Joe Murray, First Generation College Student Advising Interest Group Chair
Hannah Yang, Research Associate
“Juan” is a first-term freshman who made an academic advising appointment to discuss needed courses for next term. When he arrives for the appointment, he has something else on his mind – his financial situation. Juan received grants and loans for college, but still has a $5,000 gap of unmet need and a $500 credit card debt. Juan has campus work-study hours he fulfills weekly, but he is worried about paying for next year. He has considered “stopping out” to work full-time until he can earn enough money to pay for another term. Juan is also financially illiterate: he does not understand the interest agreement on his credit card bills or his loans, or how to budget his money.
“Juan” is not unique. As most academic advisors know, students present advisors with all kinds of personal issues, including financial ones, when they seek advice. Although most advisors are not trained financial aid counselors, it is important that we have a general understanding of available financial resources if we are to refer students to the proper “expert.”
When students with financial needs come to us regarding their financial situation, we can tell them about a new financial tool called Individual Development Accounts or IDAs. IDAs are matched savings accounts that can help low-income students and their families save toward postsecondary education. In addition to matching savings from 2:1 to as high as 8:1, IDA includes financial literacy education, asset-specific education, and case management.
What is an IDA tool?
Low-income students and their families can open an IDA account (a matched savings account for postsecondary education) with a nonprofit organization and start saving. For example, if a student saves $1,000, then the nonprofit organization matches the student savings dollar-for-dollar or more. Depending on the match rate, students can make $2,000 - $4,000 on a $1,000 investment. The student savings and the match are held in a bank and paid directly to the education institution. As the student saves, he receives case management, asset-specific education, and financial education from the nonprofit. For more information about IDAs including eligibility, see the FAQ and FAQII available on the Web site.
Why a financial tool?
Finances play an important role in whether low-income students remain in college (Lyons, 2004; Paulsen & St. John, 2002; Tinto, 1993). The cost to attend postsecondary institutions continues to increase and merit-based aid programs have replaced needs-based aid in many states. Loans are on the rise (Reed, 2008). Paulsen and St. John (2002) found that due to tuition increases, financial aid (loans and grants) is often insufficient in helping low-income students persist. These authors also found that as unmet need increases, student persistence decreases as these financial concerns affect student retention.
In addition to an increasing amount of loan debt, many college students fall victim to credit card debt. A Nellie Mae study (2005) found that the average college student graduates with more than $2,000 in credit card debt. Lyons (2004) found that students who have trouble handling credit card debt also were more likely to receive need-based financial aid and their parents provided little to no financial assistance. Lyons further noted that these financial strains may affect the retention of low-income students.
What are the benefits of an IDA?
Not only do IDAs provide students with additional money to cover unmet need, IDAs have a financial education component that can help low-income, first-generation students manage their money and minimize credit card debt. Lyons (2004 and 2007) suggested that IDAs can help at-risk students better manage their money, reduce stress, and subsequently help them remain in college. In addition to providing a financial education component and serving as retention tool for low-income students, IDAs can:
- Encourage aspirations and early commitment for college. Saving, even a small amount, increases aspiration to go to college which serves as a recruitment tool.
- Reach students outside the financial aid system. Students who default on their loans, students who lose financial aid because they are not making satisfactory academic progress, and students in non-degree programs can all use IDAs.
- Empower students. When low-income students successfully save they learn to appreciate the results of their savings and are empowered.
- Decrease debt and default rates. IDAs can provide a different avenue from loans to make up the funding gap.
How can we find IDA information we can pass on to our students?
To find a nonprofit community agency in an area with an IDA tool review the following links:
Students should contact the nonprofit nearest their area and talk to the IDA coordinator. Academic advisors should check with their institution’s financial aid office to determine how much information is available on campus regarding IDA. Advisors also can provide basic information to students about financial education as a retention strategy - see partnership example 16 on the IDA-PAYS Web site.
Now imagine meeting “Juan,” the student from the beginning of this article. This time his advisor explains the basics of starting an IDA and refers Juan to the institution’s financial aid office. With guidance from a financial aid counselor, Juan begins saving a small portion of his work-study paycheck. His savings are matched at the end of his freshman year by the local nonprofit agency thus allowing him to persist in school without stopping out. Juan learns more about financial basics from the agency and begins to lower his credit card debt. The success he has with his finances positively affects his studies; the financial education skills he learns transfer to his time management and study habits. With less financial stress Juan is better able to focus on what he truly cares about – being a college student. Next time he sees his academic advisor Juan asks about majors and summer internships!
Rossier School of Education
University of Southern California
Note: The Center for Higher Education Policy Analyis (CHEPA) at USC, under the direction of Dr. Adrianna Kezar, received a Lumina Foundation for Education grant to conduct a three-year study to examine the potential for increasing IDA use for educational purposes and to explore the higher education community’s involvement with IDAs and the potential for greater participation. See the project Web site for detailed information about the research study and findings.
Lyons, A. C. (2004). A profile of financially at-risk college students. The Journal of Consumer Affairs, 38(1), 56-80.
Lyons, A. (2007). Credit practices and financial education needs of Midwest college students. (Working paper 2007-WP-23). Networks Financial Institute: Indiana State University.
Nellie Mae. (2005). Undergraduate students and credit cards in 2004: An analysis of usage rates and trends. Retrieved from www.nelliemae.com/library/research_12.html
Paulsen, M., & St. John, E. (2002). Social class and college costs: Examining the financial nexus between college choice and persistence. Journal of Higher Education, 73(2), 189-236.
Reed, M. (2008). Student debt and the class of 2007. The Project on Student Debt, an initiative of The Institute for College Access & Success. Retrieved from http://projectonstudentdebt.org/files/pub/classof2007.pdf
Tinto, V. (1993). Leaving college: Rethinking the causes and cures of student attrition (2nd ed.). Chicago: University of Chicago Press.
Cite this article using APA style as: Murray, J., & Yang, H. (2010, September). Add a new financial tool to your advising toolkit. Academic Advising Today, 33(3). Retrieved from [insert url here]