Association for Public Policy Analysis & Management

Student loans now account for over $1 trillion in debt in the United States, surpassing credit card debt as the second largest source of debt after mortgages. Without previous experience in the financial market beyond a checking or savings account, concern may arise that 18 year-olds make suboptimal student loan decisions due to limited information. One potential policy lever that could mitigate these information problems is providing or requiring high school courses in personal finance. While recent research regarding the effectiveness of state-mandated financial education in high school on credit behavior is mixed (Bernheim et. Al., 2001; Brown et. Al., 2015; Cole et. Al, 2015; Tennyson and Nguyen, 2001), recent work suggests that when courses are rigorous, state-mandated financial education requirements can increase credit scores and reduce default rates (Urban et. al., 2015).

This paper extends this body of research by estimating the causal effect of financial education on several components of student loans. The analysis contains three parts, drawing on both cross-state comparisons as well as administrative data that compare school districts within a state.  These complementary analyses all indicate significant effects of personal finance courses on student financial aid behaviors.

First, we determine if states requiring financial education prior to graduation have different rates of borrowing and different amounts of student loan amounts for 2-year and 4-year college students. We use a difference-in-difference approach to estimate this using a panel of states from 2007 to 2015 and data from the Common Data Set, the Integrated Postsecondary Education Data System, the US Department of Education Pell Grant Files, and the Fiscal Operations Report and Application to Participate, compiled by College In Sight.

Second, we use data from 2007-2015 recording the total amount of Free Application for Federal Student Aid (FAFSA) awards for all states to determine how financial education can incentivize students to fill out the FAFSA and potentially earn grants or subsidized loans.  

Third, we use unique administrative data from the state university system for a state that does not have a financial education course mandate.  This allows us to examine how an individual student’s exposure to financial education courses changes initial financial aid decisions.  We track all high schools in the state over the period 2000 through 2014 to determine whether they ever offered personal finance courses and the years in which these courses were introduced.  We match this with administrative records for all students attending any public university within the state using high school identifiers.  Preliminary results suggest that students from high schools offering personal finance were more likely to obtain scholarships and received larger scholarship amounts, relative to students from the same school before the personal finance course was offered and students from high schools not offering personal finance.  There is no difference in whether or not a student obtains a Pell grant, takes out a student loan, or takes out a higher student loan amount conditional on obtaining loans.