Financial Literacy and Student Loan Default

Sixty percent of Americans borrow student loans in order to access higher education. More than $100 billion of student debt is delinquent or defaulted. The student-level impact is palpable as defaults results in life-altering negative impacts for student borrowers. However, high cohort default rates can result in decertification by the Department of Education for colleges and universities. Financial literacy education can help students properly handle finances and prepare for personal economic crises. Therefore, it is possible to test the effect of financial literacy program on cohort default. Schools have an opportunity to invest in their students’ social and human capital by offering financial literacy programs. Accordingly, this research explores the impact of schools’ financial literacy programs on the likelihood of student loan default. Focusing on organization-level solutions to student loan default empowers schools to address their cohort default rates. Three hypotheses are presented. The first is that mandatory financial literacy programs are related to lower default rates. The second is that comprehensive programs are related to lower default rates. The final hypothesis says that repayment rates are a mediating factor in the relationship between financial literacy program characteristics and default rates, because default rates should fall as students make payments towards their principal balances. Results indicate that financial literacy education does have an impact on default rates with repayment rates mediating the relationship. However, while optional programs are frequently available, mandatory programs are not common enough in the sample to test the first hypothesis and program content has a significant, though unsubstantial impact on default rate.