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
outlining the bureau's recommendations. "We should start where all
good education starts -- with our children."
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
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
. 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
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
How 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
recurrence. "Young 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 spotty
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.
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," he says.
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
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
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
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."
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
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 slack."
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.
Which teaching 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
.) 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."
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.
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
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
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
Financial literacy online resources for parents,
Financial literacy survey shows consumers lack
basic money skills
Students fail the credit card test