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Cascade: No. 82, Winter/Spring 2013

Spotlight on Research: Youth Debt and College Graduation*

The rise in debt among youth to finance their higher education has engendered a great deal of discussion. Much of the attention has been focused on the angst that arises when the debt has to be repaid. This has been especially burdensome on students from lower-income households. While this is worthy of concern, another aspect of the educational-related debt that is being examined is whether the debt was worth it. More specifically, what is the association of the debt with the borrower’s graduation from college? Some investigations not only consider the relationship between educational loans and college graduation but also include the influence of the student’s family’s income. A recent study by Min Zhan has augmented the latter inquiry by expanding the amount of debt to include credit card debt related to educational expenses (in addition to educational loans), as well as taking into account the influence of parental financial assets (net worth) on a student’s completion of a college degree.1 What follows is a summary of her study.


Marvin M. Smith, Ph.D., Community Development Economic AdvisorMarvin M. Smith, Ph.D., Community Development Economic Advisor

Zhan pointed out that higher education costs are a major barrier to gaining access to college and reaping the success from a college education. This is particularly challenging for low-income and minority families. Consequently, many students and their families rely on debt to finance higher education. “For example, about two-thirds of college graduates in 2008 completed their degree by taking out some type of loan.” According to Zhan, the increasing reliance on loans to finance college costs has been accelerated by several factors: a sharp rise in college costs over the decade; families’ insufficient income and savings to cover the escalating costs; a shift in financial aid policy from “need-based aid toward merit-based aid and educational tax credits”; and the increase in accessibility of federal and private loans to students and their families. Thus, loans have become one of the predominant vehicles for many families to finance the cost of college.

The deregulation of financial markets since the 1990s has also given rise to another source of funds to help cover college costs, namely credit cards. Credit cards have been made available to college students, and, as a result, credit card ownership and credit card balances have risen dramatically among this group during recent years. Zhan indicated that many college students “rely on credit cards for paying direct educational expenses, including textbooks, school supplies, and tuition.”

The author underscored some of the positive and negative aspects of using educational loans and credit card debt for college education. She pointed out that having access to credit “could increase the opportunity for a [student] to enroll in and graduate from college, compared to those without access to such resources.” In addition, the ability to borrow might allow students to forgo working long hours to earn funds to pay for college, thus improving the likelihood of continuing their education. The use of debt for college expenses might also have attitudinal and psychological effects, such as allaying “anxiety and stress during economically challenging times.”

Accumulating debt to finance college could also have some drawbacks. Zhan noted that large amounts of debt “may decrease the likelihood of graduation for college students, because of anxiety about repayment and reluctance or inability to secure additional loans.” Given the possible role played by parents in financing their child’s college, the impact of debt on college graduation might differ by the parents’ financial capacity (i.e., income and assets). According to the author, “Students from higher income families are more likely to have confidence that investments in college are worthwhile, while low-income students are more likely to perceive risks, recognizing the financial challenges that their parents faced in supporting them.”

Prior Studies. Zhan reported that earlier studies consistently found that college loans are positively related to college enrollment, but the “relationship between educational loans and college persistence and completion are mixed.” She hastened to add that the latter might be due to different study samples, such as including students from different economic backgrounds or those enrolled in different types of college institutions — such as public, private, and elite private universities.

Data and Methodology

Zhan examined the relationship between unsecured debt (educational loans and credit card debt) and college graduation and whether the influence differs by the levels of parental assets. For the analysis, she used data drawn from the National Longitudinal Survey of Youth (NLSY), Young Adult sample. The original respondents were interviewed periodically from 1979 through 1994. Starting in 1994, the adolescent (15- through 20-year-old) children of the original respondents were surveyed periodically. Zhan’s study sample contained 1,047 of these young adults who first enrolled in college between 2000 and 2004. She used variables on the young adults from their survey data and information on parental education, income, and assets from the NLSY main file.

Zhan used several variables in her analysis. They included youth debt — the total debt during a youth’s college enrollment, which includes the amount of educational loans and credit card debt; college graduation — whether a youth completed a bachelor’s degree; parental assets — household net worth during a youth’s first year in college; and various control variables such as age, gender, race/ethnicity, marital status, mother’s education, and parental economic status during a youth’s enrollment in college.

Zhan estimated a regression to examine the influence of educational loans and credit card debt on a student’s probability of graduating from college. She also estimated how the aforementioned influences differ by levels of parental assets (i.e., no net worth, low net worth, and high net worth). The author noted that some previous studies have used family income, but other researchers maintain that a family’s financial assets may play a more prominent role in a student’s college education than income.


Zhan examined the statistical relationship between educational loans and graduation from college by controlling for the variables mentioned above (including credit card debt). She found that “students with educational loans of $10,000 or above were more likely to graduate from college than those without such loans, but the possibility of their college graduation is not statistically different from that of students with loans of less than $10,000.” However, students with “loans of $10,000 or above were less likely to graduate compared to those who received loans between $5,000 and $10,000 (although the relationship was not statistically significant).” Thus, the author observed “that having educational loans helped increase the probability of college graduation, but heavier loans might not help or may even undercut the chance of graduation.”

Additionally, the author estimated the association between credit card debt and graduation (controlling for other variables, including educational loans). She found that the graduation rate of students with credit card debt of $5,000 or more was not statistically different from those with debt of less than $5,000 or no debt. But when Zhan did not control for educational loans, “students with credit card debt of $5,000 or above were more likely to graduate than those without such debt.”

The study also revealed that “parental net worth was a strong positive predictor of youth’s college graduation.” But in order for the positive impact to occur, the family must have a net worth of $50,000 or above. Students whose family’s net worth met this threshold “were more than two times more likely to graduate from college compared to the students whose families had negative or zero net worth.”

  • * The views expressed here are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
  • 1 Min Zhan, “The Impact of Youth Debt on College Graduation,” Washington University in St. Louis, Center for Social Development Working Papers, No. 12-11, 2012, available at http://csd.wustl.edu/Publications/Documents/WP12-11.pdf PDF External Link.