Why College Students Dropout and How To Fix It

Photo Courtesy of: Francisco Osorio

There was a time not so long ago when schools hung their reputation on their ability to weed out students. You probably heard it during your first-year orientation from a tepid man in his late 60s, “Only the strong will survive, and the weak? Well, they won’t be here next year.” Not until recently did our attitude toward student success change. With a growing emphasis on the user experience and our newfound ability to aggregate and analyze big data, schools are beginning to realize that keeping students is much cheaper than recruiting them.

In the past, schools invested billions of dollars into building new gyms and state-of-the-art facilities. They adopted the mantra of “build it and they will come.” It’s an effective tactic that helps recruit the best and brightest, but it doesn’t address why they leave. Retention is a growing problem for schools around the country, and it’s an issue that needs to be addressed.

But how exactly can schools keep the students they recruit? Over the past several years, we’ve seen financial literacy programs spring up on college campuses across the country. With the rising cost of tuition and student debt and the lack of professional opportunities afforded to undergraduates during and after graduation, it’s crucial that schools equip their students with financial literacy education. Topics such as financial aid, loans, over-borrowing, and managing budgets are just some of the key concepts that should be addressed. Knowledge in these areas can help students better manage expenses like tuition and rent.

While there’s little evidence to suggest that financial illiteracy leads to students dropping out, we can assume that students who don’t understand concepts like over-borrowing will likely over-borrow. But just how misinformed are college students when it comes managing their finances?

In a 2015 study on Millennials and Financial Literacy, PricewaterhouseCoopers (PWC) analyzed the personal finance of over 5,500 respondents between the ages of 23-35. The study looked at the financial characteristics of millennials as well as the factors that ‘threaten their economic aspirations and security. The study found the following:

24% of millennials demonstrated basic financial literacy knowledge.
Only 8% demonstrated high financial literacy.
Nearly 50% of millennials don’t believe they could come up with $2,000 if an unexpected need arose within the next month.
Nearly 30% of millennials are overdrawing on their checking accounts.
Only 12% sought help on debt management.

It’s All About The Money… Right?

High school students are taught that hard work and good grades are sufficient for success in higher education. They’re promised higher paying jobs and bright futures. On top of that, the government gives them blank checks and expects them to understand the repercussions of not paying that money back. Underneath all the glitz and glamour lies the harsh reality of student loan debt. You can ask almost any college dropout why he or she dropped out, and you’re likely to get the same response — “I dropped out for financial reasons.”

According to the Bill & Melinda Gates Foundation, the number one reason students drop out of college is because they’re overcome by the stress of having to work and attend school at the same time. Despite their best efforts, the stress takes its toll. In fact, a study conducted by the American Psychological Association (APA) cites money as the biggest cause of stress. Interestingly enough, finding money to pay for school is not as big of a problem as balancing school and work. Students who drop out are almost twice as likely to blame juggling work and school as their main reason as they are to blame school expenses (51 percent to 34 percent). Moreover, 36 percent of those who drop out say that even if they had a grant that paid for all of their expenses, it would be difficult to return.

If money to pay for school is readily available then why do students drop out for financial reasons?

As it stands, students have two options. The first option is to borrow enough money so that there’s no need to get a job. Because school tuition has increased substantially over the past two decades, this option means borrowing $100k+ over 4 years. That translates to $100K plus interest, no guarantee of a job after graduation, and a 6 month window after graduation before their first student loan payment is due.

The second option is the most popular but least effective for those who want to graduate. This option sees students borrowing a portion of their expenses and offsetting the difference by getting a job. It seems like a smart choice for the recent high school graduate who wants to get some work experience under his belt while going to school. However, this option becomes a little more difficult for older college students who have families and need their entire income to pay for household expenses.

People fail to understand that not all college students are 18 years old. Many of them are full-time working professionals who are trying to give their families a better life. To this demographic, college isn’t about binge drinking on thursday nights or joining a student organizations during your spare time. These people face real problems with real consequences.

In the report by the Bill and Melinda Gates Foundation, a young woman in Seattle said, “Yeah, I think [working and going to school] was hard. You want to work so that you can help pay off [your tuition and loans] so you don’t have this accumulating debt. I think, for me, it always got in the way. I didn’t have enough time in the day to get everything done.”

It’s not the money itself but how students choose to use it that’s the problem

If you give someone the tools and equipment necessary for building a house, does that mean they can build the house? Of course not. The supplies themselves aren’t sufficient if the knowledge to build the house isn't there. Student loans work the same way. You can have enough money to get through college but if you don’t know how to manage that money then you could be doomed for financial burden.

There are different things that can be done to help address this issue, and that’s precisely what many schools are doing.

Over the past several years, schools have turned their focus to financial literacy programs. Some schools have opted to build programs from scratch, while others have partnered with financial literacy organizations like iGrad.

The University of Michigan has long since been a proponent for financial literacy among students and young alumni. “We found that too many of our students that we chatted with may have heard about all of this, but don’t know where to begin to act on much of it,” says Vedder. Through the University’s Financial Literacy Resources webpage, students have access to a variety of financial tools meant to broaden their understanding of finance-related issues. Through a strategic partnership with Michigan State University Federal Credit Union, these financial literacy resources are made available at no cost. The content available to students includes blogs, videos, recommended books, detailed articles, and in-person seminars. Students have the opportunity to learn about building and maintaining good credit, personal budgeting tips, ways to minimize fraud and identity theft, methods to increase savings and home-ownership information.

On the flip side, schools like the Massachusetts Institute of Technology (MIT) have turned to iGrad—an online financial literacy platform geared specifically to college students. “Finances are a key aspect of graduate school, and graduate student debt and financial literacy is a topic of increasing discussion on the national stage,” says Dr. Christine Ortiz, Dean for Graduate Education. iGrad’s platform offers users an engaging and cohesive user experience—one that can be easily “sliced and diced” by administrators to offer personalized support directly to students. iGrad’s cloud-based platform provides students with dynamic modules, articles, infographics, videos, townhall questions, games, webinars, and much more.

iGrad Vice President Kris Alban says MIT’s decision to implement the iGrad financial literacy discipline is an affirmation of iGrad’s thought leadership and pioneering work: “When one of the leading higher education institutions examines all of the options out there and chooses iGrad, that tells us that we are succeeding in our mission of delivering first-class financial literacy education.”

In addition to in-house programs like the one at the University of Michigan, many outside agencies, including government organizations, provide financial literacy program development tools to institutions of higher education. Many of them have consultants who are ready and willing to help schools build their own financial literacy program.

Some schools have gone beyond financial literacy programs as a way of improving retention including:

- Requiring financial literacy courses for first-year students

- Incorporating financial literacy material to pre-existing financial aid orientations

- Hosting free financial literacy workshops around campus

Do Financial Literacy Programs Work?

In short, yes. In a 2014 survey of college administrators, iGrad found that students who attend schools with financial literacy programs are less likely to overborrow compared to students who attend schools without a financial literacy program. In fact, 17.3 percent of institutions with a financial literacy program in place reported that their students borrowed less than the maximum amount awarded to them at least half of the time, versus 12.6 percent of institutions without a program in place. This outcome was strengthened as reported usage of the financial literacy program increased.

Should you implement a Financial Literacy Program?

With student loan debt bubbling over $1.3 trillion, there’s no doubt schools should be taking action. It’s often best to start with an assessment of what is currently being done across campus, followed by an assessment of your students.

Questions to ask:

Are they at risk? Start by looking at your loan default rate.
Do you see trends in the type of students who are defaulting?
How does that overlay with those students’ retention? How many graduated?
How many left after one year?
Does academic success play into it?
Where do they come from?
How old are they?

Is it worth the money?

The nature of higher education, funding and budgets makes it difficult for schools to take action. Not only are budgets limited and almost always allocated to different departments or programs across campus, the uncertain outcome of such a program can be too much to bear for some. So, is it worth the money? The answer to such a question can be determined with some simple arithmetic.

Take the average number of credits taken by all of your full-time students and multiply it by the cost per credit:
Now enter your new freshman student enrollment:
Now enter your attrition rate after one year and the actual number who left for financial reasons:
Result: 300 students leave for financial reasons X $3,000 loss per semester X 9 semesters.

If you implemented a financial literacy program and kept just 30 of those 300 students, you would save $540,000 over 2 years.

It’s hard to argue against those numbers. Even if you invest $100,000 into a financial literacy program and only retain 5% of those students, you’re still coming out on top. And who wouldn’t want improved retention rates?

There’s no question that even the most rudimentary financial literacy programs will yield benefits for a school. In a world where student loan debt is the second highest form of consumer debt, a financial literacy program doesn’t just make sense, it makes money. Just run the numbers.

Why College Students Dropout and What Some Schools Are Doing To Fix It