Tuition Fee Myopia Could Have Negative Impact on Students’ Financial Futures, Study Finds

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Newswise – INDIANAPOLIS – Choosing more expensive colleges may seem like a poor financial decision given the heavy burden of student debt after graduation. However, new research from the Kelley School of Business at Indiana University shows that avoiding such colleges can lead to bigger financial problems in the long run.

The work, entitled “Early realization of costs and choice of college“, will appear in an upcoming special issue on the subject of academic marketing of the Journal of Marketing Research.

The main author of the research is Haewon yoon, Assistant Professor of Marketing at the Kelley School of Business at IUPUI. He and his colleagues at Boston University and the University of Florida found that college decisions focused on financial reporting increased preferences for low-cost, low-return colleges over high-cost colleges. and high yielding, especially among students who are focused on their college debt and are eager to get paid off.

The researchers drew on data from the University scorecard, a tool created in 2015 by the US Department of Education. The college scorecard provides better access to financial information that allows consumers to compare the expected cost and financial return of their college options. Traditionally, Yoon said students and their families assess options using traditional college rankings published by outlets such as US News & News Report or Princeton Review.

Research has found that low-cost, low-yield colleges not only offer lower lifetime income than high-cost, high-yield colleges, but also carry a higher risk of bankruptcy after graduation. The researchers found that 18 percent of students who chose low-cost, low-yielding colleges defaulted on their own student debt three years after graduation. In contrast, only 2 percent of students who chose high-cost, high-yielding colleges defaulted on their student debt payments during the same period.

Researchers investigated why people are drawn to low-cost, low-return colleges. Assuming that students could get loans covering all four years of college education, which would only require repayment after graduation, it would seem likely that students would choose the school with the higher cost and the highest return for a better financial future.

But Yoon and his colleagues found that many students didn’t see it that way. Many still preferred low-cost, low-yield colleges, even when low-cost, high-yield, high-yield colleges were defined on a relative scale; the same college could fall into either category depending on a set of considerations. Students psychologically realized the financial costs of a college education long before repayments began.

“This early realization of costs, the myopia of tuition fees, frames the choice of university as an intertemporal compromise: the more you pay up front, the more you get in the future,” Yoon said. “As a result, financially impatient students overestimate short-term tuition fees and underestimate long-term financial return, resulting in an increased preference for low-cost, low-return colleges. “

“One in five students who chose low-cost, low-yielding colleges will default financially on their loans because of the choice they made,” Yoon said. “On the other hand, the loan default rate in high-cost, high-yield colleges was only around 2%. Thus, the desire of students to minimize the payment of short-term tuition fees will hit them pretty hard in the end. “

In addition to the messages he hopes the research sends to prospective students and parents, Yoon said the research also has implications for colleges and universities and their marketing units, as it highlights the negative impact of marketing messages based on cost instead of expected return. after graduation.

“Equally important is understanding the downsides of underinvesting in human capital, which can lead to greater financial disadvantages in the future,” the researchers wrote. “A college education is a unique opportunity for most students. Focusing on maximizing total lifetime income rather than the efficiency of investments may make more sense for those who wish to use this powerful scale for economic purposes. “

The other authors of the study are Carey Morewedge, Everett W. Lord Distinguished Faculty Scholar and Professor of Marketing at the Questrom School of Business at Boston University, and Yang yang, Professor JCPenney and Assistant Professor at the University of Florida.


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