Financial Capability, Financial Education, and Student

Loan Debt: Expected and Unexpected Results

Yu Zhanga and Lu Fanb

This study used the 2015 National Financial Capability Study to investigate the relationships among financial
capability, financial education, and student loan debt outcomes. Specifically, this study examines four student
loan outcomes: delinquency, stress, preparation, and satisfaction among borrowers who obtained loans for
themselves. Three forms of financial capability (objective financial knowledge, subjective financial knowledge,
and perceived financial capability) and two forms of financial education (formal school/workplace education
and informal parental education) were used as potential predictors in the study. The Probit regression results
showed that expectedly, several financial capability and financial education factors were positively associated
with desirable financial outcomes such as loan calculation and loan satisfaction, and negatively associated
with undesirable outcomes such as loan stress and loan delinquency. However, this study also showed several
unexpected results. For example, objective financial knowledge was negatively associated with loan calculation
and loan satisfaction, and subjective knowledge and formal financial education were positively associated with
loan delinquency.

Keywords: delinquency, financial education, financial knowledge, financial literacy, stress, student loan

G
rowing education costs and rapidly increasing Understanding student loan borrowers’ repayment behav-
student loan debt have become serious issues for iors and borrowing satisfaction is a critical yet challeng-
families, governments, researchers, and financial ing issue. A study of student loan borrowers’ mental health
practitioners. Outstanding student loan debt reached $1.58 revealed that having student loans is negatively associated
trillion in the third quarter of 2021 (Federal Reserve Bank of with psychological function (Walsemann et al., 2015).
New York, 2021). The 2018 National Financial Capability Specifically, among all borrowers, those who completed two
Study (NFCS) report indicates that 26% of American adults years of college, although demonstrating a lower cumulative
were indebted with a student loan for themselves or a fam- loan amount, reported more socio-economic disadvantages
ily member. The majority (72%) of those who had student and poorer psychological function compared to those who
loans took out the loans for themselves (Financial Industry completed four years of college. Another study found that,
Regulatory Authority [FINRA] Foundation, 2019). The compared with an aggregated measure of total debt, stu-
outstanding education debt burden in the United States has dent loan debt showed a stronger positive association with
proliferated during the past decade, and the average student financial anxiety among college students; the study also
loan debt is now close to $57,520 among U.S. households showed that perceived repayment difficulty among student
(Helhoski & Lane, 2021). More borrowers with a high loan borrowers were associated with financial stress (Archuleta
outbalance have fallen behind on their student loan repay- et al., 2013). The greater the amount of student debt young
ments as opposed to making progress to reduce the debt adults have, the poorer their mental health will be (Kim &
(Looney & Yannelis, 2019). Chatterjee, 2021).

a
Doctoral Student, Department of Financial Planning, Housing and Consumer Economics, University of Georgia, 262 Dawson Hall, Athens, GA, 30602.
E-mail: [email protected]
b
Assistant Professor, Department of Financial Planning, Housing and Consumer Economics, College of Family and Consumer Sciences, University
of Georgia, 206 Charles Schwab Financial Planning Center, 407 Sanford Drive, Athens, GA 30602, 706-542-4847. E-mail: [email protected]

324 Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022, 324–343
© 2022 Association for Financial Counseling and Planning Education®
http://dx.doi.org/10.1891/JFCP-2021-0039
The present study examines the roles of financial capabil- marriage and family formation (Bozick & Estacion, 2014),
ity and education and their associations with student loan and financial satisfaction (Robb et al., 2019).
preparation, delinquency, stress, and satisfaction, which
have not been fully examined in the current literature, to Human capital theory also provides theoretical support for
our best knowledge. Specifically, we examine three aspects this study to focus on financial capability and education
of financial capability, including subjective and objective factors. Whereas the costs must be paid in the present, the
financial knowledge and perceived financial capability, and benefits of earning a higher education can only be enjoyed
two forms of financial education, namely formal financial in the future; thus, individuals compare the costs of a higher
education received from schools and workplaces and infor- education and its benefits according to human capital theory
mal parental socialization for financial matters. and choose whether or not to pursue higher education or
training (Becker, 1964). Prior research pointed out that the
Theoretical Background and Literature Review economic benefit of education varies by level of training
Theoretical Background and by career field (Cohn & Geske, 1990); furthermore, it
Life-cycle hypothesis (Ando & Modigliani, 1963) and is rational to expect that loan repayment and default behav-
human capital theory (Becker, 1964) provide a theoretical ior can vary by individuals’ highest educational attainment
background for the current study. According to the life-cycle (Volkwein et al., 1998) and by their major field of study.
hypothesis, individuals plan their consumption and savings Those who complete their educational program compared
behavior throughout their lifetimes, considering their future to those who do not are more likely to enjoy the expected
income (Ando & Modigliani, 1963). It is assumed that there earning enhancement, contribute to the nation’s economic
are no credit constraints, and individuals can borrow against and cultural production, and be less likely to default on their
future earnings. A student can weigh the cost of borrow- loan obligations (Volkwein et al., 1998).
ing student loans against the probability of completing the
program and earning income in the future. Student loans In terms of financial education, receiving formal financial
differ from other types of consumers loans, such as credit education from schools and workforces or informally from
card debts or auto loans, because other types of consumer parental socialization should contribute to the human cap-
loans provide immediate consumption and enjoyments, ital, such as increased financial knowledge (e.g., Xiao &
while student loans serve as an investment in human capital O’Neil, 2016), improved financial behaviors, such as better
to help borrowers gain knowledge, skills, and capability to credit scores and fewer delinquencies (Brown et al., 2016;
earn higher income in the future (Li, 2013). Individuals take Urban et al., 2018), and a reduced amount of delinquent
on debt before completing their education and expect to be debt (Brown et al., 2016). Individuals exposed to personal
earning low income at that time while assuming that their finance education at schools are less likely to use alterna-
future income will enable them to pay off loans at an early tive financial services (Harvey, 2019) and are more aware
age. of income-driven repayment plans which have been shown
to improve repayment progress and avoid default (Herbst,
Under the life-cycle hypothesis framework, it is reasonable 2020; Mangrum, 2019). Similarly, receiving parental finan-
to assume that students who are admitted into higher-edu- cial socialization can also contribute to increased financial
cational programs would consider borrowing student loans literacy, which is positively related to financial behavior
to supplement consumption because of higher expected and well-being (e.g., Gudmunson & Danes, 2011; Shim
lifetime earnings, given their anticipated skill set, talents, et al., 2009).
and more competitive earning power in the job market once
they obtain their degree. The decision and willingness to Student Loan Debt
borrow student loans could be associated with factors such Student loans provide students an accessible way to finance
as financial resources and students’ preparedness for college their education; furthermore, the interest rate on federal stu-
(Bound et al., 2010; Cho et al., 2015). Consequently, carry- dent loans is fixed and lower than private loans (Consumer
ing a student loan can be associated with certain decisions Financial Protection Bureau [CFPB], 2017). Private stu-
in later life stages, such as occupation choices (Rothstein dent loans are made by private organizations, including
& Rouse, 2011), home buying (Cooper & Wang, 2014), banks, credit unions, and state-based or state-affiliated

Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022 325
organizations and are generally more expensive (such as and the experience of receiving financial education are
having higher interest rates) than federal student loans associated with student loan behavior and attitudes. In
(CFPB, 2017). particular, our goal is to link financial capability and edu-
cation to student loan behaviors, including preparation pro-
The extant literature on student loans focuses on the conse- pensity, repayment delinquency and stress, and borrowing
quences of carrying student loans, such as default and delay satisfaction.
in wealth accumulation and homeownership. For example,
previous literature indicated that certain types of loans are Financial Capability
associated with homeownership (Cooper et al., 2014; Robb Financial capability can be characterized in various ways,
et al., 2020); student loan debt is also associated with lower and sometimes used as a synonym of financial literacy
wealth (excluding student loan debt) for households with (FINRA IEF, 2019). It refers to a combination of finan-
at least some college experience (Cooper et al., 2014). cial knowledge, resources, access, experience, and habits.
Previous literature noted that both completers and non- Related literature also uses the terms “financial literacy”
completers’ student loan repayment ability depends mostly and “financial knowledge” interchangeably (van Rooij
on their employment after leaving postsecondary education et al., 2012). Several studies have conceptualized financial
(Wei & Horn, 2013). Borrowers who failed to complete the literacy as synonymous with actual financial knowledge
educational program were more likely to default on student (FINRA, 2003; Lusardi & Mitchell, 2007, 2008, 2011).
loan payments (Gladieux & Perna, 2005). Huston (2010) developed a comprehensive definition of
financial literacy and posited that financial knowledge is
Student loan defaults and stress related to student loans an integral dimension but is not equivalent to financial lit-
have been important topics of discussion among research- eracy. Studies have also emphasized the financial skills and
ers. College students holding student loans are more likely capability aspects of financial literacy (Hung et al., 2009;
to experience financial stress compared to those without Klapper et al., 2015). Therefore, our definition of finan-
student loan debt (Britt et al., 2015). Student loan repay- cial capability includes the actual possession of financial
ment difficulties were associated with various factors such knowledge and other dimensions, namely perceived finan-
as individual students’ demographic background and finan- cial knowledge and capability, the application of which
cial characteristics, the associated academic institution’s originated from Huston’s (2010) study (also see Xiao et al.,
features, and the type of loan to be repaid (Gross et al., 2020). Furthermore, financial capability falls under both the
2009). The literature suggested that students seeking associ- knowledge dimension and the application dimension. Being
ate and post-bachelor’s degrees showed worse student loan financially capable means possessing knowledge on criti-
repayment behaviors (Brown et al., 2019), and non-White cal financial matters to confidently take effective action that
males with lower income or having other types of debt dem- best fulfills an individual’s financial goals.
onstrated higher likelihood to be late on student loan pay-
ments (Fan & Chatterjee, 2019). Having adequate financial knowledge and an accurate
assessment of financial knowledge can promote financial
Evidence from previous literature showed that gender and practices and the financial decision-making process (Chen
ethnicity were significant indicators of financial knowl- & Volpe, 1998). Previous research has revealed a positive
edge and financial behaviors (Lyons, 2004; Wang, 2009; relationship between financial knowledge and financial
Woodyard & Robb, 2012), which are associated with stu- behavior (Afsar et al., 2018; Hadar et al., 2013; Lusardi
dent loan debt behavior and attitude. Among college stu- & Mitchell, 2011; Nguyen et al., 2017; Peng et al., 2007).
dents, females were found to be less knowledgeable about Individuals deficient in financial knowledge, specifically
personal finance topics compared with males, and the dif- low debt literacy, were more likely to engage in negative
ferences between genders persisted, even after accounting financial behaviors, such as high-cost transactions, incur-
for many demographic characteristics (Borden et al., 2008; ring of higher fees, and high-cost borrowing (Lusardi &
Chen & Volpe, 1998, 2002; Lusardi & Mitchell, 2007; Robb Tufano, 2015). Interestingly, the literature offers inconsis-
& James, 2009). This study contributes to the literature on tent evidence that the role of financial literacy and its asso-
student loan topics by examining how financial capability ciation with student loan behavior and attitudes requires

326 Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022
better understanding. For instance, Robb and Sharpe (2009) student loan stress, and is positively associated with
revealed that financial knowledge was positively associated (c) student loan preparation and (d) student loan
with carrying higher balances in credit card debt among satisfaction.
college students. Moreover, Borden et al. (2008) found that
financial knowledge was not significantly associated with H3: Perceived financial capability is negatively associ-
either risky or healthy financial behaviors. ated with (a) student loan delinquency and (b) student
loan stress, and is positively associated with (c) stu-
Both objective and subjective financial knowledge are dent loan preparation and (d) student loan satisfaction.
important components of financial literacy and should be
examined together to determine their influence on financial Financial Education
behaviors (Friestad & Wright, 1994; Nguyen et al., 2017). The literature has established a strong relationship between
Robb and Woodyard (2011) indicated that the effects of financial education and financial attitudes and behavior. In
both types of financial knowledge on financial behavior the current study, we applied a broader definition of finan-
are differential. Objective financial knowledge is gener- cial education to incorporate formal financial education
ally measured using a series of financial knowledge tests in (a) taught by schools and provided by workplaces and (b)
order to generate an assessment of an individual’s finance- financial socialization and teaching provided by parents that
related knowledge (Chung & Park, 2019; Kramer, 2016; can be considered an informal financial education in a fam-
Wang, 2009), whereas subjective financial knowledge is ily setting. First, formal financial education implemented in
defined as an individual’s belief about his or her own finan- schools or workplaces targeting certain subgroups of people
cial knowledge (Carlson et al., 2009) and can be measured had multiple benefits such as facilitating knowledge acquisi-
by directly asking individuals to assess their own financial tion, improving confidence levels in knowledge and ability,
knowledge, obtained through a self-rating of respondents’ and encouraging action-taking (Shim et al., 2009; Xiao &
financial knowledge (Nguyen et al., 2017; Porto & Xiao, Porto, 2017). The literature showed that those who received
2016). Evidence suggested that having higher objective formal financial education had a higher objective and per-
financial knowledge encouraged sound financial practices, ceived financial knowledge, desirable financial behavior,
such as demonstrating positive short- and long-term finan- and perceived financial capability (OECD & OCDE, 2006;
cial behaviors (Kim et al., 2019), and subjective financial Xiao & O’Neil, 2016). Furthermore, personal finance edu-
knowledge was positively associated with informed borrow- cation typically has a positive influence on financial knowl-
ing behaviors (Fan & Chatterjee, 2017; Seay & Robb, 2013) edge (Bernheim et al., 2001; Brown et al., 2014; Brown
and savings behaviors (Robb & Woodyard, 2011; van Rooij et al., 2016; Danes et al., 1999). However, the results in the
et al. 2012). Additionally, there is a positive association current literature were mixed about whether financial educa-
between financial knowledge and overall financial satisfac- tion courses provided by schools and employers can gener-
tion (Joo & Grable, 2004; Xiao et al., 2014; Xiao & Porto, ate an influence on individuals’ financial behavior (Lusardi
2017), suggesting that financial knowledge could also influ- & Mitchell, 2009; Mandell, 2009; Mandell & Klein, 2009;
ence student loan debt-related satisfaction. The negative Fernandes et al., 2014; Urban et al., 2018).
and significant association between financial knowledge
and student loan-related financial stress highlighted the Implementing personal education in high schools was
importance of financial literacy on student loan repayment found to increase financial knowledge and improve credit
behavior and satisfaction (Fan & Chatterjee, 2019). card use behavior among young adults (Stoddard & Urban,
2020; Urban et al., 2018), which helped them to assume less
H1: Objective financial knowledge is negatively asso- financial risk compared to those who have not taken such
ciated with (a) student loan delinquency and (b) student a course (Lyons, 2003). High school financial education
loan stress, and is positively associated with (c) stu- graduation requirements decrease the private loan amount
dent loan preparation and (d) student loan satisfaction. and reduce the likelihood of carrying a credit card balance
among student loan borrowers (Stoddard & Urban, 2020).
H2: Subjective financial knowledge is negatively However, other studies implied that financial education had
associated with (a) student loan delinquency and (b) limited effects on financial outcomes (Robb & Sharpe, 2009;

Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022 327
Mandell & Klein, 2009; Cole et al., 2016). As with other Chatterjee (2019) found that parental financial social-
education, the influence of financial education decreases ization and receiving parental guidance on finances was
over time (Fernandes et al., 2014; Brown et al., 2016) and negatively associated with student loan worries. A recent
might not be effective in complex financial matters (i.e., study affirmed the significance of financial education and
investment or retirement planning) (Alsemgeest, 2015) or indicated that a comprehensive blend of formal education
for reducing high-cost borrowing behaviors (Bruhn et al., and financial socialization from parents would increase
2016). Those who received financial education provided by the financial satisfaction of student loan borrowers (Kim
employers have demonstrated behavior positively associ- et al., 2021).
ated with financial literacy (Bayer et al., 2009; Bernheim
& Garrett, 2003; Kim, 2008; Kim et al., 2005), such as H4: Formal financial education is negatively associ-
increased contributions to retirement accounts (Bayer et al., ated with (a) student loan delinquency and (b) student
2009), higher financial well-being (Garman et al., 1999), loan stress, and is positively associated with (c) stu-
and greater likelihood to budget, manage asset allocation, dent loan preparation and (d) student loan satisfaction.
and plan for retirement (Prawitz & Cohart, 2014). Overall,
the effectiveness of financial education continues to be a H5: Financial socialization from parents is negatively
variable of interest among researchers. associated with (a) student loan delinquency and (b) stu-
dent loan stress, and is positively associated with (c) stu-
The current study also examines informal financial educa- dent loan preparation and (d) student loan satisfaction.
tion, or parental financial socialization, in relation to stu-
dent loan outcomes. Parental financial education during Method
childhood is associated with a higher prevalence of healthy Data and Sample
financial behaviors in emerging adulthood (LeBaron et al., This study used the 2015 state-by-state National Financial
2020). The literature suggested that parental financial social- Capability Study (NFCS) to examine the determinants of
ization has a profound influence on the financial capability, student loans, including calculating repayment in advance
behavior, and well-being of adult children (e.g., Cole et al., (or loan preparation), being late for repayment (or repay-
2014; Jorgensen et al., 2017; Kim & Chatterjee, 2013; Shim ment delinquency), being concerned about repayment (or
et al., 2009). Financial socialization is defined as acquiring loan stress), and being satisfied with a borrowing experi-
knowledge about money, learning attitudes, money-related ence (or loan satisfaction). This data set was funded by the
beliefs, and money management in various financial prac- FINRA Investor Education Foundation and conducted by
tices such as banking, budgeting, saving, insurance, credit Applied Research and Consulting, with an aim to collect
borrowing and developing the skills necessary to manage information, including financial attitude, financial behavior,
one’s financial resources (Kim & Chatterjee, 2013; Solheim and capability of U.S. adults who were aged 18 and older at
et al., 2011). Previous studies indicated that communica- the time of the survey. Notably, even though a newer wave
tion with parents about money was significantly associated of NFCS (2018) is currently available, some of the main
with financial knowledge and behavior of young adults, student loan-related survey questions were removed in the
including saving and borrowing, investment, and insur- 2018 wave; therefore, in this study, we used the 2015 wave
ance (Afsar et al., 2018; Jorgensen & Salva, 2010; Kim & of NFCS.
Chatterjee, 2013; Kim et al., 2011; Lusardi et al., 2010).
Furthermore, such influences remained important, even The analytical sample of this study included 3,735 partici-
when the children were attending college away from home pants. First, in the overall NFCS sample, those who had stu-
(Shim et al., 2009). In terms of parental informal financial dent loans for themselves and excluded those who borrowed
socialization and borrowing behaviors, Pinto et al. (2005) for their spouses or children included 5,514 respondents.
found that the amount of credit information given by par- We further restricted our sample to non-full-time students,
ents was negatively associated with the outstanding balance because most student loan payments are not due before grad-
carried by college students on their credit cards, while peer uation or for full-time enrolled students. Additionally, we
influence, school education, and mass media all showed only focused on the employed and excluded non-employed
an insignificant relationship with credit card use. Fan and respondents such as homemakers, retired, and unemployed

328 Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022
and disabled individuals. Lastly, the responses “Don’t More than half (52.29%) confirmed that they had con-
know” and “Prefer not to say” were dropped regarding the cerns about not being able to pay off their student loan
key variables except for objective financial knowledge. For debt. 40.93% of respondents reported having calculated
objective financial knowledge, “Don’t know” and “Prefer repayment before applying for student loans. Only 33.68%
not to say” were coded as incorrect answers for each item. would choose the same action if they were to go through
the loan borrowing process again, indicating overall bor-
Of all the respondents, the majority (73.60%) worked full- rowing satisfaction.
time; 41.26% were aged 25–34, and 25.73% were aged
35–44. Around 57% were female, 63% were White, 45.81% Independent Variables
were married, 47.58% reported holding a college degree, Financial Capability. Objective financial knowledge,
22.38% reported holding a post-graduate degree, and subjective financial knowledge, and perceived financial
38.53% had an annual income between $35,000 to $75,000. capability were the three aspects used to reflect financial
Lastly, 49.32% had financially dependent children. capability. First, objective financial knowledge in this study
was measured using six questions that objectively exam-
Dependent Variables ined the respondents’ knowledge of fundamental financial
Four dependent variables related to student loans were exam- concepts, such as numeracy, inflation, bond and stocks,
ined in this study: (a) being late for repayment (loan delin- compounding rate, mortgage, and diversification. Possible
quency), (b) being concerned about repayment (loan stress), objective financial knowledge scores ranged from 0
(c) calculating repayment in advance (loan preparation), and (answered all wrong) to 6 (correctly answered all six ques-
(d) being satisfied with borrowing experience (loan satisfac- tions). The respondents’ average objective financial knowl-
tion). First, being late for repayment, or loan delinquency, was edge was 3.08 on a 0–6 scale.
measured by the question: “How many times have you been
late with a student loan payment in the past 12 months?” in Second, subjective financial knowledge was measured
which responses of “once” and “more than once” were coded using the question: “On a scale from 1 to 7, where 1 means
as 1 and otherwise 0. Second, feeling concerned about repay- very low, and 7 means very high, how would you assess
ment, or repayment stress, was measured using the question: your overall financial knowledge?” Responses ranged from
“Are you concerned that you might not be able to pay off 1 (very low) to 7 (very high). Lastly, perceived financial
your student loans?” It was coded as a binary variable with 1 capability was measured using a single question: “How
if the participant answered “yes” and 0 if he or she answered strongly do you agree or disagree with the following state-
“no.” Additionally, respondents were asked, “Before you ment? I am good at dealing with day-to-day financial mat-
got your most recent student loan, did you try to figure out ters, such as checking accounts, credit and debit cards, and
how much your monthly payments would be?” which was tracking expenses.” Responses ranged from 1 (strongly
coded as a binary variable to determine calculating advance disagree) to 7 (strongly agree). The averages of subjective
repayment, with 1 indicating the respondent tried to figure financial knowledge and perceived financial capability were
out monthly payments, and 0 otherwise. Lastly, being satis- 5.28 and 5.66, each on a 1–7 scale.
fied with the borrowing experience was measured as a binary
variable, using the question: “If you could go through the Financial Education. Formal financial education was
process of taking out loans to pay for your education all over constructed as a binary variable, with 1 indicating that the
again, would you take the same actions or make a change?” respondent participated in financial education offered by a
It was coded as 1 if answered “take the same actions,” as a school, college, or a workplace, and 0 otherwise. Informal
proxy for borrowing satisfaction, and coded 0 if answered financial influence from parents, or financial socialization,
“make a change,” indicating dissatisfaction. “Don’t know” was also used as a binary variable, with 1 meaning “Yes” to
and “Prefer not to say” responses were dropped from the the question “Did your parents or guardians teach you how
analyses for these variables. to manage your finances?” and 0 if answered “No.” Among
all sample participants, only 33.68% reported receiving
In the current study, about one-third (29.14%) of the par- formal financial education, and 47.42% said their parents or
ticipants reported being late on student loan repayment. guardians taught them how to deal with finances.

Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022 329
Control Variables Moreover, sociodemographic characteristics including age,
Completion of a student loan education program and gender, race, marital status, educational attainment, income,
whether the respondents had student loans through federal, working status, and having financially dependent children
private, or a combination of federal and private sources were also controlled in this study. “Don’t know” and “Prefer
were included as control variables, each coded as binary not to say” responses were dropped. The detailed descrip-
variables. In this study, 64.74% reported having completed tive statistics are presented in Table 1.
their educational program for which they borrowed the
loan; 61.78% took out only federal student loans, 11.60% Statistical Analyses
took out only private student loans, and 26.62% borrowed To examine the determining roles of financial capability and
a combination of both federal and private student loans. financial education, we use probit regression models for the

TABLE 1. Descriptive Statistics (2015 NFCS)

Variables (continuous) Obs Mean Std Dev
Objective financial knowledge (0–6) 3,735 3.08 1.56
Subjective financial knowledge (1–7) 3,678 5.28 1.21
Perceived financial capability (1–7) 3,701 5.66 1.40
Variables (dichotomous) Obs %
Loan delinquency 3,569 29.14
Loan stress 3,563 52.29
Loan preparation 3,582 40.93
Loan satisfaction 3,260 33.68
Formal financial education 3,337 30.33
Informal parental socialization 3,619 47.42
Types of loans 3,543
Federal only 61.78
Private only 11.60
Both federal and private 26.62
Completed education 3,673 64.74
Employment status 3,735
Full-time employed 73.60
Part-time employed 17.05
Self employed 9.34
Age
18–24 3,735 16.76
25–34 41.26
35–44 25.73
45–54 11.35
55–64 4.39
65+ 0.51
White 3,735 62.84
Female 3,735 56.95
Married 3,735 45.81
Education 3,735
(Continued )

330 Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022
TABLE 1. Descriptive Statistics (2015 NFCS) (Continued)
Variables (continuous) Obs Mean Std Dev
High school and lower 7.04
Some college 23.00
College degree 47.58
Post graduate 22.38
Income 3,735
less than 35k 29.59
35k–75k 38.53
75k+ 31.89
Having dependent children 3,735 49.32
Note. N = 3,735. Unweighted.

four binary dependent variables, including (a) being late for at sample means. The regression results reported were
repayment, (b) concerned about repayment, (c) calculat- unweighted. The weighted results showed slight differences
ing repayment in advance, and (d) borrowing satisfaction. in coefficients and p-values but remained consistency for
Probit models are nonlinear regressions, and the coeffi- the significance levels and the directions of the associations.
cients are fitted with maximum likelihood. We assume that The weighted results are available upon request from the
the probit model takes the following form: authors.

Pr(Yi = 1|FC, FE, CV) = 𝛷(FC′i𝛽FL + FE′i𝛽FE + CV′i𝛽CV), Loan Delinquency—Who Made Late Repayment? Table 2
shows the probit regression results for repayment delinquency.
where Pr denotes probability, and 𝛷 is the cumulative dis- The objective (β = −0.115, p < .000) and subjective (β = 0.071,
tribution function of the standard normal distribution. FC p = .003) financial knowledge showed opposite relationships
and FE are the financial capability and education variables. with the likelihood of having late student loan payments.
CV includes control variables and intercept. 𝛽s are regres- Providing an additional correct answer to the objective
sion coefficients for these variables. This probit model is knowledge questions was associated with 3.8% decrease in
equivalent to the following latent variable model, esti- the probability of being late for loan repayment, whereas
mated as: an additional point increase in the subjective financial
knowledge scale was associated with a 2.4% increase in
Yi* = FC′iβFL + FE′iβFE + CV′i𝛽CV + 𝜀i, probability. Perceived financial capability was negatively
related to late repayment behavior (β = −0.125, p < .000),
where Yi = 1 if Yi* > 0 and Yi = 0 if Yi* ≤ 0. The dependent and the marginal effect showed that an additional point
variable Yi* is an unobserved continuous real-valued vari- increase in the perceived financial capability was associated
able for respondent i. The observed outcome of the binary with a 4.2% decrease in the probability of engaging in late
choice Yi* is equal to 1 if an affirmative response is provided repayment. Interestingly, formal financial education received
and 0 otherwise. Before conducting probit regressions, vari- from schools or workplaces showed a positive association
ance inflation factors (VIF) were obtained, and no multicol- with being late for repayment (β = 0.115, p = .040), and those
linearity issue was identified. The VIF results are available who obtained financial education were 3.9% more likely to
upon request from the authors. make a late student loan repayment.

Results Moreover, compared with those holding federal-only loans,

Probit Regression Results those who had private loans and a combination of federal
Tables 2–5 present the probit regression results for the four and private loans were more likely to be late on loan repay-
dependent variables, with coefficients, standard errors, and ment. Self-employed borrowers were more likely than full-
marginal effects reported. Marginal effects were calculated time working borrowers to be late on loan repayment. Older

Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022 331
TABLE 2. Probit Regression Results for Student Loan Delinquency (2015 NFCS)
Variable Coef. SE p Sig. dy/dx
Objective financial knowledge −0.115 0.018 0.000 ***
−0.038
Subjective financial knowledge 0.071 0.024 0.003 **
0.024
Perceived financial capability −0.125 0.020 0.000 ***
−0.042
Formal financial education 0.115 0.056 0.040 *
0.039
Informal parental socialization 0.040 0.054 0.452 0.013
Types of loans (Ref: Fed only)
*
Private only 0.176 0.079 0.027 0.061
**
Both federal and private 0.201 0.060 0.001 0.069
Completed education −0.037 0.062 0.550 −0.012
Employment (Ref: Full-time employed)
Part-time employed −0.042 0.076 0.583 −0.014
**
Self employed 0.275 0.089 0.002 0.097
Age (Ref: 18–24)
25–34 0.390 0.084 0.000 ***
0.131
35–44 0.475 0.094 0.000 ***
0.167
45–54 0.422 0.108 0.000 ***
0.152
55–64 1.039 0.133 0.000 ***
0.393
*
65+ 0.721 0.348 0.038 0.273
White −0.134 0.054 0.014 *
−0.045
Female −0.127 0.053 0.017 *
−0.042
Married 0.097 0.062 0.120 0.032
Education (Ref: High school and lower)
Some college −0.342 0.111 0.002 **
−0.107
College degree −0.471 0.107 0.000 ***
−0.155
Post graduate −0.686 0.119 0.000 ***
−0.200
Income (Ref: less than 35k)
35k–75k −0.018 0.069 0.791 −0.006
75k+ −0.200 0.081 0.013 *
−0.065
***
Having dependent children 0.291 0.059 0.000 0.097
Constant 0.094 0.183 0.608
Log Likelihood −1632.052
Likelihood ratio Chi-squared 316.920 df = 24 p < .000
Pseudo R-squared 0.089
Observations 2,964
*
p < .05; **p < .01; ***p < .001. Unweighted.

borrowers, compared with those aged 18–24 and those who Loan Stress—Who Were Concerned About Loan
had financially dependent children, were more likely to Repayment? Table 3 presents the results for student loan
report being late on repayment. White women and those stress or concern regarding being unable to pay off the
with education levels higher than high school were less loans. Those with higher objective financial knowledge (β =
likely to report late loan repayment. −0.122, p < .000) and higher perceived financial capability

332 Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022
TABLE 3. Probit Regression Results for Student Loan Stress (2015 NFCS)
Variable Coef. SE p Sig. dy/dx
Objective financial knowledge −0.122 0.017 0.000 ***
−0.049
Subjective financial knowledge −0.012 0.023 0.610 −0.005
Perceived financial capability −0.084 0.020 0.000 ***
−0.034
Formal financial education −0.030 0.053 0.574 −0.012
Informal parental socialization 0.081 0.050 0.107 0.032
Types of loans (Ref: Fed only)
Private only −0.281 0.077 0.000 ***
−0.112
***
Both federal and private 0.219 0.057 0.000 0.086
Completed education 0.048 0.060 0.418 0.019
Employment (Ref: Full-time employed)
Part-time employed 0.082 0.073 0.257 0.033
Self employed 0.159 0.086 0.065 0.063
Age (Ref: 18–24)
25–34 −0.035 0.077 0.645 −0.014
35–44 0.023 0.087 0.796 0.009
45–54 0.121 0.100 0.227 0.048
55–64 0.296 0.130 0.023 *
0.115
65+ 0.000 0.341 1.000 0.000
White −0.216 0.052 0.000 ***
−0.085
Female 0.054 0.050 0.282 0.022
Married 0.058 0.059 0.321 0.023
Education (Ref: High school and lower)
Some college −0.137 0.110 0.211 −0.055
College degree −0.123 0.106 0.248 −0.049
Post graduate −0.180 0.116 0.123 −0.072
Income (Ref: Less than 35k)
35k–75k −0.323 0.066 0.000 ***
−0.128
75k+ −0.615 0.077 0.000 ***
−0.242
***
Having dependent children 0.291 0.056 0.000 0.116
***
Constant 1.270 0.180 0.000
Log Likelihood −1875.688
Likelihood ratio Chi-squared 343.180 df = 24 p < .000
Pseudo R-squared 0.084
Observations 2,960
*
p < .05; ***p < .001. Unweighted.

(β = −0.084, p < .000) were less likely to report such con- Compared with federal loan borrowers, those who had pri-
cern. Specifically, all other aspects constant, providing an vate loans were less likely to report feeling concerned about
additional correct answer to the objective knowledge ques- student loan repayment, whereas those who had a combina-
tions was associated with a 4.9% decrease in the probability tion of federal and private loans were more likely to have
of feeling concerned about student loans, and an additional such default concerns. Those aged 55–64 were particularly
point increase in the perceived financial capability scale more likely to be stressed over student loan repayment
was associated with a 3.4% decrease in the probability. compared with 18–24 aged individuals. Being White and

Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022 333
TABLE 4. Probit Regression Results for Student Loan Preparation (2015 NFCS)
Variable Coef. SE p Sig. dy/dx
Objective financial knowledge −0.082 0.017 0.000 ***
−0.032
Subjective financial knowledge 0.159 0.023 0.000 ***
0.062
Perceived financial capability −0.018 0.020 0.359 −0.007
Formal financial education 0.138 0.053 0.009 **
0.054
***
Informal parental socialization 0.366 0.050 0.000 0.143
Types of loans (Ref: Fed only)
**
Private only 0.212 0.077 0.006 0.084
Both federal and private 0.069 0.057 0.222 0.027
***
Completed education 0.389 0.061 0.000 0.150
Employment (Ref: Full-time employed)
Part-time employed −0.004 0.072 0.956 −0.002
Self employed 0.127 0.087 0.146 0.050
Age (Ref: 18–24)
25–34 −0.322 0.076 0.000 ***
−0.125
35–44 −0.369 0.087 0.000 ***
−0.141
45–54 −0.338 0.100 0.001 **
−0.128
55–64 −0.419 0.133 0.002 **
−0.155
65+ 0.119 0.329 0.718 0.047
White −0.164 0.052 0.001 **
−0.065
Female −0.140 0.051 0.006 **
−0.055
Married 0.068 0.059 0.250 0.027
Education (Ref: High school and lower)
Some college −0.231 0.113 0.040 *
−0.089
College degree −0.375 0.110 0.001 **
−0.146
Post graduate −0.352 0.120 0.003 **
−0.135
Income (Ref: Less than 35k)
35k–75k 0.005 0.066 0.940 0.002
75k+ −0.017 0.077 0.824 −0.007
***
Having dependent children 0.199 0.056 0.000 0.078
Constant −0.550 0.178 0.002 **

Log Likelihood −1851.625

Likelihood ratio Chi-squared 367.950 df = 24 p < .000
Pseudo R-squared 0.090
Observations 2,978
*
p < .05; **p < .01; ***p < .001. Unweighted.

having an annual income higher than $35,000 indicated less are shown in Table 4. While objective financial knowledge
likelihood of being stressed, but having financially depen- was negatively associated with calculating repayment in
dent children was positively related to being stressed about advance (β = −0.082, p < .000), subjective financial knowl-
student loans. edge showed a positive relationship (β = 0.159, p < .000).
The marginal effects showed that, all other items constant,
Loan Preparation—Who Calculated Repayment in providing an additional correct answer to the objective
Advance? Regression results for student loan preparation knowledge questions was associated with a 3.2% decrease

334 Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022
TABLE 5. Probit Regression Results for Student Loan Satisfaction (2015 NFCS)
Variable Coef. SE p Sig. dy/dx
Objective financial knowledge −0.066 0.018 0.000 ***
−0.024
Subjective financial knowledge 0.104 0.025 0.000 ***
0.038
Perceived financial capability 0.007 0.021 0.733 0.003
Formal financial education −0.072 0.056 0.202 −0.026
***
Informal parental socialization 0.341 0.054 0.000 0.123
Types of loans (Ref: Fed only)
Private only −0.175 0.080 0.029 *
−0.061
Both federal and private −0.390 0.062 0.000 ***
−0.135
***
Completed education 0.272 0.065 0.000 0.096
Employment (Ref: Full-time employed)
Part-time employed 0.059 0.078 0.451 0.022
Self employed 0.055 0.093 0.551 0.020
Age (Ref: 18–24)
25–34 −0.245 0.081 0.003 **
−0.088
35–44 −0.263 0.093 0.004 **
−0.092
45–54 −0.356 0.110 0.001 **
−0.120
55–64 −0.576 0.154 0.000 ***
−0.179
65+ −0.163 0.333 0.624 −0.057
White 0.076 0.055 0.171 0.027
Female −0.131 0.054 0.015 *
−0.048
Married −0.047 0.063 0.455 −0.017
Education (Ref: High school and lower)
Some college −0.346 0.117 0.003 **
−0.119
College degree −0.484 0.112 0.000 ***
−0.173
Post graduate −0.405 0.123 0.001 **
−0.139
Income (Ref: Less than 35k)
35k–75k 0.269 0.073 0.000 ***
0.098
***
75k+ 0.504 0.083 0.000 0.187
*
Having dependent children 0.152 0.060 0.011 0.055
Constant −0.708 0.193 0.000 ***

Log Likelihood −1608.321

Likelihood ratio Chi-squared 305.190 df = 24 p < .000
Pseudo R-squared 0.087
Observations 2,736
*
p < .05; **p < .01; ***p < .001. Unweighted.

in the probability of calculating student loan repayment in those who received financial education from schools or
advance. In contrast, an additional point on the subjective workplaces were 5.4% more likely and those who were
knowledge scale was associated with a 6.2% increase in financially socialized with their parents were 14.3% more
probability. Additionally, both formal (β = 0.138, p = 0.009) likely to calculate loan repayment in advance.
and informal parental socialization (β = 0.366, p < .000)
showed positive associations with the calculating repay- Table 4 also reports the results for control variables.
ment before the application for student loans. Specifically, Compared with those holding federal-only loans, those who

Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022 335
had private loans were more likely to calculate monthly subjective financial knowledge and perceived money-man-
payments before borrowing. Those who completed a degree agement skills. Regarding financial education, both formal
using an education loan were more likely to report calculat- education from school and informal financial socializa-
ing monthly payments during the pre-loan stage. Older bor- tion from parental teaching were examined. The findings
rowers, those who were aged 25–64 (compared with those of this study showed that objective financial knowledge is
aged 18–24), women, those who were White, and those who negatively associated with making late repayments and loan
had higher educational attainment (compared with having stress, thus supporting H1(a) and (b), but it is also nega-
high school or lower) were negatively associated with cal- tively associated with calculating repayment in advance
culating repayment amount in advance, while having finan- and borrowing satisfaction, thereby not supporting H1(c)
cially dependent children showed a positive association. and (d). The negative relationship between financial knowl-
edge and being late for student loan repayments and feeling
Loan Satisfaction—Who Were Satisfied with the Borrowing stressed about student loans is consistent with the literature
Experience? Results for student loan borrowing satisfac- on financial stress and risky financial behavior (e.g., Fan &
tion are shown in Table 5. Objective financial knowledge Chatterjee, 2019; Lusardi & Tufano, 2015).
showed a negative association with the likelihood of taking
the same action if respondents were to re-borrow the loan One possible explanation of the negative relationship
(β = −0.066, p < .000), while subjective knowledge showed a between objective knowledge and loan preparation is that
positive relationship with the likelihood of reporting overall people with higher financial knowledge can be prone to
borrowing satisfaction (β = 0.104, p < .000). The marginal assess their needs for student loans in a more comprehensive
effect results showed that providing an additional correct way than the oversimplified calculation of whether they are
answer to the objective knowledge questions was associ- likely to afford the monthly payments several years down
ated with a 2.4% decrease in the probability of being satis- the road, especially since lenders offer various repayment
fied with the borrowing experience, and an additional point plans based on each borrower’s circumstances. It could be
increase in the subjective financial knowledge scale was more interesting to examine more sophisticated student
associated with 3.8% increase in that probability. Informal loan preparation practices other than only monthly repay-
financial education received from parents showed a positive ment calculation. Future studies could explore this research
relationship (β = 0.314, p < .000), and those who received path if the data on borrowers’ behavior with more advanced
parental financial socialization were 12.3% more likely to loan preparation practices is available. Finally, unexpect-
be satisfied with their student loan borrowing experience. edly, our findings suggest a negative relationship between
objective financial knowledge and student loan borrowing
Compared with federal-loan-only borrowers, those who satisfaction. This could be because the satisfaction measure
borrowed private student loans or a combination of federal is a retrospective assessment for the borrowing experience,
and private loans were less likely to be satisfied with their and more financially literate individuals could be more
borrowing experience. Completion of the degree was a likely to regret and be stressed about student loans. This
positive indicator of borrowing satisfaction. Women, those could also indicate that it is necessary to examine subdo-
who were aged 25–64, and those who had education lev- mains of financial satisfaction using various measures such
els higher than high school were less likely to be satisfied as borrowing experience satisfaction with credit cards, car
with their borrowing experiences. Contrarily, those with loans, and income.
an income higher than $35,000 and those with financially
dependent children were more likely to be satisfied with Subjective financial knowledge was found to be positively
their student loan borrowing experience. associated with being late for student loan repayment, calcu-
lating student loan repayment in advance, and student loan
Discussions, Limitations, and Implications borrowing satisfaction, thus only supporting H2(c) and (d).
This study examined the roles of financial capability and The findings confirmed that subjective financial knowledge
financial education in relation to student loan preparation, is a strong indicator of borrowing behaviors (Allgood &
delinquency, stress, and satisfaction. We measured three Walstad, 2011; Fan & Chatterjee, 2017; Robb & Woodyard,
aspects of financial capability, including objective and 2011). In line with previous studies (e.g., Nguyen et al.,

336 Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022
2017; Kramer, 2016; Robb & Woodyard, 2011; Xiao, Ahn, is consistent with previous studies (e.g., Kim & Chatterjee,
et al., 2014; Xiao, Chen, et al., 2014), we also identified 2013; Shim et al., 2010; Urban et al., 2018). Furthermore,
inconsistency in the roles of objective and subjective finan- parental financial socialization was also positively associ-
cial knowledge. Moreover, more research is needed to fur- ated with loan satisfaction, thus supporting H5(d), as sup-
ther investigate the positive relationship between subjective ported by previous studies (e.g., Fan & Chatterjee, 2019;
knowledge and the likelihood of making late loan pay- Kim & Chatterjee, 2013). These findings suggest that well-
ments, which could be associated with inaccuracies in the implemented financial education mandates along with bet-
self-assessment of financial knowledge. ter financial socialization engagements with parents could
be an effective mechanism (Fan & Chatterjee, 2019; Fan &
The results showed that perceived financial capability was Zhang, 2021; Urban et al., 2018).
negatively associated with being late for student loan repay-
ment and concerned about repayment, thereby supporting The results of the current study did not necessarily suggest
H3 (a) and (b). This finding suggested that individuals’ that financial education programs are ineffective in pro-
confidence in money management may help their ability to moting positive student loan repayment behavior, but they
engage in better financial practices, which was also found did raise questions regarding how student loan borrowers
in previous studies (Tang & Baker, 2016; Xiao & Porto, obtain and utilize financial information from formal educa-
2017). However, inconsistent with the findings from Shim tions, what content should be taught through the financial
et al. (2019), which implied that individuals with low finan- education program, and the duration of the education ses-
cial self-efficacy could face higher psychological stress, we sion to maximize the effectiveness in enhancing financial
found that, specifically regarding student loan stress, per- behaviors. Also, as suggested in Urban et al. (2018), well-
ceived financial capability showed a negative relationship funded teacher preparation could be key to successfully
with stress induced by such debt. implementing financial education programs. Moreover, the
timing of financial education also matters. Memory fades,
The study shows that those with higher objective knowledge and cognitive abilities, which could worsen with age, could
and perceived financial capability were less likely to make a diminish the effect of financial education. It is possible that
late student loan payment and feel stressed about their stu- those who have recently received financial education, for-
dent loans. On the other hand, those with better subjective mally or informally, can demonstrate better student loan
financial knowledge and informal financial education from outcomes. It is worth further examination on the timing
parents were more likely to calculate student loan monthly of financial education and financial outcomes for future
payments in advance and feel satisfied with their borrowing studies.
experiences. Given the variations in the influences of objec-
tive and subjective knowledge, perceived financial capabil- The study also indicates that, compared with those who
ity, and formal and informal financial education on student only borrowed federal loans, those who borrowed from
loan outcomes, different emphases can be placed on student multiple student loan sources (both federal and private) or
loan interventions and education programs to customize the only from private loans were more likely to exhibit loan-
focus on these influential factors. delinquency behavior, which is consistent with Robb et al.
(2019). Borrowers using multiple loans or using private
Surprisingly, we found that formal education received at loans only were also less likely to feel satisfied with their
school or in the workplace were positively associated with overall borrowing experience. According to Minsky (2018),
being late for student loan repayments, which could be cor- the repayment terms for federal student loans are more flex-
roborated with previous studies claiming that financial edu- ible than private student loan terms and typically have lower
cation might have limited and delayed effects on financial interest rates compared with private student loans. A grace
outcomes (Brown et al., 2016; Fernandes et al., 2014). We period is granted to students who graduated, left school,
found that both formal education from schools and in the or dropped below half-time enrollment, depending on the
workplace and informal financial socialization from parents federal student loans type. Federal student loans also offer
were positively associated with calculating monthly repay- options to postpone students’ loan payments if borrowers
ments in advance, thus supporting H4(c) and H5(c), which are having trouble making payments. Notably, private loan

Journal of Financial Counseling and Planning, Volume 33, Number 3, 2022 337
borrowers were more likely to calculate monthly repay- workplaces. More research is needed to closely examine
ments before borrowing. Interest rates of private loans financial education programs in order to maximize the effec-
are set by the lender regarding a student loan borrower’s tiveness in enhancing student loan financial behaviors and
credit score and cosigners on the terms or conditions. This satisfaction. Based on the significance of parental financial
could explain why private-loan-only borrowers compared socialization found in this study, parents should recognize
with fixed-interest-rate federal student loan borrowers were their critical roles in shaping student loan behaviors and the
more likely to calculate monthly payments before applying. attitudes of borrowers. More research is needed to exam-
ine how to improve parental involvement and socialization
This study is limited by the cross-sectional dataset that during their informal financial education process with their
was used, so the results did not imply any causality. children at early ages, so that, when entering adulthood,
Longitudinal datasets and appropriate methods are needed adult children can make informed student loan decisions and
in the future to examine long-term student loan preparation, demonstrate responsible borrowing behaviors.
repayment behavior, stress, and satisfaction to examine pos-
sible causal relationships. For example, long-term surveys For financial counselors and planners, understanding the
from before borrowing through the repayment period could different roles played by financial capability and the finan-
provide better insights into whether borrowing experience cial education experiences of their clients can provide
could possibly be related to an increase in financial and stu- valuable insight to provide better services based on client
dent loan literacy. Some limitations of this study include characteristics. Financial practitioners can also emphasize
the lack of detailed information in the data. For example, the significant role of perceived money management skills
we could not account for student loan deferment and/or for- and improve financial confidence while providing counsel-
bearance options available for borrowers who might have ing or planning services, because our findings showed that
a short-term financial hardship and therefore paused their borrowers with higher confidence in their own financial
repayments. Future studies can explore these options if data skills and capabilities were less likely to experience student
is available. Another limitation related to data limitation is loan delinquency and stress.
that the timing of receiving financial education is not avail-
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of Consumer Studies, 40(6), 712–721. https://doi. or affiliations with any commercial interests related to the
org/10.1111/ijcs.12285 subjects discussed within this article.
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Marketing, 35(5), 805–817. https://doi.org/10.1108/ cial support for the research, authorship, and/or publication
IJBM-01-2016-0009 of this article.

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