How Financial Literacy, Federal Aid Knowledge, and Credit Market Experience Predict Loan Aversion for Education

By Jacob Martin

A recent multi-year study on causes of federal student loan aversion (defined as the unwillingness of students to borrow to finance their education), entitled How Financial Literacy, Federal Aid Knowledge, and Credit Market Experience Predict Loan Aversion for Education uses survey responses from high school seniors, community college students who did and did not borrow for higher education, and adults without a college degree.

Among the key findings:

  • Higher financial literacy and higher knowledge of federal student loans are related to lower federal student loan aversion, reducing aversion rates by as much as 30 to 50 percent.
  • Students with a past borrowing history exhibit lower levels of loan aversion when their experiences were with positive debt (e.g. mortgages).
  • Familiarity with general financial concepts leads to a willingness to take out student loans in community college students and adults.
  • Awareness of consumer benefits offered through federal student loans (e.g. subsidized interest) may change opinions and make individuals less averse to borrowing.
  • Awareness of income-based repayment leads to a decrease in loan aversion for all parties except for current community college students with federal loans. This suggests that perceived risk associated with paying off a loan is a key factor in aversion.
  • Prior experience with payday lending (or other negative debt experiences) was related to increased loan aversion for community college students who did not borrow for college.