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Is Financial Education a Good Idea and Whose Idea Is It Anyway?

posted by Jean Braucher

Educators find it hard to be against education, and I am no exception to that rule. But some evidence from JumpStart Coalition, which promotes financial education for young people, is cause for pause. Its last survey of high school students, conducted among 5775 12th graders in 37 states in 2006, found that those who had taken a financial literacy course actually did slightly worse on its financial literacy test than students who had not taken a course. See www.jumpstart.org/fileuptemp/2006GeneralReleaseFinal%202.doc (Thanks to Professor Lauren Willis of Loyola of Los Angeles School of Law for pointing out this information in an excellent presentation on financial literacy education at the Association of American Law Schools annual meeting in NYC earlier this month.)

There are many possible explanations for the JumpStart survey result. JumpStart also found that kids from more affluent families did better on the test. It is not surprising that factors and influences other than taking a course have a lot to do with learning about finances. It is also possible that the courses the students took were not very good, either in the content or teaching methods.

JumpStart’s list of "corporate partners" gives you a pretty good idea of who wants to promote the idea of "financial literacy."  http://www.jumpstart.org/advisor.cfm  The many financial institutions on this long list presumably think financial education will not have much effect on the willingness of consumers to pay lots of interest and fees on high balances of various kinds of debt. Rather than push for financial education, maybe financial institutions should work on offering simpler products that are easier to understand and compare.

We should also keep in mind that the JumpStart test doesn't necessarily tell us much about the capacity of high school students to get on a sound financial footing. In a news release on the survey, JumpStart reported that "only 22.7 percent [of test takers] understand that interest on savings accounts may be taxable if one's income is high enough." This is worth knowing if you are choosing between a tax-deferred savings vehicle and an ordinary savings account and you would have to pay taxes on the latter, but it is a fine point that many high school students won't make use of for years. I am impressed that more than a fifth of high school students know that (but maybe I shouldn't be, because if there were five answers to choose from, the figure is barely above what guessing would tend to produce). 

Furthermore, emphasis on financial education may miss the obvious point that staying out of debt trouble doesn't depend primarily on complicated book learning or at least not on book learning about finances. It's a lot easier to avoid over-indebtedness and to save if you have a higher income. Having relatively higher income correlates with finishing college. In other words, a high school student would probably be better off taking the most challenging course available (AP Chemistry or AP European History anyone?) than a financial literacy course if that student wants to avoid debt trouble and build a nest egg in the long run. Not only would doing so help with getting into and finishing college, it would also develop critical thinking skills, valuable to resist advertising promotions.

Basic prudence isn't rocket science, and a lot of facts and figures may just get in the way. Some simple rules for financial health are:  Spend less than you make, preferably much less. Save early and often. Avoid like the plague running a balance on a credit card. You can’t afford not to have health insurance. Avoid a bad marriage. Develop good job skills.


Finally, someone else spotted this also. If you look back into previous years you will find a similar pattern as well. While education is good I think we need to examine the context of the education. The current approach is like teaching the classroom part of drivers education about 3 years before the student gets into the car and how effective is that?

Also, an introduction to basic finance to young people can do more to build confidence rather than build intelligence. I'd rather see more emphasis placed on instruction in college wen people actually have access to credit. However, with as much as colleges make from card marketing agreements, I think it would be not as welcomed as some might think.

Rather than teach the math of finance it might be more relevant to teach more about the underlying triggers and emotional issues that cause people to get into trouble so students can watch fro those clues. After all, debt is the symptom, not the underlying cause.

Financial literacy education can't wait until high school, let alone college! This education needs to be in our school curriculum beginning in Kindergarten. It's easy to do as part of math or social studies.

The most important concept that kids of this age can be taught is that of delayed gratification. With a sense of delayed gratification, a skill that is easily taught in the context of personal finance basics, kids ultimately learn that you can't always get everything you want now or even at all. This will lead them to lead happier, less frustrating lives with much less debt.

My point is that I'd like to see some proof first that "financial literacy" programs in schools have measurable impact on behavior. We'd have to agree on what behavior in particular we are looking for. But until there are more than hunches and wishful thinking to suggest that these programs are a good idea, I wouldn't divert scarce resources (including kids' time) to them. Financial literacy education sounds good, but does it really do anything for kids who didn't learn about delayed gratification in other ways? And does it waste the time of the other kids, who did? School programs may be swamped by stronger influences, for good or ill, in kids' lives. My hunch is that the schools have enough to do already, without asking them to take on the problem of over-indebtedness, too. Talk of financial education often seems to be a way to excuse ever more complicated consumer financial services products and ever more aggressive marketing of high cost credit.

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