Dr. Cliff Robb has a PhD in Personal Financial Planning from University of Missouri–Columbia. You may think that student loan financing and home ownership could never be connected. Dr. Robb’s research says otherwise! Check out this episode, where he talked about how the type of student loan could affect one’s decision to become a homeowner. Based on his paper, “The Role of Federal and Private Student Loans in Homeownership Decisions”.
Chris Pratt: I am really excited today. We have an amazing guest. He has a PhD in Consumer Economics, specializing in Personal Financial Planning from University of Missouri Columbia. He’s won the best paper award from the National Endowment for Financial Education and Best Theoretical Research award from the Financial Planning Association Conference among many other awards. And he is the first author of the paper, “The Role of Federal and Private Student Loans in Home Ownership Decisions”. His name is Dr. Cliff Robb. Welcome to the show Dr. Robb. How are you?
Dr. Cliff Robb: I’m doing very well. Thanks for having me.
Chris Pratt: Yeah, thanks for coming on. So first of all, your background is really impressive and really amazing. And our listeners are going to have a lot to learn from this episode and to take away, I want to start with that, with your background before we get into your paper, as some of your other research that you’ve done spending this, these topics over personal finance over your career, you got a bachelor’s degree in Psychology. Is that correct?
Dr. Cliff Robb: That is correct. Yes.
Chris Pratt: Okay, and then you went on to get your Master’s and PhD in Consumer Economics. Can you talk about, I assume when you got the bachelor’s degree in Psychology, you weren’t necessarily planning to go into Economics?
Dr. Cliff Robb: That is correct. It’s very astute. I got my undergraduate degree in Psychology and I did apply to several PhD programs in Labor Economics and was summarily rejected by six programs.
Chris Pratt: Wow. So first of all, before you entered the rejections, what made you decide, Hey, I want to go into Economics to get my PhD in Economics because, and that’s, I think a common misconception is that you have to go to graduate school for what you got your undergraduate degree on.
Dr. Cliff Robb: Yeah. So what’s nice is that it’s a nice kind of little blend here that I, my degree is Consumer Economics and for people that are really not in the world of academia, or even in this smaller niche world of Consumer Economics, that sounds like that’s a pure Economics degree. And it really isn’t, it’s really a degree that is a, it’s a blending of theoretical backgrounds. So there is a lot of psychology and sociology that builds into the theory for kind of, because we’re thinking about how people make decisions from a household or individual perspective. And so we’re really studying that individual unit and
Chris Pratt: The financial decisions?
Dr. Cliff Robb:Yes, yes. And most economics departments again, this is, I don’t want to over-generalize, but a lot of economics departments, you’re kind of thinking it’s macro or micro and even in the micro, it’s still pretty big economic stuff. They’re not talking about how this one person makes choices as much. So economics gives us a really powerful set of tools to work with, but we also then inform those tools with things like psychology and other theories that might apply.
Chris Pratt: Awesome. Okay. So what, what made you want to go to graduate school in the first place?
Dr. Cliff Robb: Well, um, that’s a great question. So I was living in, I think that at that time I was in Nashville, Tennessee. I had lived in Washington DC area. So I lived in Arlington for about a year before that. And a bunch of my friends that I was living with, we’d just gotten an apartment after college and they were all going to law school. They were all going to different things or other kind of graduate degree programs. And I really didn’t have a plan. So I was in Nashville thinking, well, at least I should maybe think about this and started to apply to graduate programs. And since I was a psychology major, that was where I felt like that might be the easiest path and getting to the rejection part. I got rejected a lot, but I had a really good family friend and I’m from Tuscaloosa, Alabama.
And she was actually a faculty member at the University of Alabama. And she told me that she thought I would really enjoy the Consumer Economics degree track because there was a huge amount of really human and psychological factors at work. But it was also a practical, understand how people work with money piece. So I looked at it, I did some research and I was like, okay. And it was a Masters. So I was like, that’s, you know, it’s not an overcommitment. It might give me a set of pathways because that was a kind of program where, you know, I could come out of it as someone who’s going to go do personal financial planning or financial services, or I might continue a path at that point. I wasn’t fixed on a graduate program all the way to PhD yet. So it was a really nice transition.
Chris Pratt: And a master’s degree is usually about two years, right?
Dr. Cliff Robb: Yeah. This was a year and a half, about two years program. So it did have a thesis. So that always taxed on a little bit more time because not every master’s program makes you write a thesis, but this was a thesis program. So it was about just under, I think just a little short of two years.
Chris Pratt: Right. And a thesis is basically just a research paper, right?
Dr. Cliff Robb: A long painful paper.
Chris Pratt: Don’t say painful. It’s fun. That’s the reason you get the master’s. And then, so you went on to get the PhD where you had to do an even longer, uh, more fun dissertation I’m assuming in Consumer Economics. Can you talk a little bit about that?
Dr. Cliff Robb: Yeah. So I was fortunate to have a good mentor at the University of Alabama and he, you know, I had a couple of different programs. I was looking for further graduate studies, so a couple of different PhD programs, but he really recommended that the University of Missouri was one of the kind of longstanding traditional programs for Consumer Economics and that they really did a great job there and he endorsed their faculty. And I looked at that program and was really happy with what I saw. So Missouri was a great fit for my doctoral work. And so while there, I got to kind of, again, expand my understanding of consumer decision making theory. I got to take a lot more advanced economics courses, as well as some advanced human development and psychology type courses. And I got to teach some undergraduate level courses after a while.
So I got to teach some of the personal finance side courses that I would eventually end up teaching as a kind of part of my career. And it was just a really nice fit and a place where what was nice about it is that the research world was just pretty wide open it, whatever you can think about any aspect of consumer financial decision-making was kind of on the table, you know, why do people do this with their money or what’s going on with these decisions? So it was a very free, pretty environment in that way.
Chris Pratt: Okay, great. So your background is really amazing. Let’s jump into what you know about personal finance from your, you know, your background in Consumer Economics. You wrote this paper called, “The Role of Federal and Private Student Loans in Home Ownership Decisions”. And there’s a lot to this paper. You examine more than just home ownership, really. You examine, uh, student loans more, more broadly. And one of the things we found was that student loan debt is the second highest category of consumer debt. The number is moving around a little bit, but it’s around 1.6 trillion, $1.5 trillion right now, auto loans I think are a little bit higher. I don’t know if you know what number one is.
Dr. Cliff Robb: Oh, it would be mortgages, right?
Chris Pratt: Yeah. I have the number. I have the numbers here. Mortgages are about 10 trillion student loans, about 1.5 trillion auto loans, about $1.3 trillion in debt, and then credit cards come after that. So these are huge numbers, not really quantifiable to the individual person, but one of the results of your paper was that going to a public university is associated with a $10,000 decrease in cumulative loan balance. So going to a public university lowers on average your loan balance, that’s when one of the findings of your research paper. So can you talk about the background of this paper, why you decided to study this because we were talking a little bit before the show and it was super interesting.
Dr. Cliff Robb: Yeah. So I can kind of give you a quick highlight. So if we kind of think about how I started, one of my areas of interest early on at the dissertation level was how college students were making their financial choices as, as students thinking about, okay, once I graduated, I’m going to have this income and how am I going to work in that context? Or how am I going to think about my spending as a student? And so one of the hot topics when I was working on my PhD was a credit card debt among college students. Because at that time it was incredibly easy for college students that did have proof of income or even parental co-signers to just get credit cards, even with some pretty high limits. So they weren’t just like $500 limits. They were a couple thousand dollars limits. And I found that fascinating.
And we looked at that, that since kind of, you know, the landscape has altered a bit. We had the card act that came through and it’s just become a little bit harder. Credit card companies are not just on college campuses anymore, trying to get new customers that way. And what we did see there, uh, over time as I’ve been looking at research in this area is that student loan debt has just shown this steady increase and it’s become more and more, I think it’s, it’s more pervasive in the sense that a larger percentage of students are reliant on it. And not only are more students rely on it, but more students are relying on it in kind of larger numbers. So they need more and more, uh, loan dollars to get through their programs. That to me was kind of a fascinating trend and it was kind of supplanting the issue with credit cards that I had seen early in my career.
Chris Pratt: Yeah. That’s phenomenal. And as of 2019, there were over 10 million borrowers with student loan debt, over 10 million people with student loan debt. Many of them who decided to take on this debt in high school and, you know, before they were even legally adults or who didn’t even really think about the decision to take on this debt. Right. For a lot of people, it’s just kind of an automatic just thing you do. So, uh, another finding from your paper was that there was a $1,000 increase in respondent’s private student loan balance that saw that you would lower the likelihood of buying a home by about 5%. So every thousand dollars that your student loan balance goes up, the likelihood of you buying a home, goes down by five percentage points and, uh, every thousand dollars your federal loans go up specifically federal loans. There’s no significant impact on, on home ownership. Can you talk about the results of this paper and some things that surprised you in what you found?
Dr. Cliff Robb: Yeah. And I think it’s, uh, you know, one thing I’m going to view right up front, just to kind of help frame things and make sure things are put in the right context, there are going to be some limitations here. So when we look at the home purchase decision, which is, you know, whether they bought a home or not zero-one, it is only for the four year window immediately after graduation. So, so right off the bat, we have to kind of think, okay, not everyone who graduates college is kind of jumping into the home ownership market quickly. And sometimes it’s not just means related. Sometimes it’s truly like they’re not ready to settle down to a home yet, but so that is one kind of limitation, but it is correct what you outlined. When we were able to break down the types of loans, we can look at federal student loans, which are subsidized and typically offer much more favorable structures for borrowers compared to private loans, which can be a huge mix of all kinds of structures.
And there can be all kinds of aspects of those private loans. The private loans seem to be the factor that’s really influencing that home ownership transition in our model. So while having more federal loan debt, if it’s just federal student loans, that really didn’t seem to push the needle. People were not less likely to become home buyers in that four year window, but if they had private loans and more likely what this is, is that these private loans were stacked on federal loans because 17% of those with, uh, private loans were private and federal cause usually it’s, my federal loans are exhausted. I’m going to take on some private. Those are our people that were having issues, buying homes within that 4,000, or at least those are the people that were not making a transition to home ownership in that timeframe.
Chris Pratt: So, it may not necessarily be the fact that it’s a private loan, but just the fact that people who have private loans tend to have more loans overall all up.
Dr. Cliff Robb: Yeah, yeah. Of the sample respondents, 21% of our sample respondents had some private loans. And among that only 4% of the sample was only private loan. So those are unique people that are getting just private loans.
Chris Pratt: Wow. Yeah. Can you talk a little bit about the difference between a private student loan and a federal loan? We talk a lot on this show about the FAFSA and how pretty much everyone who can, should fill out the FAFSA. Can you talk about that difference?
Dr. Cliff Robb: Yeah. So what, what you’re usually getting, when you look at something like the federal student loans, you’re getting usually fixed rate loans that are a very clear structure, but they do have cap limits on how much you can borrow. So there’s a max, you can borrow as an undergraduate. I can’t remember the exact numbers. It’s something like 22 or 23,000, I think, for an undergraduate.
Chris Pratt: So when you say they have like fixed rates, beneficial rates, what does that mean?
Dr. Cliff Robb: Just, you know, lower interest rates.
Chris Pratt: Right.
Dr. Cliff Robb: So the idea is you’re going to get a fairly low interest rate on that debt and it’s fixed. And so if you go to the private loan market, first of all, you have to go through all of the process of actually getting or being eligible for a loan, which is a lot of paperwork and headaches. And you may get loan structures that are variable rate. You may get higher interest rate loans. You may get rates that, uh, you know, the variable rate, they may start low and then get high as they expect you to be working.
Chris Pratt: Okay, so this, this concept of a variable rate, this applies to mortgages too, with, with home ownership, what is a variable rate loan and why might a fixed rate loan be favorable to a variable rate?
Dr. Cliff Robb: So when you’re planning the fixed rate loan and allows you to know this is going to be my payment for the life of the loan structure, right? If you like the idea of knowing what your payments are going to be year in and year out, month in month out, a fixed loan is going to give you that. With a variable rate, you’re going to be adopting the risk that if market interest rates happen to rise in the near future, that rate may then rise as a result. There’s usually a cap on how much it can rise, but it’s usually tied to some kind of target rate in the market. And so if you started to say it, your private loan started three and a half percent, but they’re variable. If market interest rates start to rise, they’ll go up to 4% now, and now your payment is larger. And if you’re not ready to take on that additional monthly payment within your budget, it can really put a strain on a household’s ability to meet their obligations.
Chris Pratt: Yeah. And this sounds like, almost like an investment, like you’re taking that kind of a risk, like, like you’re investing in interest rates. Um,
Dr. Cliff Robb: Yeah, Well, you’re also making a lot of assumptions about their ability to meet higher future payments.
Chris Pratt: Right.
Dr. Cliff Robb: Which kind of defeats the model because you’re supposed to be getting a nice income stream or income track out of college. If that doesn’t materialize, that’s where most people really struggle. So people that don’t have that income stream materialize as they estimated it would.
Chris Pratt: Yeah. That’s something we talk about is, we want people to come out of college, of course, with a job and with a job that pays well. And that gives a positive return on investment based on however much you took out from your loan. Do you have any thoughts or advice for kids who are, or parents who are trying to make decisions on what school they should go to and how large largest student loans they should take out. Right. Like, is it really a big deal if I want to go to a private school and all my friends are going there to take out 20,000 extra dollars a year to go to that school.
Dr. Cliff Robb: Yeah. That’s, that’s one of those things where it’s such a hard thing to just kind of blindly weigh. Yeah. Because everything is so much factor related. So from my opinion, and again, I get to be a bit biased because I was fortunate to have, um, education planning as a part of my household. So that wasn’t something I had to, to navigate too much. Once I got to more graduate level, I had to figure that out. But I was again, fortunate to get aid programs that were kind of paying me to be there. But from a starting point, if you’re thinking about your education choices, if your family has not already set up some kind of education savings plan, which most states offer really favorable education savings plans, I would definitely recommend looking into that. If you’re still in the stage where you have time, if that didn’t happen, then I don’t think it’s terrible to look at federal student loans as that first line of support, because I do think they are a reasonable way for many people to get into the college environment.
I do draw a line when I say, okay, should you necessarily be taking on all the federal aid that’s available to you? Because some people view that as a signal of what you can afford. And it is absolutely not. Just what they will offer. You isn’t necessarily what you need. And so I always, I tell people, go in with having already mentally established, what is the budget you think you should be living on and be strict on yourself, be tight, be like, what do I need beyond paying this tuition? What do I really need to live on? Because some people will use aid as additional spending that may or may not be necessary.
Chris Pratt: Right. So speaking of, you know, federal loans and the government, do you think that the government is giving enough support for college students to manage, to be able to get out of student loans? Like, do you think that the government should do something differently with respect to student loans?
Dr. Cliff Robb: Yeah, I would say I do not think the current model is being very effectively run or managed and I’ll kind of point out a few things I see that are issues. For one, just looking at our data. So the study that we did, and again, this wasn’t comprehensive, this is, there’s lots of limitations to it, but it’s still the signal to me is that, we really might want to ask questions on, is there enough support from federal student aid? So the idea there is that are, we really are those caps too low, under current prices of college. And so knowing that people are having to turn to private loans, in some cases, people are maybe having to work more hours than they want to because federal student aid will not meet their, their kind of daily obligations. That’s a question of mine. I also look at the, um, the structure of loan, forgiveness programs.
These are not working very efficiently in our country. People are finding themselves several years out and realizing that some mistake might’ve occurred one year into their program or two years in or three years in, and they’re not qualifying for these relief programs that are supposed to be there to help them. And I’m very frustrated with the model where what we’ve done is we’ve allowed the federal government to generate the loans, but then they’ve passed the loans off to private entities to manage. And those private entities have no incentive to help you personally get out of your debt.
Chris Pratt: Can you talk about a little bit more about this? Because I always hear questions about hardship and financial aid, my fiance and I were actually just talking about it. And I was like, um, I’m actually not well-versed enough on this topic.
Dr. Cliff Robb: Yeah. So the issue is that when these, when these private entities take over managing people’s student loan debt, so like, you know, I’m not going to certainly pinpoint not all the problems are with certain, you know, with any one lender, but Navient has been in the news for lawsuits against their practices. And sometimes it comes out of the case
Chris Pratt: Call them out. Don’t hesitate to call them out.
Dr. Cliff Robb: I’m happy to. So the idea here is that they failed at some point in their obligation to the customer.
Chris Pratt: Right.
Dr. Cliff Robb: Something went wrong in the filing, a payment didn’t get properly put in its place or was wrongly appointed as being a late payment. And thus, the client is penalized. The student borrower is penalized.
Chris Pratt: But the student didn’t do anything
Dr. Cliff Robb:And they didn’t do anything wrong. And that’s the problem. And the problem is that that student is now sitting with, you know, maybe 10 more years of debt obligations. That should not be their responsibility. Sometimes these relief programs are built as their ten-year programs. You pay on your loans for 10 years and the rest will be forgiven. And if you find your nine, Oh, there was a mistake back in year three, we didn’t record this one or where this happened, or we, we don’t agree with this. You, you forgot to file a form in year four, all of a sudden you’re ineligible and you’re back to square one. So to me, there’s a really problematic practices.
Chris Pratt: So this is for people who are already on a student loan forgiveness plan. Is that what you’re saying?
Dr. Cliff Robb: Yeah. These are the people that have enrolled in forgiveness programs and are knowingly trying to they’re, you know, these are people that are doing public service. These are educators, these are people that are giving to the communities they’re in and there should be support for them. Yeah.
Chris Pratt: Yeah. I want to shift gears now from student loans. Um, we’ve covered that pretty well. You talked to me a little bit before the show about credit cards and about how you kind of shifted from credit cards to student loans because of increased protections. And because student loans kind of have become a much more ballooning issue. I mentioned that student loan debt is larger than credit card debt, but credit cards are still a very big issue for Americans and for college students and young professionals, we get letters, pre-approval letters and pamphlets and packets in the mail every single week from credit card companies. Can you talk a little bit about for college students, uh, credit cards and credit card debt?
Dr. Cliff Robb: Yeah. So I, I really can, and one of the things is you’re right. So when people are coming out of college now, or even once they reach that point of like being 21 and they become targets of companies that are trying to get customers, right. So the idea is the credit card companies know that I think this data is probably outdated a little bit, but a couple of years back the data was that the first card you owned, you are going to hold on average for 15 years.So..
Chris Pratt: 15 years! Wow!
Dr. Cliff Robb: So they want to be your first card. That’s why they’re sending out all these solicitations to young adults, because they know if we just get you, you know, on our card, like you’re gonna at least hold it for a while. We’re going to get some fees from you.
Chris Pratt: Okay. So, so wait a minute. So, you know, I hear a lot that people have all these reasons for wanting to get a credit card. And I always say, Whoa, hold on a second, because you have no idea. If you’ve never had a credit card, what’s your behavior is going to be like, once you get one and you just said, the average person holds their first credit card for 15 years, I can almost guarantee you that if I surveyed a hundred of my friends and asked them how long they think they’d have their first credit card, they would not say 15 years.
Dr. Cliff Robb: Well, I can tell you there, there are a few from a personal financial planning standpoint, there are a few reasons why you might want to hold onto that card for a long time.
Chris Pratt: Right.
Dr. Cliff Robb: That’s simply from the credit report, credit history stamp, right? So having a card, a long-standing card, especially if it’s just got an open balance that you’re not using and not borrowing on, that looks great for your credit history. So I definitely don’t discourage people from being a long time holders of the card, especially a card they feel like has worked for them.
Chris Pratt: Okay.
Dr. Cliff Robb: But I do think people can be really thoughtful about what that first card is. So don’t go to the dance with the first person that invites you necessarily.
Chris Pratt: So I, and, and you talked before the show about, um, some kind of predatory behavior from credit card companies and some laws that were passed. Can you talk just briefly for us young ins who haven’t experienced some of this predatory behavior? Can you talk a little bit about that? I mean, I remember my mom when I was a kid telling me stories about how the credit card companies would literally come to her school and set up booths as if it was, you know, the science fair or the, um, or the career fair. And they would, uh, hand out credit cards to anyone who walked by.
Dr. Cliff Robb: That is exactly the model that was going on. So what would happen is they would show up, they set up a booth, free pizza, sign up for a card free t-shirts sign up for a card that kind of stuff. And college students are going to get a free t-shirt right. You’re not turning down. If you’re not turning down free pizza, you’re not turning down free t-shirts and all you have to do is sign a form with your name and give them a little bit of information. You get a credit card too. Why not? Right. So this was very common practice. And the problem was that they were essentially giving people with zero proof of income credit limits. And again, I can’t say exactly what those were, but I know they were usually credit limits that I think were probably inappropriate for the level of financial literacy. Most card borrowers had as well as, uh, financial means that those card borrowers personally had.
Chris Pratt: I mean this is something that I think to an extent is still happening today. I saw some reporting on Apple’s new credit card, the Apple card, and how they had some of the highest approval rates, if not the highest approval rate of any credit card on the market today. And they were just, uh, handing out credit cards to pretty much anyone who signed up. And that was really dangerous because of how easy it was, right? You, you have an iPhone and you just click a button and you’re signed up.
Dr. Cliff Robb: And if you have verifiable income, you can get a credit card at age 18. My recommendation for most people starting out is as a teenager, you’re allowed to be an authorized user on an account. So if you have a parent or guardian, that’s the best way to start. If they’re willing to let you be an authorized user, because they have complete oversight on that card’s use. But yeah, I agree with you and your early kind of statement that my general opinion is it’s not necessarily a bad thing for college students to have credit cards. It’s definitely not a bad thing for young adults out of college, but I do recommend start with low limits, use them solely as a means of providing reliable payments and don’t focus on using them for things like aspirational purchases, use them to get maybe some reward points, but use them sparingly and use them responsibly so that yeah, you get the benefit of growing your credit report and your credit score without the penalties of kind of racking up the debt that can happen so easily.
Chris Pratt: Okay. So aspirational purchases, one of my best buddies just bought a super slick BMW. I don’t know if he paid cash or, you know, got a lease or, or whatever. I imagine he didn’t put it on a credit card, but what is an aspirational purchase?
Dr. Cliff Robb: It’s going to vary conditionally,
Chris Pratt: Don’t buy a BMW, I assume.
Dr. Cliff Robb: The idea is that you don’t buy something that you want. Obviously, if you don’t need it, you don’t… don’t buy it. But it’s also just gives the idea that don’t buy something that you couldn’t afford to pay off in that payment period. Especially if it’s not a have to. Now, I get, you might be in a situation where you’re tapped on your emergency account. You don’t have the resources necessary and something like the water heater’s broken and you may in a crisis situation, be forced to rely on a credit card, knowing that, Hey, it’s going to take me three months to pay off this water heater. And I’m going to off some debt. That’s not problematic. That’s sometimes necessary, but it’s the idea that I’m just going to go out and buy myself. I saw this brand new, I saw this great coat this morning on a TV show, and I’m going to get that coat. I don’t care that it costs a thousand dollars cause some celebrity was wearing it. I’m going to buy that thousand dollar coat and I’ll pay it off over the next 10 months or something. That’s, that’s what we mean by an aspirational purchase. That’s putting yourself in a hole.
Chris Pratt: Awesome. So moral of the story, don’t be stupid with your credit card. You know, I get it. It’s tough and it’s, it’s confusing and you really never know how you’re going to behave with something until you feel you have it. And until you have that spending power. So just folks be careful. Thank you so much, Dr. Robb for coming on the show. This has been really amazing. You’ve been really insightful. Thanks for taking the time to come and chat with us. Again, his name is Dr. Cliff Robb, his paper is called, “The Role of Federal and Private Student Loans in Home Ownership Decisions”. I highly recommend you go and give that a read, at least get the abstract to read. This is a phenomenal paper. He has a ton of other research and in Consumer Economics I highly recommend you check out. So again, thank you for coming on, Dr. Robb.
Dr. Cliff Robb: Yeah. Thanks for having me, this was fun.