Walden University ScholarWorks Walden Dissertations and Doctoral Studies Walden Dissertations and Doctoral Studies Collection 2017 Exploring Student Loan Personal Financial Management Decisions Using a Behavioral Economics Lens Michael J. Wermuth Walden University Follow this and additional works at: https://scholarworks.waldenu.edu/dissertations Part of the Business Administration, Management, and Operations Commons, Finance and Financial Management Commons, and the Management Sciences and Quantitative Methods Commons This Dissertation is brought to you for free and open access by the Walden Dissertations and Doctoral Studies Collection at ScholarWorks. It has been accepted for inclusion in Walden Dissertations and Doctoral Studies by an authorized administrator of ScholarWorks. For more information, please contact [email protected]. Walden University College of Management and Technology This is to certify that the doctoral dissertation by Michael J. Wermuth has been found to be complete and satisfactory in all respects, and that any and all revisions required by the review committee have been made. Review Committee Dr. Anthony Lolas, Committee Chairperson, Management Faculty Dr. Godwin Igein, Committee Member, Management Faculty Dr. Jeffrey Prinster, University Reviewer, Management Faculty Chief Academic Officer Eric Riedel, Ph.D. Walden University 2017 Abstract Exploring Student Loan Personal Financial Management Decisions Using a Behavioral Economics Lens by Michael Jay Wermuth MBA, Embry-Riddle Aeronautical University, 1995 BS, U.S. Air Force Academy, 1983 Dissertation Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy Management Walden University February 2017 Abstract There is a student loan debt problem in the United States. Seven million student borrowers are in default and another 14 million are delinquent on their loans. A high level of college loan debt leaves students with insurmountable payments and holds them back from starting a family, buying a home, or saving for retirement. The problem is that financial managers may not understand the student loan decision process well enough to help students make a loan decision that prevents an unmanageable level of debt. The purpose of this study was to explore and understand the student’s loan decision process using a conceptual framework that contrasts rational choice theory and behavioral economics within the Blackwell, Miniard, and Engel’s consumer decision model. This exploratory study was designed to answer research questions about how students perceived the forces that might influence the decision. A qualitative case study was conducted and purposeful sampling was used to identify 28 undergraduate students who had a student loan at a university in the Rocky Mountain region. The students were interviewed, the data coded, and the coded data were analyzed to identify themes. The data were used to diagram the decision process and identify decision variables. The findings indicated that students were pragmatic in their loan decisions, but they were not rational actors. The research highlighted 3 behavioral economic themes: the power of intention, herding, and complexity resulting in the use of the satisficing and default heuristics. The contributions of this study could be of interest to financial managers, parents of students, and students planning to enter college. Preventing unmanageable student debt could bring positive social change to the students and their families. Exploring Student Loan Personal Financial Management Decisions Using a Behavioral Economics Lens by Michael J. Wermuth MBA, Embry-Riddle Aeronautical University, 1995 BS, U.S. Air Force Academy, 1983 Dissertation Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy Management Walden University February 2017 Acknowledgments I express my heartfelt thanks to my committee. I am grateful to Dr. Anthony Lolas, Dr. Godwin Igein, and Dr. Jeffrey Prinster for devoting their time, talents, and attention to this endeavor. Each member of the committee brought a unique and valued contribution to the process. Together, they enriched this study. I would like to offer a special acknowledgment to my Chair, Professor Lolas, for his wise counsel and for giving generously of his time during numerous reviews of this document. Dr. David Bouwin, Dr. Kenneth Sherman, and Dr. Lilburn Hoehn provided important suggestions that improved my research. I am grateful to these professors and all my classmates for their words of advice and their constant encouragement. I also express my thanks to the professionals at Walden University (e.g., academic advisors, librarians, and the writing center staff) who smoothed many of the bumps out of my path. My very special thanks to Brig Gen (ret.) Rich Fullerton, Ph.D. Rich was a dear friend, a role, model, and the source of much encouragement. Everyone should have a friend like Rich. Rich recently went to be with our Lord. I miss him. Debbie is my best friend and helpmate. She was also the grammar and style editor for this dissertation. Debbie read this paper more times than anyone should have to read a dissertation. She was very patient with me throughout the Ph.D. program. Debbie is a wonderful wife and a great cheerleader! I love her dearly. I praise the Lord because He is good and merciful. He provided my strength, my intellect, the time, the finances, and the people in my life to make this academic journey possible. I pray that I use this degree to bless His children and bring Him glory. Table of Contents List of Tables ..................................................................................................................... vi List of Figures ................................................................................................................... vii Chapter 1: Introduction to the Study ....................................................................................1 Background of the Study ...............................................................................................3 Problem Statement .........................................................................................................5 Purpose of the Study ......................................................................................................6 Nature of the Study ........................................................................................................7 Research Question .........................................................................................................9 Conceptual Framework ..................................................................................................9 Definition of Terms......................................................................................................10 Assumptions .................................................................................................................14 Limitations ...................................................................................................................14 Delineations .................................................................................................................16 Significance of the Study .............................................................................................18 Summary ......................................................................................................................19 Chapter 2: Literature Review .............................................................................................21 Literature Search Strategy............................................................................................22 Part 1: Student Loan Situation .....................................................................................23 Scope of the Problem ............................................................................................ 23 Default and Delinquency Literature ...................................................................... 26 Consequences of Debt........................................................................................... 29 i Part 2: Student Loan Literature ....................................................................................33 College Access ...................................................................................................... 34 Degree Persistence/Degree Completion ............................................................... 39 Financial Management .......................................................................................... 40 Part 3: Decision Theory ...............................................................................................43 Rational Choice Family of Theories ..................................................................... 45 Concepts from Behavioral Economics.................................................................. 51 Consumer Decision and Behavior Models ........................................................... 64 Part 4: Alternative Explanations ..................................................................................70 Financial Literacy ................................................................................................. 70 Information ........................................................................................................... 73 Math Skills ...........................................................................................................