The Role of Trans-Generational Financial Knowledge and Self-Reported Financial Literacy on Borrowing Practices and Debt Accumulation of College Students

Abstract

This paper studies the effects of trans-generational financial knowledge, self-reported financial knowledge, academic performance, and overall financial literacy on financial management practices, using a sample of 380 college students. Exploratory estimates using a series of ordered Probit models indicate that academic status and self-reported overconfidence on financial knowledge relate positively to the amount of debt a student carries. More interesting, our estimates provide strong support to the hypothesis that a trans-generational financial knowledge effect from parents to students plays a major role in reducing the amount of financial burden students assume. The trans-generational effect provides robust results, both in the form of student loans and credit card balance. In addition, students that maintain a good credit card history, as reflected by high repayment rates, are more likely to hold lower debt amounts than otherwise. A high debt level implies that students are living beyond their means and consequently developing unhealthy financial management practices. Our empirical estimates also find the presence of a strong overconfidence effect, as reflected by unrealistically high self-reported financial knowledge, leading students to an incorrect decision making process in favor to holding more debt. We argue that lack of personal financial literacy and easy access to credit are at the core of high debt accumulation.