Credit Access and the College-persistence Decision of Working Students: Policy Implications for New England Credit Access and the College-persistence Decision of Working Students: Policy Implications for New England

By Pinghui Wu and Lucy McMillan

Every year, 2 million first-time, full-time undergraduate students enter a degree-granting post-secondary institution in the United States, but more than one-third leave college before obtaining a college degree. While some students drop out of college for personal reasons or to pursue a different career goal, during this report’s sample period, nearly 40 percent of young adults left college because they could no longer afford to stay. The objective of this study is to gain better insight into the relationship among employment, credit constraint, and the college persistence of US 18- to 24-year-old working college students, who represent more than 50 percent of the undergraduate population. To do so, we investigate two interrelated research questions: (1) Does involuntary job loss affect the college-dropout decision of working students, and (2) does access to credit through credit card loans buffer against the liquidity effect of job loss?

This report’s analysis shows that job loss has an adverse effect on college persistence for 18- to 24-year-old US working students, that is, whether those students remain in college. Although the effect was minimal during the 2000–08 period, it became significantly magnified after 2008. It is estimated that from the 2009–10 through 2019–20 academic years, involuntary job loss led to a 17 percentage point increase in a working student’s probability of dropping out of college in the next academic year. We find supporting evidence that the stronger effect in the later period reflects college students’ more restricted access to credit card loans after the passage of the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, which imposed tight restrictions on credit extension to individuals who are younger than 21 or older but enrolled in college. For many working students who have difficulty acquiring alternative forms of credit, credit card loans serve as a crucial means of smoothing consumption when income fluctuates. Tightening of the credit card market has a direct impact on these students.

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. While the underlying analysis was conducted using national data, the findings are relevant to New England, where higher education employs 4 percent of the region’s workforce, 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. An important caveat is that the report’s findings do not imply that credit card loans improve college students’ net welfare. While access to credit card loans improves persistence in the short run for unemployed college students, a large credit card debt leads to other adverse consequences and is unlikely the optimal solution to liquidity issues. Instead, the significance of credit card loans in the personal finance of working students reflects a dearth of alternative income assistance to compensate for short-term earnings loss. Extending timely unemployment assistance to college students through either unemployment insurance or student financial aid programs could potentially insure these students against unforeseen job-loss risks and yield retention benefits. Policymakers concerned with the retention of working college students should consider these options and explore them to a greater degree.