Financial Education

Quality Financial Literacy: No Gold Medal for the US

Alejandra Lopez-Fernandini — Thu, 14 Aug 2008 15:37:00 -0400

A recent article in the Chicago Tribune raised important questions about the effectiveness of financial education and challenged the appropriateness of its offering to consumers operating in an increasingly complex financial industry. Author Greg Burns is right to draw attention to the lack of evidence on the impact of financial literacy, but policymakers should not abandon the pursuit of quality financial education just yet.

Financial education should be a complement to, not a substitute for other consumer protections.

For middle and lower income individuals who have fewer financial resources to begin with, learning the warning signs to trouble and the resources to seek support is unquestionably valuable.

Policymakers, legislators, education administrators, and the financial industry should consider five promising existing policy ideas to improve the delivery of effective and high quality financial literacy.

1. Evidence demonstrates that coupling financial education with account ownership improves sav ings rates, asset accumulation and leads to positive behavior change. Wells Fargo and US Bank have evaluated the impact of providing "just in time" or point of sale education-which provides information and education when the individual is making a decision-and found that educating their customers results in improved cardholder behavior. The private sector should better use these "teachable moments" to transfer financial literacy to their consumers.

2. A major piece of the problem is the shortage of financial education advisors and educators to offer independent, reasonably priced financial services advice. Establishing a Financial Services Corps would connect families hungry for knowledge and individualized guidance with a corps of financial experts, planners and advisors who would deliver financial advice across a broad array of areas (household budgeting, credit repair, emergency savings, higher education, retirement, and homeownership). The Corps could be structured to deliver a tax credit to financial planning providers, or to issue vouchers directly to families who seek professional financial counsel.

3. Building evidence on the effectiveness of financial education (especially group-based) in changing attitudes and behaviors requires policymakers devote federal funding to support more rigorous research and evaluation. Understanding the impact of financial literacy on behavior change requires sophisticated evaluation to determine a causal relation (more powerful than a correlation). Some evidence exists, but more research is needed to make the case.

As my colleague Karen Murrell points out, most financial education programs were developed in the last 10 years and many programs are too new to have long-term tracking in place. As for more established programs, they often lack the resources (cost and technical expertise) to conduct rigorous evaluation.

4. The bulk of current federal funding for financial literacy efforts focuses on credit counseling and home purchase. Problem solving, money management, and economic principles should be incorporated earlier in a person's education, and re-emphasized throughout their schooling years for maximum impact as an adult.

5. We should support the findings from the President's Advisory Council on Financial Literacy and encourage the Treasury Department to provide this newly created body with the authority to enforce their final recommendations.

Financial literacy efforts are not mutually exclusive to pro-consumer regulation or one-on-one counseling. Consumers of all ages need to understand when and how to access financial advice and have affordable, unbiased options for this advice available. For most of America's households, quality financial education is the most reliable vehicle to accomplish this.

Employers Helping Employees to Weather Tough Times

Karen Murrell — Fri, 13 Jun 2008 13:56:00 -0400

Almost daily there are news reports that the average gas price has set a new record. The continued increase in gas prices is taking its toll on many Americans and to manage the higher prices faced at the pump, people are searching for ways to cut other expenses. As individuals are looking for ways to cut expenses so they can afford increasing fuel costs, employers are also taking steps to help. Some employers are responding to the escalating gas prices by establishing perks to help their employees manage these costs.

Some businesses and local governments are cutting back to four-day workweeks, with employees working four 10-hour days instead of five eight-hour days in an effort to help employees save some money on gasoline. The city of Birmingham decided to adopt a four-day week for employees starting July 1 and starting June 1, Avondale, Ariz., will move to a four-day workweek at City Hall.

These cities are not the only employers who are offering flexible schedules in response to increasing gas prices. The Society for Human Resource Management (SHRM) recently conducted a survey, What Employers Are Doing to Help Their Employees with High Gas Prices in 2008. This survey showed that 26 percent of employers are offering a flexible work schedule in response to rising fuel costs. Eighteen percent are instituting telecommuting and 14 percent are rewarding performance with a gas card. The survey showed that 42 percent of employers are raising their mileage reimbursement to the IRS maximum.

Employers are using benefits, not increased pay, to help employees cope with rising fuel prices. This raises a larger question as to the employer's role in helping their employees to weather tough times. Perhaps there is a broader role for employers to play, not only to cope with rising fuel prices, but also to help employees to better manage their personal finances by providing broad-based, comprehensive financial education. Employers are positioned to provide trusted, just-in-time financial education in locations that are convenient to employees.

While it might appear as an altruistic move on the part of the employer, research suggests that employers do indeed benefit when they help their employees. Garman, Leech, and Grable conducted research that showed that workers who are less anxious about personal financial problems may be more productive. Providing personal finance education may also help employers with recruiting and retaining employees; however, there are a number of other cost-benefit issues that employers often consider.

The New America Foundation advocates for incentives to encourage the expansion of financial education in the workplace. There is a need for workplace financial education that is provided during the workday, in the workplace or at a nearby convenient location, and that is offered in tandem with the opportunity to utilize appropriate financial products such as a savings account, a low-cost checking account, or a low-cost prepaid card.

To expand workplace education, better information is needed about best practices and different delivery options for providing financial education, particularly for small employers operating in different work environments such as retail stores, manufacturing plants, and office settings. The New America Foundation is currently conducting research to better understand the motivations of employers who are offering financial education and perceived benefits for the company. The Foundation is also exploring the challenges, barriers, and the costs of providing education--including the implied liability cost from providing information which turns out to be wrong or misleading and results in employee loss. A full report will be published this fall.

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.

Is Financial Education Doomed to Get Failing Grades in Schools?

Karen Murrell — Thu, 22 May 2008 23:51:00 -0400

Recently there has been a lot of attention on the lack of financial education in the United States. Some experts have suggested that we need to educate people at an early age in order to reverse this trend. Although providing financial education in schools seems like a logical way to provide financial education to youth; however, some research appears to show that delivering financial education in the schools is not effective. The Jump$tart Coalition for Personal Financial Literacy has been conducting national surveys of high school seniors to measure their financial literacy biennially since the 1997. The 2008 survey had the lowest score of any survey issued to date, with high school seniors answering just 48.3 percent of the financial literacy questions correctly.

Although there is a desire to help youth improve their financial decision making, state and local officials are struggling to determine how best to provide financial education in schools. Only three states require at least a semester long personal finance course. Teachers are stretched thin and are often overwhelmed with the thought of adding personal finance to the list of topics they are required to teach. They also struggle with getting students excited about complex concepts like credit card interest rates and loans.

The New America Foundation recently convened a meeting of national experts working to provide financial education in the K-12 school system to discuss strategies to expand the quantity, quality and effectiveness of financial education provided in schools. The following is a list of suggestions that these experts believe will help facilitate increased financial education in schools. Suggestions fall into four broad categories: pursue research and knowledge initiatives, develop an influence strategy, enhance financial education in schools, and develop legislation and regulations based on effective practices at the state and local level.

Pursue research and knowledge initiatives

Define financial competence for each grade level. Although many experts will agree that there is a need for financial education for youth, there is no consensus about what this means. Clear financial education standards, benchmarks, and competencies that lead to positive financial behavior need to be uniformly adopted. Additionally, continuous research and evaluation should be employed to measure the impact of financial education provided on knowledge gained and behavior changed.
Pursue research opportunities to probe lingering questions about personal finance education at the state level. Some states are interested in providing financial education in schools, but want to know more information about the experiences of other states that currently require a personal finance course or that integrate personal finance into other subjects. Through a national survey of states, additional information can be collected and disseminated.

Develop an influence strategy

Develop a logic model that will inform an influence strategy. A logic model should depict all of the potential audiences and organizations that need to be educated and influenced in order to expand financial education in schools. The logic model will be used to help identify strategic opportunities to collaborate with others to promote the need for increased financial literacy in grades K-12.

Explore ways to incorporate parental education as part of financial education in K-12. There is anecdotal evidence that teaching youth about financial education provides an opportunity to educate their parents as well. Explore ways to develop an intergenerational model that provides financial education to both youth in schools and their parents.

Enhance financial education in schools

Promote early financial education. Much of the financial education that occurs in schools is targeted to high school students, but some experts believe that waiting until high school to teach personal finance is too late. Students have often developed attitudes and beliefs about money long before high school. Focusing on financial education throughout the school years, with a particular focus on education in grades K-8, provides a better opportunity to influence positive behavior change. Additionally, a focus on early education would address the fact that a significant number of students drop out of school and might not receive financial education if it is only offered in high school. Early education ensures that students who don't complete high school will receive at least a base level of personal finance education.

Require a financial education capstone course for all high school students. Experts believe that even if financial education is integrated into core courses and provided through grades K-11, a personal finance capstone course is needed in grade 12 to reinforce the information learned in earlier grades and prepare students-both those going on to higher education and those directly entering the workforce-to adopt appropriate financial strategies for the next stage of their lives. In addition to exploring ways to implement a capstone course in grade 12, consideration should be given as to whether or not financial education should be anchored one particular subject in grades K-11. Currently, financial education can be integrated into any subject.

Provide teacher training and resources. Ensure that teachers at all grade levels are trained in personal financial management, and are taught how to integrate personal financial management concepts into the curriculum. Provide sufficient resources to enable teachers to acquire quality, interactive educational materials that are age appropriate. Explore the most effective way to incent and support teachers to provide financial education and determine the right balance between issuing mandates and encouraging voluntary efforts.

Develop legislation and regulations based on effective practices at the state and local level

Develop model legislation and model regulations that highlight best practices for states and local government. Work with a core group of states that have passed financial education legislation or regulations to determine the components that are most effective. Based on this information, develop a model law and regulations that incorporate best practices from various states. Other states can use these documents as a starting point for developing their own financial education legislation and regulations.

Tie funding to effective practices. Once there is consensus about effective practices for states to implement financial education in the schools, both federal and state funding should be tied to adoption and implementation of these practices. This ensures that funding is directed in a manner that supports the most effective practices.