If a working college undergraduate loses their job, their likelihood of dropping out of school increases substantially, according to a recently released New England Public Policy Center report by Federal Reserve Bank of Boston economist Pinghui Wu and senior research assistant Lucy McMillan.

More specifically, the analysis in “Credit Access and the College-persistence Decision of Working Students: Policy Implications for New England” finds that when a working undergrad aged 18 to 24 experiences involuntary job loss, the likelihood that they won’t return to school the next academic year rises 17%.

Only 2% of the students in the report’s sample were affected by job loss. However, the authors note that more than half of the 18- to 24-year-old undergraduates in the United States have jobs, and nearly one-half of these working students depend on their earned income to pay for their college education.

Wu and McMillan also point out that although they conducted their analysis using national data, their findings may be especially relevant to New England, where the number of people employed in higher education is more than twice the national average. “Student retention therefore carries implications not only for the individual students seeking a college education, but also for the vitality of the region’s labor market,” the authors write.

They suggest that given the connection between job loss and dropping out of school, policymakers concerned with college retention or college persistence – the return of students to school from year to year – should consider providing unemployment assistance through either unemployment insurance or financial aid programs to working students who lose their job.

“This report’s findings suggest that employment stability plays a pivotal role in the retention of young working students, and a small contingency fund goes a long way in preventing college dropout due to temporary employment disruptions,” the authors write.

Impact of job loss on college persistence has increased since the CARD Act

The report, which studies the academic years from 2000 to 2019, finds that while job loss had a significant impact on college persistence over the last decade, the effect was minimal before 2009, the year that the Credit Card Accountability Responsibility and Disclosure Act, or CARD Act, went into effect. The law, enacted in response to the 2007–2008 financial crisis, was intended mainly to make credit card lending more transparent. But, the authors say, it may make it more difficult for working students to obtain the funds they need to stay in school after losing their job.

A provision of the CARD Act tightly restricts how credit card companies market and issue cards to college students or to people who aren’t in college and are younger than 21. Wu and McMillan cite Consumer Financial Protection Bureau data showing that the share of new accounts issued to cardholders under the age of 21 fell from 5.7% in 2007 to 1.7% in 2009 and that the share of 18- to 24-year-old US undergraduate students with at least one credit card fell from 66% in 2000 to 50% in 2016.

The report estimates that the decreased use of credit cards by undergraduates after 2008 could account for as much as 96% of the subsequent increase in the college dropout rate due to unemployment among working students during the post-CARD Act period.

“By restricting credit supply to college students, the CARD Act of 2009 inadvertently inhibits the ability of liquidity-constrained students to remain in school when earnings fall,” the authors write.

Most working college students are not covered by unemployment insurance

The authors caution against loosening the CARD Act restrictions. They point out that although a credit card loan may enable an unemployed student to stay in school, several studies have found that large credit card debt can lead to adverse financial, psychological, and academic consequences for students. They suggest that potentially preferable ways of offsetting the effects of job loss on college persistence could involve student financial aid or unemployment insurance benefits, but the qualifications for receiving each would have to be expanded.

Wu and McMillan note that currently, job loss by a working college student is rarely covered by a school’s student aid or a state’s unemployment insurance. Student aid is based on financial information from the preceding year, which wouldn’t include a sudden drop in earnings caused by the loss of a job. Some colleges offer emergency aid programs, but job loss rarely qualifies a student to receive it.

The eligibility criteria for unemployment insurance benefits usually exclude students who lose their job because they have not been in the workforce long enough, are unable to meet the work-availability requirement, and/or had only seasonal employment, which is not covered by UI in some states. Using data from the U.S. Census Bureau’s Current Population Survey, the authors estimate that from 2000 through 2019, the probability that a college-aged unemployed worker received UI benefits was only 8.5% compared with 32.7% for workers aged 25 to 54 and 41.8% for workers aged 55 to 64.

“Considering the small fraction of college students affected by involuntary job loss, such policy is unlikely to impose substantial fiscal burden on the UI system,” the authors write, “but it might provide long-term benefits from the human capital gains.”

Read the report.