Financial Literacy

Reading, Writing and Financial Education?

Pamela Chan — Thu, 02 Jul 2009 19:30:00 -0400

In response to the financial downturn, high schools around the country are adding financial literacy to their curriculum. Some schools are offering the financial literacy class as an elective. Others are making it a graduation requirement. New Jersey is the newest state to join Utah, Missouri and Tennessee in requiring high school-ers to take a financial literacy course. Some individual school districts, like the Chicago Public Schools, are making the decision without a mandate from the state.

The recent trend to make financial education part of the core curriculum in public schools reminds me of a New America event held last year, "The Effectiveness of Youth Financial Education." Experts stressed the importance of linking financial education to real-world financial activity, such as a savings account or visits to a bank. Being able to see how savings grow in a real account engages kids' interest in personal finance and motivates them to learn and retain financial principles.

For kids from higher income families who have the resources to open a bank account on their own, financial education in school would be immediately relevant and helpful. For kids from lower income families without the resources or access to a bank account, financial education in school may seem unimportant. The ASPIRE Act, which would create a Lifetime Savings Account at birth for every child in America, could help even the playing field and ensure that schools' efforts to teach financial literacy are maximized for children from all families.

Employers Aid Workers in Financial Distress

Karen Murrell — Tue, 02 Dec 2008 17:28:00 -0500

It's official. On Monday the National Bureau of Economic Research confirmed that the U.S. has been in a recession since December 2007. This news came as no surprise to many consumers. They have been feeling the impact of escalating unemployment rates and increasing food and other costs for quite some time. Many people have been struggling to afford basic needs like food, child care, housing, and transportation and this financial stress often spills over into the workplace. Employers are taking notice of the stress and are providing some help.

Last week in an article published by the Wall Street Journal titled "Crisis Help via Work," they reported that more and more workers are feeling stress from job pressures and from the turmoil in the financial markets. To help alleviate this stress, some employers are offering free financial counseling. In the article, the WSJ cited an EAP program that provides assistance with budgeting and debt reduction by certified financial planners, accountants, and attorneys through confidential telephone counseling sessions. This sounds like a win-win solution to help workers deal with stress and to help employers gain more productive employees, but there are some challenges in engaging more employers to adopt this service.

The New America Foundation recently commissioned research conducted by Dr. Lewis Mandell of the University of Washington to determine the motivations, methods, and barriers for employers to provide non-retirement financial education in the workplace, particularly to low- and middle-income workers. The study explores the reasons why employers decided to offer financial education and it identifies the perceived internal benefits and external benefits of providing financial education in the workplace. The study also documents the types of financial education offered by employers, as well as information about when and where the education was offered. Additionally, the report provides information about the role of third-party, out-of-house providers, such as EAPs, and presents mini-case studies illustrating how employers across the country utilize various parties to deliver this important benefit. The full report is available for download here.

For a brief video overview of the paper by Karen Murrell, please click here.
And please stay tuned for the posting of a more in-depth conversation about the research findings with Dr. Lewis Mandell.

Battle of the Bulges: Obesity, Financial Illiteracy and the Role of Behavior

Jamie Zimmerman — Wed, 28 May 2008 21:56:00 -0400

I've recently been thinking about the similarities between our national epidemics of obesity and financial illiteracy. Both are socio-cultural phenomena created through generations of misinformation, misunderstanding and perverse incentives. Factors like (but not limited to) easy credit and encouraged consumerism without proper consumer disclosure and easy access to abundant, cheap astonishingly unhealthy foods has created a culture of overindulgence on so many levels. Both problems tend to fall disproportionately on poor, low and even some moderate-income households, which lack easy access to alternative options (like banks red-lining disadvantaged neighborhoods; public school cafeterias serving french fries most everyday yet not offering physical education classes). And both are believed to have huge social and economic costs that are now reaching epic proportions. If similar forces are causing and/or driving these problems, then shouldn't efforts to tackle both childhood obesity and financial illiteracy also be similar? Only recently has this become apparent to those fighting the battle of such rhetorical bulges.

At the high-level International Conference on Financial Education host this month by the US Department of Treasury and the Organization of Economic Cooperation and Development, INSEAD Professor Klaus Wertenbroch presented his research on psychological biases in financial decision-making. He told a story of how explaining to a high school aged girl how much money she could save (and earn through compound interest on savings and investments) if she did not buy that one Coke each day out of the vending machine at school. He explained this as "a message that clicked" with the student that she can make good financial decisions just by changing her attitude toward money. But the message about the coke in the vending machine everyday "clicked" with me in another way - it's the same sort of message those in the fight again obesity make as well. Overall, the messages are similar - yes, knowledge is important, but healthy habits (behavior) stem also from attitudes. We seemed to reach this consensus at the OECD/Treasury Conference but failed to come up with any agreement on concrete solutions to the financial literacy glut in the United States. The problem is, creative messaging to change attitudes will only go so far if access to more "healthy" options (access to financial services; physical education classes and salads in schools) are not - and have not traditionally been - readily available.

However, one buzzword that had stemmed from new insights of behavioral economics might offer an innovative approach - Nudge, as recently made popular by the new book by Thaler and Sunstein. The power of the "nudging" (some wonks like to call it libertarian or soft paternalism) people in the right direction and the idea seems to be catching on in both health and financial education circles. As Dr. Wertenbroch put it "we need to create choice environments to coax people in the right direction." And while he referred explicitly to financial decision-making, this could obviously be applied to healthy eating and living habits as well. For instance, why don't we do more to default people into the more "healthy" options (healthy school lunches offered; auto-defaults into retirement accounts or other financial products such as savings accounts)? Why not use new media more actively to "nudge" people toward physical and financial fitness? Marcin Polak presented on the Polish government's investment in "edutainment," which used popular mass media and internet to launch an effective campaign against financial illiteracy, is actually quite amazing. I don't see why we couldn't emulate something similar in the United States.

It seems like experts and policymakers alike are finally realizing that in order to win the fight to effectively change unhealthy behaviors - and the perverse environments our society has created that enable and indeed encourage such behaviors - some creative and active "nudging" back in the right direction is going to be necessary.

Why Not A Stronger Vision for Financial Literacy?

Alejandra Lopez-Fernandini — Mon, 05 May 2008 23:40:00 -0400

Last Monday I attended "Financial Literacy Day on Capital Hill", an awareness-raising event convened by the Jump$tart Coalition for Personal Financial Literacy, JA Worldwide and the National Council on Economic Education. In addition to a hall of exhibits by government, not-for-profit and corporate organizations that promote financial literacy across the country, Rep. Rubén Hinojosa (D-TX), Sen. Daniel Akaka (D-HI), and Sen. Wayne Allard (R-CO) offered moving remarks to the audience of practitioners and hill staff. I was wholly impressed and heartened by the passion and sincere commitment to financial education shown by these leaders, and enjoyed seeing the variety of curricula and methods on display. Yet, I left perplexed about the absence of policy that could systemize and enforce the delivery of these valuable efforts.

Recognizing that too many Americans, both youth and adult, are not making sound, forward-looking financial decisions, the President's Advisory Council on Financial Literacy was formed in early 2008 to take stock of the nation's financial literacy levels and assess the federal government's efforts to address this widespread problem.

The Council is comprised of an impressive cadre of 16 professionals from the private sector-with Charles Schwab presiding as chair. The creation of the Advisory Council, a non-governmental body to independently review federal efforts and provide suggestions for improvement, reflects the Administration's leadership to achieve broader financial inclusion and promote responsible decision-making.

Although its mandate is limited to doing little more than assessing the financial literacy landscape and making recommendations to the Department of Treasury, I am hopeful that the Council will fully capture and convey to the President through the Treasury Department the scope of this problem. However, without the resources to undertake meaningful research and outreach, and with no authority to implement new policy or programs or revise current efforts, the Council may have limited ability to force substantive improvements to the nation's financial education activities.

The following policy options are informed by research and practitioner experience, and could feasibly improve the state of our nation's financial literacy, if implemented, enforced, and supported with proper resources. The suggestions below incorporate promising ideas from a 2007 roundtable of experts convened by the New America Foundation.

Youth Financial Literacy
Financial education should be taught starting at the kindergarten level and reinforced in every grade through high school. It should be integrated into the existing kindergarten through eighth-grade curricula, incorporated in core high school courses (in particular math and science), and included in each state's standardized testing. Teachers could acquire the information and confidence they need to teach financial education through pre-service education.

Financial Education in the Workplace
Employers are motivated to provide financial education to employees for several reasons, and a number of initiatives demonstrate the value of the workplace as an effective delivery location. To increase the number of employers offering financial education and to ensure the most effective strategies are being employed, more research identifying best practices for employers of all sizes is needed. Incentives, such as tax credits, may encourage employers (particularly small employers) to provide broad-based, comprehensive financial education and should be considered when developing plans for workplace interventions.

Financial Access for Underserved Markets
There are many individuals providing financial counseling today for vulnerable, low-income or low-wealth Americans. However, they are concentrated in credit counseling, helping those already in serious difficulty; homeownership counseling; and working with Individual Development Accounts. Not only are more dedicated counselors needed, but people who regularly interact with low-income or low-wealth consumers need to be trained to provide good financial advice.

The New America Foundation recommends the creation of a Financial Services Corps (FSC), that would recruit a range of financial experts, planners, and advisors to deliver targeted financial expertise and advice to households seeking to better understand the complexities of the financial services sector, access assistance when facing financial difficulties, and plan for savings and investment goals. While potentially building on the model of the Congressionally-established Legal Services Corporation, which provides funding for local legal services programs, the FSC would provide the infrastructure, resources, and support to engage and connect financial experts with low and middle income households and communities. If established, a FSC would greatly expand the availability of financial experts, educators and counselors; serve as a credible resource for financial information; and make timely financial information available for individuals who need it most.

Financial Literacy Research
To develop a comprehensive approach that can help consumers make good financial decisions, research should emphasize four areas: (1) understanding the consumer demand, (2) exploring consumer motivations and effective marketing approaches, (3) exploring the effectiveness of financial education at the point of a financial transaction, and (4) incorporating knowledge from other fields, particularly psychology, neuroscience, behavioral economics, health, nutrition, family sciences, and child development.

Outreach and Awareness
While many financial education materials exist, consumer demand for financial education is not high among the general population. To stimulate demand and to effectively communicate to those who lack awareness of financial education resources, campaigns should segment consumers and appeal to their specific motivations and financial education needs. Outreach and awareness campaigns need to include both high-tech and high-touch methods to effectively reach diverse audiences.

College Grads Crippled by Credit Card Debt

Karen Murrell — Mon, 28 Apr 2008 13:25:00 -0400

Many experts have predicted that our economy is moving into a recession and as the economy declines, it will become even more important for college students to graduate with as little credit card debt as possible to enable them weather tough times. A recent article in the Washington Post stated that college students can least afford to graduate with debt these days with an unstable job market. Many college students are crippled with debt. They graduate with credit card debt as well as student loan debt and in today's economy they may not be able to find a job immediately upon graduation. In spite of these facts, research shows that college students continue to accumulate credit card debt.

A recent study by the US PIRG Education Fund showed that nearly two thirds of students reported that they had at least one credit card. Seniors reported carrying more than $2,500 of credit card debt. This debt was incurred to pay for college expenses as well as living expenses. Students reported using credit cards for "day-to-day" expenses (55%) and books (55%). The next highest categories reported were "weekends and pizza" and emergencies.

As college costs continue to soar, college students are increasingly turning to credit cards to cover costs. The US PIRG survey showed that nearly 25% reported that they used their credit cards to pay for tuition. Last week two major financial institutions announced plans to curb private student loans and this move will likely force even more students to turn to credit to finance their college education.

In spite of the dire situation, there are efforts to help college students escape the credit trap. Financial education coupled with sound policy and less credit card marketing on campuses could help college students avoid the credit card trap.

Many consumer advocates believe that financial education is important because students often don't understand the obligations and long-term impact of credit cards and as a result, some universities are beginning to incorporate financial education into their freshman orientation.

Credit card issuers are exploring ways to educate college students who apply for credit to help reduce the number who ultimately fall into trouble. The Center for Financial Services Innovation documented the results of a pilot program of three credit card issuers--Target Financial Services, U.S. Bank, and Wells Fargo. The results showed that although engaging cardholders in educational activities was challenging, early intervention seems to hold some promise for improving credit behavior and reducing delinquency.

Recently several policy makers are taking steps to address this issue. Senator Robert Menendez (D-NJ) introduced a bill that requires consumers under age 21 to "opt in" before they could be the target of credit card solicitations. Carolyn Maloney (D-NY) and Barney Frank (D-MA) have introduced a similar bill in the House that addresses complaints that card issuers manipulate their mail to result in late payments even when consumers pay on time.

Additionally, universities are stepping in to ban credit card marketing on their campuses. College students are frequently enticed to open credit card accounts on campus with the lure of free gifts. The US PIRG study shows that 76 percent of students stopped at tables on campus to apply for a credit card and nearly one-third were offered a free gift. Increasingly, college campuses are banning these practices.

These efforts are all important steps to help college students avoid the credit-card trap and enable them to graduate without a debt load that will certainly burden them and threaten their financial future.

Saving Across America

Ellen Seidman — Thu, 24 Apr 2008 14:44:00 -0400

Last week I had the privilege of discussing asset building for lower income Americans in three very different settings: the annual Opportunity Economics Colloquium of the Hope Street Group, held at the Lansdowne Resort outside of Washington; an Assets Forum sponsored by the New America Foundation in the State Capitol in Sacramento, California; and with a group of financial services, social service and foundation representatives brought together by the City of Seattle. While the settings and audiences varied, the theme was the same: how to empower and encourage all Americans, particularly those who do not have funds either to cushion an economic setback or to invest to achieve economic security, to take sustainable first steps toward saving. Given the current financial crisis, one wishes these discussions had started ten years ago, but that same crisis makes it all the more important that they're happening now.

Our group at Hope Street, which included policy types and investment bankers and other private sector players, young and less young, from both coasts, was assigned the task of recommending policies that would be effective to increase to 50% the percentage of Americans who had savings to cover six months of operating expenses. In other words, unlike the usual Washington policy debate, this was not about pension and retirement savings, important as those are. We settled on a goal of about $10,000-recognizing that it was low, but to give us a target to shoot for-and focused on liquid assets, while recognizing that bankable non-liquid assets, such as a home, can sometimes serve the same purposes. While we didn't stick entirely to the task, in that at least one of our policy recommendations is a bet on the longer term, the policies we chose would all constitute effective steps toward the goal.

After four hours of robust discussion and debate, we settled on five top policy recommendations. These are: build a new generation of savers by seeding a savings account for every child-to become available at age 18-with $500 and, as in the United Kingdom, use the new account to enhance the financial literacy of the entire family; encourage greater competition in the consumer financial services sector-while recognizing the need for effective consumer protection-to increase innovation in products and services that serve the bottom half of the wealth distribution; encourage greater efforts in the workplace to provide easy, automatic paths to saving beyond retirement saving, and financial education about how to manage and grow those savings; revitalize the US Savings Bond program, which provides a totally safe, small denomination, non-account-based, modestly liquid vehicle for saving in small amounts; and stop punishing savings by substantially modifying the asset limits that discourage everyone from TANF recipients to applicants for Pell grants for higher education from saving. The Hope Street colloquium ended with presentation of these ideas to representatives of the three Presidential candidates.

In Sacramento, the focus was on financial literacy, both to build on and to build up momentum for the California Financial Literacy Initiative (AB 2123), introduced by Rules Committee Chair Ted Lieu and sponsored by California Controller John Chiang. We discussed the increased need for financial literacy in a world of enhanced individual responsibility for financial health, a younger and older population, and ever more complex financial products from a widening array of providers. The Financial Literacy Initiative is a platform on which the state and its partners can build both financial literacy resources and outreach. Already the California Library Literacy Services has indicated interest in adding financial literacy to its broader literacy initiative, potentially bringing this type of education into a trusted resource for adults in over 600 communities. A particularly innovative element of AB 2123 would start the process of establishing a Financial Literacy Corps to mobilize financial professionals and others to provide unbiased financial advice to low- and middle-income families who are now without this resource. New America Foundation is working on this concept on a national scale and it is exciting to see it begin to take shape in California.

Seattle and King County have been working on a series of asset-building initiatives, including a Bank on Seattle program. The participants in the asset-building coalition-city and county officials; social service agencies; banks, thrifts and credit unions; and the philanthropic sector-are focused on building pathways to enable people to better meet their financial needs. We spent our time discussing what was needed, the roles of all parties, examples of success and best practices, and what the literature tells us. Specific areas of concern were bringing people into bank accounts and linking those accounts to saving; effectively coordinating financial education with the opportunity to use what was being taught; small dollar loans; and the challenges of banking immigrants in both urban and rural settings. Participants were very interested in the Federal Deposit Insurance Corporation's small dollar loan pilot program, both for what the 30 bank participants in that program (none of them, unfortunately, in Washington State) will be trying and demonstrating and because the FDIC will be disseminating the learnings widely.

It is enormously exciting that the importance of building savings and assets-of establishing the underpinnings of financial stability-has gained such interest in such a variety of venues. It is even more exciting that people across the country, from all sectors, are working together to develop and implement long-term, sustainable strategies to make financial stability attainable for everyone.