Picture a college student who successfully applies for financial aid, secures enough funding to cover their tuition and living expenses, and excitedly embarks on their higher education journey.
However, as the semester progresses, they find themselves drowning in debt and unable to financially sustain themselves. Overwhelmed by these circumstances, they feel forced to drop out of school.
This unfortunate situation is not uncommon among many college students today. While financial hardship is undoubtedly a concern for students from all backgrounds, those who lack basic financial literacy skills may face an even greater risk of dropping out.
The link between financial literacy and student retention has become increasingly evident in recent years as institutions seek ways to support their students beyond academics.
In this article, we will dive deeper into the link between financial literacy and student retention, exploring why it is so critical for universities to prioritize financial education as part of their support systems.
The Challenge of Student Retention
Although there are many reasons an individual may choose not to complete their college education, financial factors are often a huge contributing factor.
With the rising cost of tuition and the increasing amount of student loan debt, students are forced to make tough decisions that weigh both the academic and financial benefits of pursuing higher education.
This leads to substantial student attrition rates in higher education due to a lack of resources or finances necessary for successful completion.
Due to the high cost associated with higher education, many students struggle with staying enrolled and subsequently graduating from college or university. Research conducted found that only 58% of freshmen graduate from their institution four years later.1
The Institute For College Access and Success found that when asked how worried students would be about needing to drop out of college if a financial setback such as a large car-repair bill arose, 35% were very worried, and an additional 29% were somewhat worried.2
These statistics highlight the fact that many students in higher education face potential hurdles due to their lack of finances.
There are many contributing factors when it comes to student retention and attrition, but one factor is certain – money plays an important role.
Financial barriers can prevent students from enrolling or continuing their education after they have begun. Creating a need for effective financial literacy programs and resources at universities to help guide them through the successful completion of college degree requirements.
Programs that focus on teaching about personal finance management, budgeting strategies, smart borrowing principles, and other financial literacy topics can go a long way.
It can lower student loan default rates or delinquency rates among college students because graduates with larger loan debt often have difficulty starting repayment following graduation. In fact, 85% of student loan borrowers say difficulty in saving has delayed their ability to buy a house.3
Ultimately, these initiatives could also lead to increased student success since understanding proper personal finance management helps avoid excess loans and also serves as motivation for individual achievement during their studies.
By implementing strong financial educational opportunities tailored towards student success and providing access to those opportunities, universities could see an increase in graduation rates due to better financial wellness among their students.
The Financial Literacy-Student Retention Nexus
As mentioned earlier, the link between financial literacy and student retention is an important one. In recent years, there has been increasing evidence that financial stress and debt are major contributors to dropping out of college.
The importance of financial literacy extends far beyond simply managing one's money effectively. It plays an integral role in students' ability to persevere throughout their college education.
Research has consistently shown that financial troubles can be detrimental not only in terms of academic progress but also overall well-being and mental health.1
According to The National College Health Assessment, students who suffer from financial stress are far more likely to experience mental exhaustion, depression, anxiety, and even trouble sleeping.1 This often leads to poor academic performance, which can easily lead to a decision to drop out of college.
As if this weren't enough, universities have reported that financial stress alone is the leading reason that students drop out.2
When you consider how financial stress and poor mental health can form a vicious cycle, it becomes clear that financial literacy is not just a nice-to-have skill for students but rather a necessary tool.
Without adequate financial literacy, students may find themselves ill-prepared to manage the financial challenges and responsibilities that arise during their academic journey.
The Benefits of Financial Literacy Programs
With access to financial literacy programs – inside and outside the classroom – students have a greater chance of graduating with less student loan debt and improved prospects for long-term financial stability.
At its core, financial literacy education is about empowering students with knowledge that will help them avoid costly mistakes related to budgeting, credit cards, and borrowing more than they can repay.
We’ve seen this time after time with studies showing that taking part in such programs leads to fewer defaults on student loans. Additionally, by providing educational advice on topics like smart borrowing practices or using good budgeting techniques, students are given the tools needed to make proper decisions.
These are the tools that will be essential when it comes to managing their own finances.
While these materials may train someone today for current habits, they are being equipped for long-term financial success, which would not be possible without effective instruction at the right times in each individual's life.
Many students may be feeling overwhelmed or even intimidated by the process of managing their debt. But when provided with clear resources on how to do so, students are much more likely to be successful in navigating financial decision-making.
By providing them with tools to create healthy finances, schools can encourage student engagement, which is essential for academic performance and a greater chance of graduating.
Finally, learning how to budget smartly and take control of finances can provide long-term benefits for individuals. Here are some of the key financial indicators that experts point to in terms of financial flexibility and stability further down the line:
- Long-term savings strategies: Young people may need a retirement plan, college funding for their children, or want to set aside money for vacations and other events. Learning how these activities can fit into their budgets is important for achieving long-term wealth stability.
- Refinancing decisions: Depending on goals like shortening repayment timelines or reducing interest rates, financial literacy programs can help students understand the best way to structure their debt.
- Credit score management: Credit scores are important for young adults who may need credit cards, mortgages, or other types of loans in adulthood. Financial wellness education can provide knowledge on how managing such scores over time and making smart choices with money helps build a better score in the future.
Set Your Students up for Success
Financial literacy has a significant impact on student retention and overall well-being. By prioritizing financial education and providing students with the necessary skills, knowledge, and support, universities can help their students succeed academically while also promoting their long-term financial stability.
Learn how the award-winning, personalized, iGrad financial literacy platform equips students with the tools needed to succeed in the real world of personal finance.
1 - https://www.studentclearinghouse.org/nscblog/research-center-releases-2020-persistence-and-retention-report/
2 - https://www.insidehighered.com/news/2022/02/25/survey-college-students-need-help-financial-literacy
3 - https://scholarshipamerica.org/blog/the-far-reaching-impact-of-the-student-debt-crisis/
4 - https://www.acha.org/documents/ncha/NCHA-II_SPRING_2019_US_REFERENCE_GROUP_EXECUTIVE_SUMMARY.pdf
5 - https://journals.sagepub.com/doi/10.2190/CS.16.3.c