Why Johnny can't save money -- and what schools should do about it
The average teen may know when Columbus set sail and the
speed of a car traveling from Poughkeepsie to Buffalo in five hours, but too
many have no idea how much their savings account can earn. With financial literacy stuck at dismal rates, the call for
better financial education in public schools is amplifying.
But while the intentions behind this push are laudable,
questions linger about how financial subjects should be taught -- and whether
they're even teachable for school children.
The financial education movement has been gaining momentum
for more than a decade. The Consumer Financial Protection Bureau added its
considerable weight in 2013 with a set of recommendations for teaching financial
topics to all grade levels. "We are deeply committed to a vision of an
America where everyone is financially educated," said CFPB
Director Richard Cordray in the white paper outlining the bureau's
recommendations. "We should start where all good education starts -- with
Among his organization's recommendations: Teach personal
finance at every grade level, include the material on standardized tests and
require students to take a stand-alone personal finance class before
graduation. The U.K. and Australia are already mandating such actions. (See Lessons from overseas on financial education.)
The bureau's advice echoes that of the President's Council on
Financial Capability, which recommended in January 2013 that states incorporate
personal finance into the Common Core Standards for English and math. The Common
Core is a set of benchmarks adopted by 45 states spelling out what K-12 students
should know at the end of each grade.
Numbers tell the story
Survey after survey show Americans don't understand basic financial
concepts. In the 2012
Financial Capability Study by the
Financial Industry Regulatory Authority, for example, less than half of respondents
scored a passing grade on five simple questions
about financial fundamentals. Only 39 percent answered three or more
questions correctly, down from 42 percent in 2009.
High school students fare even worse. Nearly three-quarters
failed the quiz in the 2008 survey
by the Jump$tart Coalition for Personal Financial Literacy,
with fewer than 5 percent earning the equivalent of a C or better.
New payment products such as prepaid debit cards, gift cards and
mobile payments make the financial landscape even more complex for today's
costly is ignorance? Look no further than the recent financial crisis, says the
CFPB. It was brought on partly by Americans ensnared in debt and credit
products they couldn't afford. The bureau says education is the best hope for preventing a
people today and future
generations should not have to repeat the financial mistakes made by earlier
generations," wrote Cordray in the CFPB white paper.
State records are
The feds are pushing financial literacy because states, which control
education policy, are inconsistent in their approaches. Forty-six now include personal
finance in their educational standards, compared to only 21 in the 1990s. But only
17 states require high school students to take a personal finance class and five
require testing on economic topics. "When the law does not require
implementation of specific education standards, they become voluntary and less
effective, tending to take a back seat to the required education
standards," says the CFPB's white paper.
A lot of what you'd like people to know how to do, you're going to have a hard time teaching successfully because the decisions aren't relevant.
Just ask Stuart Greenfeld, adjunct economics professor at
Austin Community College. Until the 2013-14 school year, Texas high schools were
not required to offer personal finance courses. When Greenfeld surveyed his
classes at the beginning of the 2013 school year, only eight of his 84 students
had taken a high school personal finance course. But 47 had credit cards --
including 10 high school students in an early college start program. Less than
a quarter of his students knew the difference between simple and compound
interest. "I was sort of shocked at the lack of knowledge they had,"
Julia Angelem remembers all too well the limitations of the
personal finance lessons she received in a lifestyle class at her Seattle high
school in the late 1980s. "It was taught by a coach," she laughs.
"That's how much they cared about it."
Although she learned basics like how to write a check, she
says the lessons never covered real-life budgeting challenges. A few years
later, she left college with thousands of dollars in credit card debt.
Her mother finally sat her down and talked to her about
money -- a discussion Angelem wishes they'd had a decade earlier. With Mom's
help, she learned how to manage on her modest starting salary and eventually
she dug her way out of debt.
Now a mother herself, she is teaching her own children about
money and credit so they won't make the same mistakes she did. She thinks
schools have a role to play, too. "If we're going to have lifestyle
classes where the kids carry
around a baby for a week, it should be much more realistic," she says.
"It should look at why debt is bad. If we could slice out 10 percent of
the curriculum for something kids will really
use in the future, I would support that."
But does it work?
Trouble is, there's not much evidence that formal education in financial
concepts works for children as young as five -- or even for teens. The 2008
Jump$tart survey famously showed that students who took a personal finance
class in high school scored no differently than those who didn't. Critics note research
flaws in the study, but the results turned the survey's author, economist Lewis
Mandell, from a financial education proponent into its loudest skeptic.
Mandell now argues it's better to wait to teach financial information
until just before it's needed. Your motivation to learn about, say, mortgages is
highest when you're buying a house. Teaching material "pre-need" is a
waste because students forget it, says Mandell. "If you measure the amount
they've learned by their scores on the final and contrast it with what they
knew going into it, they will show incredible learning," he admits.
"But if you ask them a year later, they'll have no recollection of it
because there's no real reason why the material should be sticky."
To waste very scarce educational resources on something that we know is just going to be of interest and advantage to those who are already holding all the marbles, just strikes me as very pathetic and very, very unfair.
Harvard professor Brigitte Madrian, co-director of the household
finance working group for the National Bureau of Economic Research, agrees.
"There's only so much we could expect of any initiative to increase
financial literacy in the public schools just because a lot of what you'd like
people to know how to do, you're going to have a hard time teaching
successfully because the decisions aren't relevant," she says.
Mandell goes even further, arguing that pre-need financial
education is not just ineffective, it's unethical. The few kids who do well
in it are those who excel in most other subjects, too, he says, and they tend
to come from wealthier, better-educated families. "To waste very scarce
educational resources on something that we know is just going to be of interest
and advantage to those who are already holding all the marbles, just strikes me
as very pathetic and very, very unfair," Mandell says.
What's more, the focus on education neglects the fact that
some economic hardships are beyond the control of individuals, say Mandell and
other critics. Their alternative: make financial systems simpler. For example, studies
show that when the
default 401(k) option for employees is automatic enrollment, participation
rates increase. Chile is considering applying this principle to its student
loan program by limiting loan amounts based on extensive research into what students
can expect to earn in their chosen fields.
Better than ignorance
Proponents of financial education in public schools counter that policy changes
won't suffice -- and education is less expensive than the alternative. "People
make too many financial decisions for a few policy changes or changes in the
choice architecture to be enough," says Annamaria Lusardi, distinguished
professor at The George Washington University School of Business and founder of
the Global Financial Literacy Excellence Center. "It's going to be much
cheaper to equip people with the tools they need to make decisions than to
rescue them later on when they've gotten into trouble."
Education advocates also complain that the bar is higher for
financial education than other subjects. "Just because you don't remember
logarithms doesn't mean that math failed," says Jeanne Hogarth, vice
president of policy at the Center for Financial Services Innovation and a
former economist with the Federal
Reserve. "We need to cut financial education a bit of
I think people mistake the teaching of financial literacy with a particular event when it's really about teaching habits of thought.
Council for Economic Education
While no solid studies show that K-12 financial education
leads to better decision-making later in life, some experts find hope in research by Bill Skimmyhorn, an assistant economics
professor at West Point. Skimmyhorn looked at the effects of the Army's
Personal Financial Management Course (PFMC), an eight-hour, mandatory class
rolled out in 2007 and 2008 for all new active-duty enlisted soldiers. The
largest study of its kind, it examined the behaviors of soldiers who took the
class over a two-year period.
"The most significant finding was that the course had a
very powerful effect on retirement savings and some moderate but important
effects on savings and credit behaviors," says Skimmyhorn. Soldiers who
took the PFMC were twice as likely to participate in the military's retirement
plan and saved twice as much as those who did not take the course. At the same
time, the credit balances of PFMC graduates were 10 percent to 12 percent lower than
those of soldiers who did not take the course. So it appears the graduates were
saving more and spending less.
methods are best?
Even if those results translate for public school children, experts
disagree on the best methods of instruction. Skimmyhorn notes that personal
finance is different from math or reading because the student has to not only
absorb the lessons, but be disciplined enough to apply them. He thinks the
implication of his research for public schools may be that the curriculum needs
to be very relevant to student needs -- the sort of "just-in-time"
approach Mandell recommends. "Teaching juniors and seniors in high school
how to do a net present value analysis will prove very difficult and probably
won't affect their behavior," he advises. "Instead you might provide
them with some rules of thumb, some advice for their situation or direct them
to other available resources."
Others say that while just-in-time learning is important, you
can't wait until the last minute to get basics, such as the difference between
a need and a want. (See What to teach.) They maintain that schools should teach principles -- early and often --
because kids form
impressions about money early, and cumulative learning drives increasingly
responsible financial behavior as they grow up. "I think people mistake
the teaching of financial literacy with a particular event when it's really
about teaching habits of thought," says Nan Morrison, president and CEO of
the Council for Economic Education. "Opening a bank account is a one-time
event. We're trying to teach kids skills and
tools they can apply to any decision they may face going forward."
I have to believe education works.
Center for Financial Services Innovation
Schools can do that without breaking the bank by
incorporating financial lessons into other subjects, says the CFPB. That's what
Colorado schools are doing. In fall 2013, the state integrated personal finance
into its math and social studies standards, which schools are required to
teach. Melissa Colsman, executive director of the teaching and learning unit at
the Colorado Department of Education, says the move fills an important gap. Before
the standards were implemented, most schools did not take a comprehensive approach
to teaching students how to make good financial decisions, she says.
What to teach
The Treasury Department's MoneyAsYouLearn.org website provides teachers with personal finance lessons that fit into math and English classes. The site stresses understanding of 12 "personal finance big ideas," with the hope they will lead to practical actions:
• Compound interest (Action: saving early and managing debt)
• Opportunity cost (Action: effective decisions and recognition of foregone options)
• Value of education (Action: wise choices about higher education)
• Risk (Action: understanding of diversification and insurance)
• What money is (Action: understanding of its value)
• Time value of money (Action: more informed purchasing, investing and planning)
• Cost/benefit analysis (Action: better decision making)
• Debt (Action: understanding its appropriate use in education, housing and purchasing)
• Setting goals (Action: sense of purpose and more achievable outcomes)
• Delayed gratification (Action: ability to save for future purchases)
• Scarcity (Action: acknowledging limitations and making choices)
• Inflation (Action: understanding how to mitigate its effects on savings, debt, purchasing and investment).
As for lesson style, the CFPB and most educators say that hands-on,
experiential learning is the way to get through to kids. Holly Winter is among
them. She devised a system for her junior high math and literacy students at
Denver's Morgridge Academy where they each owe $1,200 a week in play
money to rent their desks. They earn the funds by coming to class on time and
doing their homework and extra credit assignments.
If they do everything they're supposed to, they end up with
a little extra to save toward rewards such as a no-homework pass. Mostly,
though, Winter tries not to give prizes. "I want them to know that it
feels really good to be in the black and it feels bad to be in the red,"
says Winter, who once struggled with credit card debt. "And they do. They hate going into the red."
According to Mandell, though, play money isn't enough. The
real learning doesn't begin until you're teaching with genuine cash.
"Everyone has to have some skin in the game," he says.
The one type of public school program he supports involves
setting up savings accounts for students. San Francisco's Kindergarten to College (K2C)
program is a great example. Since 2012, San Francisco has put $50 for each
kindergartener into a college savings account that parents and others can
contribute to. The schools are also integrating financial subjects into the
children's math curriculum, using the accounts as a teaching tool. Educators
are watching closely to see what effect the program has on future behaviors.
In fact, experts are all eager for better research on the
efficacy of school financial literacy programs. Even Harvard's Madrian, a
skeptic, admits that if she had a niece or nephew who didn't have the benefit
of her economic instruction, she would want them to be able to take a class in
school. But she would want the curriculum to be rolled out on a small scale and
tested over time. "That would then inform how you would want to change
things going forward," she says. "We're not going to have any data
until we go out and do something."
In the meantime, "I have to believe education
works," says Hogarth.
See related: Financial literacy online resources for parents, children
, Financial literacy survey shows consumers lack basic money skills
, Students fail the credit card test
Published: January 9, 2014