The Influence of Financial Literacy on Financial Behaviors: Evidence From Mandatory Federal Student Loan Entrance Counseling

Abstract

This study examines the relationship between mandatory federal student loan entrance counseling, financial literacy, and financial behaviors using evidence collected from federal student loan borrowers as part of the National Student Financial Wellness Study conducted by The Ohio State University. Results from a structural equation model indicate that effective federal student loan entrance counseling is positively related to financial literacy, which is associated with more positive financial behaviors. Additionally, the results show that positive financial behaviors are associated with lower expected student loan debt burdens. Although the results indicate that mandatory federal student loan entrance counseling may contribute to increased financial literacy, positive financial behaviors, and reduced debt burdens of many students, the information delivered in entrance counseling seems to be "lost" on about one-third of the students in the sample. The result that financial literacy is associated with positive financial behaviors is promising for family and consumer sciences professionals as they seek to educate students and communities about personal finance topics. Results also highlight the need to supplement or enhance mandatory student loan entrance counseling with other resources and forms of financial education.