Recently, North Carolina became the 20th state in the country to require students to complete a financial literacy class before graduating high school. On the surface, this seems like such an obvious law for states to pass because it directly addresses the problem of financial illiteracy in the United States without really costing too much. In North Carolina, they had to get rid of one of their U.S. history classes (which some teachers and parents were upset about, but North Carolina was one of only two states in the U.S. that had multiple American history courses).
To support the case for financial literacy to be taught in high school, the Republican Lt. Gov. of North Carolina posted some interesting statistics on Twitter. I won’t list them all here, but the statistics showed North Carolinians scoring very poor on EPF (economics and personal finance) exams, the amount of student loan debt and credit card debt in our country, and the lack of savings.
Politicians on both sides of the aisle are touting high school personal finance classes as a major part of the solution to financial illiteracy in America, if not the cure. So that got me thinking...how much does being taught personal finance in high school actually help? Can we compare students who took personal finance classes and those who didn’t, and see the differences in financial decisions and behavior?
The good news is that yes, there are multiple studies focused on financial education and its impact on financial behavior. On top of that, all of the studies I found came to the same conclusion: teaching personal finance in high school doesn’t make a difference. The Management Science study I found reported that “interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied, with weaker effects in low-income samples.” This means that out of all of the factors that can potentially impact financial behavior, the impact of financial education is about 0.1%. Which is next to nothing. And for lower-income students, the ones who need help the most, the impact is even less than 0.1%. They also found that in less than two years after receiving financial education, they had forgotten what they learned.
When you learn something new that goes against common knowledge (and common sense), it might take more than one study to change your mind. So I found another study by economists at Harvard, the Federal Reserve Bank of Chicago, and Wellesley College, which is referenced here. Their conclusion? “State mandates requiring high school students to take personal finance courses have no effect on savings or investment behavior.”
Economist Lewis Mandell, a strong proponent for financial literacy, authored a 2009 study that found “those who took the course [in personal financial management] were no more financially literate than those who did not.” His views have shifted, and he now believes that “financial education doesn’t work when it’s given in advance of when the consumer needs it.”
The more I read and researched, the clearer it became: teaching high school kids personal finance doesn’t really make a difference. Which is pretty disappointing, considering how many politicians and advocates for financial literacy parade around the idea of personal finance classes in high school as something really impactful.
There is no doubt we still have a problem. Debt is a huge issue for so many Americans, people are getting taken advantage of left and right by immoral financial institutions, and knowledge about basics, like retirement accounts and credit cards, is still very much lacking. I learned that personal finance classes aren’t the solution, but I’m still not sure what the solution is.
Several scholars, including Lewis Mandell, are pushing for a new type of financial literacy where consumers are educated at the point of sale instead of years or decades in advance. This means educating someone about credit cards when they get their first credit card, or waiting until they’re employed by a company that offers retirement accounts before educating them about employer-sponsored retirement accounts. That could mean shifting some of the financial education burden to employers or lenders, which could cause some problems; I’m not sure if we want credit card companies to be the ones educating young consumers about credit cards.
Although it’s still unclear if point of sale financial education will be beneficial, or even become mainstream, it makes a great deal of sense. Learning and putting your knowledge to use at the same time seems like it would make it more likely for concepts and ideas to stick. There are factors which we already know have huge impacts on financial behaviors, like the effects a parent’s financial behaviors and habits have on their children. But children can’t control whether or not their parents do a good job teaching them about money and personal finance.
To solve the financial literacy problem in America, we need to figure out how to educate and empower lower-income Americans, and those of us whose parents had poor financial habits and behaviors. This won’t be easy; a financially educated America would threaten so many different billion dollar industries, like rent-to-own stores and payday lenders. Many brick and mortar banks would go out of business, and credit card companies would lose billions in revenue if people began using credit cards more responsibly. It’s clear that high school personal finance classes aren’t going to be enough. I think point of sale education could have a big impact for many people, but I also believe that it’s the responsibility of those of us that are financially educated to spread as much knowledge and information as we can, which is why I began writing this newsletter.
Thanks for reading today’s newsletter. If you have any questions, comments, or suggestions, please e-mail me at email@example.com.