Fri May 12

Studying can be a costly choice. Universities should address young people’s financial literacy gaps

Written by Tracey West, Lecturer in Behavioural Finance, Griffith University

This article is part of our series on big ideas for the Universities Accord ^[1]. The federal government is calling for ideas to “reshape and reimagine higher education, and set it up for the next decade and beyond”. A review team is due to finish a draft report in June and a final report in December 2023.

Australians with a HECS-HELP debts are facing an estimated 7.1% increase ^[2] on their debts come the middle of the year, thanks to inflation. Some students have been expressing shock and dismay ^[3] as their loans are interest-free and they believed they would not grow.

Although it is not “interest”, the effect for borrowers is the same. Decades of low inflation have meant HECS-HELP indexation has been largely ignored – until now.

This comes on top of already-significant HECS-HELP debts. An arts and law undergraduate this year now pay more than A$15,000 per year ^[4] in fees as a full-time student.

The repayments (which do not start until a certain income threshold is reached) impact disposable income and borrowing capacity ^[5] and may negatively impact women ^[6] disproportionately.

This is why universities should do more to help students better understand their HECS-HELP debt and make financial decisions in general. The Universities Accord is a prime opportunity to initiate this change.

The accord review is looking at how universities can meet the knowledge and skills needs of the future. On top of other generic skills learned at university, such as communication, collaboration, problem-solving and critical thinking, we need to add financial literacy.

Studying is a financial decision

It can be argued universities have a moral obligation to build financial literacy skills and educate students about how course fees are charged and then repaid when they start working.

Universities rely on student fees as a substantial part of their funding. And students accrue significant amounts while studying – often in the tens of thousands of dollars.

The 2021 ANZ Financial Wellbeing Survey ^[7] found that 18–24 year olds struggle with financial planning, choosing products, understanding online risks and credit-trap awareness.

A young woman works with a calculator and laptop with sheets of paper.

Young Australians do not have good levels of financial literacy. Shutterstock

What is financial literacy?

Financial literacy is a core life skill ^[8]. It includes lodging tax returns, managing superannuation and ensuring you have enough money to look after yourself and your family.

It requires you to be competent in many aspects of the financial decision-making process. It includes the person’s knowledge of financial concepts, their ability to gather and sift through information and compare products, and their confidence in making decisions involving money.

Although the concept is broad, there is a set of five questions ^[9] about interest rates, the stock market and mortgages that are regularly used to measure an individual’s level of financial literacy.

The Household, Income and Labour Dynamics in Australia survey ^[10] has asked these questions and shows a decline in average correct answers ^[11]. Between 2016 and 2020 men went from 4.1 to 4.0 and women went from 3.7 to 3.5.

More alarming than the overall decline and increasing gender gap is the decline in financial literacy for those aged 15 to 24. Average scores fell from 3.4 to just 2.9 out of a possible five points for young people.

Why should unis get involved?

Nothing substantial is currently being done to address this knowledge gap among young Australians.

In its early iterations, the National Financial Literacy Strategy (later named the Financial Capability Strategy ^[13]) focused on driving improvement through formal education in schools.

However, the effort has not shifted the dial ^[14] on school performance in terms of financial literacy and there are issues with the focus on maths ^[15] in the school curriculum over building specific financial literacy skills.

The US example

Making financial literacy classes compulsory is not an overly ambitious goal. In the United States, 19 states ^[16] either require or plan to require students to do a personal finance course to graduate from high school.

There are signs this may be mandated in colleges and universities. A 2019 US Treasury Department report ^[17] recommended universities and colleges “should require mandatory courses to teach students financial concepts and skills”. This would include:

clear, timely and customised information to inform student borrowing
communicating importance of graduation and major on repayment of student loans
preparing students to meet financial obligations upon graduation.

Many US universities already have financial literacy courses. The Ohio State University, for example, runs a financial coaching program ^[18] to assist thousands of students each year in setting financial goals, budgeting and banking, credit, debt repayment, saving and retirement planning.

How can we improve financial literacy?

A young person works on a computer next to a cup, book and phone.

Universities could mandate financial literacy courses as part of graduates. Specific information about student debts could also be provided before students take on a loan. Vlada Karpovich/Pexels

There are many opportunities for Australian universities to formalise financial education.

At the strategic level, they should add “developing financially capable students” to the list of graduate attributes.

They could then mandate all students complete a course on managing personal finances as part of graduation requirements. There could be flexibility about how this is done – online and cross-institutional study are both obvious options.

Student services can also provide workshops on tax, budgeting, superannuation, insurance, inflation and the economy and investing.

Finally, if students are electing to defer their fees via HECS-HELP, they should be required to complete a specific non-graded financial literacy module to better understand the implications of accruing the debt.