cho, S.H., Xu, Y, & Kiss, D.E.(2015, March). Understanding student loan decisions: A Literature Review. Family and Consumer Sciences Research Journal, 43(3), 229-243. http://onlinelibrary.wiley.com/doi/10.1111/fcsr.12099/abstract Johnson, C. (2015). Understanding federal loan repayment. Family and Consumer Sciences Research Journal, 43 (4). p. 306-312. Examines theories related to student loan debt, effect of student loans on college education, and effect of student loans on post-school life circumstances

College is Expensive! • 2003-2013: State funding for colleges decreased by 12%

and median tuition rose 55% across all public colleges

• Students have two methods of elasticity in response to increased college costs

– Select a lower cost college to attend

– Graduate with more student loan debt

Source: Higher education: State funding trends and policies on affordability (December, 2014). Washington, DC: Report to the Chairman, Committee on Health, Education, Labor, and Pensions, United States Senate. U.S. GAO. Retrieved from http://www.gao.gov/assets/670/667557.pdf.

Student Loan Overview: Two Big Concerns

• Increasing frequency of use by students – Going to college effectively means going into debt for

a majority of American college students

• Increasing outstanding student loan debt burdens – College graduates – Those who do not complete a degree program and

lack an income boost to help repay debt

Student Loan Statistics • In 2010, total outstanding student loan debt rose to over $800 billion,

overtaking credit card debt for the first time, as well as auto loan debt (only mortgages have a higher debt total): https://www.aeaweb.org/articles.php?doi=10.1257/jep.26.1.165

• April 2015: Student Loan Debt Clock reports $1.3 trillion owed – http://collegedebt.com/

• Average amount of debt owed by graduating students in 2013 was $28,400: http://ticas.org/sites/default/files/legacy/fckfiles/pub/classof2013.pdf

• In 2012, 71% of all students graduating from 4-year colleges had student loan debt – http://ticas.org/sites/default/files/pub_files/Debt_Facts_and_Sources.pdf

More Student Loan Statistics • Average cumulative debt of bachelor’s degree recipients

increased – 9% between 2002-03 and 2007-08 school years – 24% between 2008-09 and 2002-13 school years – Graduates of for-profit colleges have higher amounts of debt

than those of public and private non-profit colleges – http://trends.collegeboard.org/student-aid/figures-tables/average-

cumulative-debt-bachelors-recipients-public-four-year-time

• The monthly average student loan payment (2010 SCF data): $242 – http://www.brookings.edu/research/papers/2014/06/19-typical-student-

loan-debt-akers

Student Loan Impacts On Students • “Generation indebted”

• Opportunity costs (e.g., “crowding out effect”)

• Postponed savings, reduced wealth accumulation

• Emotional distress • “Living a postponed life”

(marriage, family)

• Career choices • Stifled entrepreneurship

On Society • Reduced/delayed home and

auto purchases • Decreased/delayed family

formation • More young adults living with

parents and impacting parents’ finances

• Lifetime wealth loss impacts (money that isn’t available to be spent or invested)

• Stifled entrepreneurship

NC2172 Student Loan Research: Focus Group Study

• Purpose: To understand decisions that students made with regard to college selection and student loan borrowing

• Three rounds of data collection: two campus-based samples and a sample via SSI

• Data collected via an online course platform that enabled students to “talk” with one another

• Rich qualitative data indicating students’ decision-making processes and their knowledge, thoughts, and emotions related to student loan debt

• A journal article reporting research results is in progress

Focus Group Questions • Question 1: How did you decide which colleges or universities to attend?

• Question 2: How did you feel about borrowing money for college?

• Question 3: What assistance/sources of help, if any, did you use before making the decision to take out a student loan?

• Question 4: Tell me what you know about your loans.

• Question 5: How do you think your student loan debt will affect you economically after graduation? Please explain. (Examples: your monthly loan payment, ability to rent apartment, get a car; ability to buy a house or how much house can be purchased, saving for retirement, starting an investment program, maintaining a relationship that might lead to marriage).

Focus Group Questions • Question 6: What factors influenced your decision to accept the

type of financial assistance you are using?

• Question 7: How has the amount of financial aid you’ve requested/received affected the number of college credits for which you’ve enrolled?

• Question 8: Thinking back to a time when you received a student loan refund (i.e. borrowed funds remaining after tuition and fees were paid), tell us how you or someone you know, used those available funds. (Examples: saved for a future semester, invested the money, paid off other loans, room and board, miscellaneous spending, etc.)

Focus Group Study Deliverables

• Data analyzed using qualitative analysis techniques (data categories and counts)

• Article being submitted to Journal of Financial Counseling and Planning

• Accepted NEAFCS meeting workshop (2015) on the online focus group process

NC2172 Student Loan Research: Online Experiment Study

Explore the role that information could play in influencing the perceived value or prudence one is making in a hypothetical educational scenario

Basic Question Does highlighting the return on an educational investment influence the perceived prudence of such an investment

–Use of hypothetical

–Control for level of personal educational attainment, whether one borrowed, satisfaction with that choice

Motivation to Attend College From the list below please rank the reasons for attaining a college degree with 1 being most import. Simply move the listed options up or down to create your rank.

– Make more money – Signal to others that you are intelligent – Have a better work environment – Enjoy the university experience – Better employment opportunities – Improved skills – Increased knowledge – Opportunity to meet new people – Other (please list) ____________________

Scenario: Male • Jonathan, age 18, will be graduating from high school in a few

months. He has been accepted to the state university which is about three hours away from where he currently lives. Due to this distance, living at home would not be a possibility if he attends the university.

• Recent college graduates, on average, have $26,000 in student loan debt upon graduation. In order to pay the $26,000 in student loan debt, monthly payments of $270 would be made for 10 years.

• Jonathan is trying to decide if he should attend college or pursue a career right out of high school. With his current resources he would need student loans to pursue an undergraduate degree at the state university.

• I have read Jonathan's situation and am ready to answer questions

pertaining to his education choices

Survey Question

• Do you think it is wise for Jonathan to take student loans in order to pursue a college degree? On a scale of 1 to 5 where 5 is very wise to take out student loans and 1 is not wise at all to take out student loans.

1 Not Wise 2 3 4 5 Very Wise • How much in total should Jonathan be willing to take in student

loans in order to pursue this degree? – $0 – $1 - $9,999 – $10,000 - $19,999 – $20,000 - $29,999 – $30,000 - $39,999 – $40,000 - $49,999 – $50,000 or more

Treatment • Additional Information: On average, an individual

whose highest education level is a high school diploma will make $1,912 less per month than someone who has a bachelor’s degree.

Which of the following is correct? • The average salary is higher for those with college

degrees than with high school diplomas • The average salary is higher for those with high

school diplomas than with college degrees

More Treatment • Additional Information: On average, an

individual with a bachelor’s degree will make $1,912 more per month than someone whose highest education level is a high school diploma.

Which of the following is correct? • The average salary is higher for those with

college degrees than with high school diplomas • The average salary is higher for those with high

school diplomas than with college degrees

Question • Additional Information: Samantha has been

dreaming of attending college since she was in middle school. It is all she talks about whenever she is around family and friends.

• Which of the following is correct?

– Samantha is extremely interested in attending college – Samantha is not very interested in attending college

Future NC 2172 Plans • Complete four planned papers about

student loans using Experimental Study data

• Study consumer decision-making related to homeownership and Social Security (retirement)

For Further Information • See

http://www.lgu.umd.edu/lgu_v2/homepages/home.cfm?trackID=15376

• List of 18 NC2172 members: http://www.lgu.umd.edu/lgu_v2/homepages/member.cfm?trackID=15376