The Case for High School Financial Literacy
Why High Schools?
Clearly, personal finance education should start early at both home and school. But measurement is very hard to do in people’s homes and in primary school. There is no national effort to meaningfully track data on this topic at the elementary and middle school levels. College data is not gathered at a national level on this topic, and for many individuals, educational opportunities end with high school anyway. Fortunately, personal finance education data can be obtained for state-by-state comparison purposes at the high school level. According to the Bureau of Labor Statistics, 68% of 2014 high school graduates were enrolled in colleges or universities.1 For those graduates who choose to go on to higher education, personal finance education in college is often scant and scattered, with few colleges offering a personal finance elective and even fewer requiring personal finance instruction as a graduation requirement. Regardless of when a young person’s formal education ends, they will be thrust into situations where they need to know how to manage daily living expenses. So, high school seems like the best and most logical place to deliver personal finance education to America’s youth.
Admittedly, a high school focus could omit some of the students who have dropped out of high school. The National Center for Education Statistics indicates that the high school dropout rate (the percentage of 16- through 24-year-olds who are not enrolled in school and have not earned a high school credential) was 7% in 2013.2
The Case for Financial Literacy
Personal finance education in high school provides students with the knowledge and skills to manage financial resources effectively for a lifetime of financial well-being. Here are just some of the reasons our young people need to learn about personal finance:
- The number of financial decisions an individual has to make continues to increase, and the variety and complexity of financial products continues to grow. Young people often do not understand debit and credit cards, mortgages, banking, investment and insurance products and services, payday lending, rent-to-own, credit reports, credit scores, etc.
- Many students do not understand that one of the most important financial decisions they will make in their lives is choosing whether they should pursue post-secondary education or not after high school, and if they decide to pursue additional education, what field to specialize in.
- Most college students borrow to finance their education, yet often do so without fully understanding how much debt is appropriate for their education or the connection between their area of study and the income level that they can expect upon graduation. Many students attend college without understanding financial aid, loans, debt, credit, inflation and budgeting.
- At many colleges, financial literacy education is largely composed of brief, federally mandated entrance and exit loan counseling for students. Student feedback indicates that most do not comprehend the information presented, and view it as one more requirement of the financial aid process rather than a learning opportunity.
- Employee pension plans are disappearing and being replaced by defined contribution retirement programs, which impose greater responsibilities on young adults to save and invest, and ultimately spend retirement savings wisely. If they fail to do this, they could become a significant economic burden on our society.
- A recent study indicated that only 24% of Millennials (ages 18 to 34) surveyed could answer four out of five questions correctly in a financial literacy quiz.3 By comparison, 48% of Baby Boomers (born between 1946 and 1962) were able to answer four out of five of these quiz questions correctly. While Boomers should be more knowledgeable, our young citizens are dangerously illiterate in this area.
- On an international financial literacy test of 15-year-olds, the U.S. ranked behind China, the Czech Republic, Poland and Latvia, and was statistically tied with Russia—what a “Sputnik moment.”4
- A Charles Schwab survey indicated that parents are nearly as uncomfortable talking to their children about money as they are discussing sex.5
- Seven in 10 college students from the Class of 2013 graduated with student debt that averaged $28,400 and delinquency rates on student loans continue to soar.6,7
Financial literacy leads to better personal finance behavior. There are a variety of studies that indicate that individuals with higher levels of financial literacy make better personal finance decisions. Those who are financially illiterate are less likely to have a checking account, rainy day emergency fund or retirement plan, or to own stocks. They are also more likely to use payday loans, pay only the minimum amount owed on their credit cards, have high cost mortgages, and have higher debt and delinquency levels.
As a society, we need more training programs that increase the number of financially literate citizens who are able to make better and wiser financial decisions in their own lives. Such programs are not just good for the individual but also helpful to society. The 2008 financial crisis clearly shows that a lack of financial literacy was one of the factors contributing to poor financial decisions by individuals, and that the choices made had negative consequences on our country.
As former President Bill Clinton recently stated, financial literacy is “a very fancy term for saying spend it smart, don’t blow it, save what you can and know how the economy works.”9 Financial literacy, just like reading, writing and arithmetic, builds human capital by empowering individuals with the ability to create “capital for humans” to use in their lifetime—for buying a home, going to college, having a rainy day and a retirement fund. Financial literacy education is not a handout but rather a helping hand that gives individuals the knowledge and skills that can help them solve financial problems or prevent difficulties from occurring.
We would not allow a young person to get in the driver’s seat of a car without requiring driver’s education, and yet we allow our youth to enter the complex financial world without any related education. An uneducated individual armed with a credit card, a student loan and access to a mortgage can be nearly as dangerous to themselves and their community as a person with no training behind the wheel of a car.
The basics of personal financial planning—teaching young people about money, its value, how to save, invest and spend it, and how not to waste it—need to be taught in school and at home. When they graduate, high school students should, at a minimum, understand how credit works and know how to budget, save and invest. They should also understand the connection between income and careers and how student loans work. And they need to understand the critical importance of rainy day and retirement funds, and the amounts they will need in those funds.
1"United States Department of Labor, Bureau of Labor Statistics. “Economic News Release, College Enrollment and Work Activity of 2014 High School Graduates.” http://www.bls.gov/news.release/hsgec.nr0.htm
2"U.S. Department of Education, National Center for Education Statistics and the Institute of Education Sciences. “Fast Facts, Dropout Rates.” https:// nces.ed.gov/fastfacts/display.asp?id=16
3"Mottola, Gary. “The Financial Capability of Young Adults—A Generational View.” FINRA Foundation Financial Capability Insights. http://www. usfinancialcapability.org/downloads/FinancialCapabilityofYoungAdults.pdf
4"Organization of Economic Co-operation and Development (OECD). “PISA 2012 Results: Students and Money: Financial Literacy Skills for the 21st Century (Volume VI).” PISA, OECD Publishing. http://www.oecd.org/pisa/keyfindings/PISA-2012-results-volume-vi.pdf
5"Charles Schwab & Co. “2011 Teens & Money Survey Findings, Insights Into Money Attitudes, Behaviors and Expectations of 16- To 18-Year-Olds.” http://www.schwabmoneywise.com/public/file/P-4192268/110526-SCHWAB-TEENSMONEY.pdf
6"The Institute for College Access & Success and The Project on Student Debt. 2014. “Student Debt And The Class of 2013.” Retrieved from http://ticas.org/sites/default/files/legacy/fckfiles/pub/classof2013.pdf
7"Federal Reserve Bank of New York, Research and Statistics Group, Microeconomic Studies. “Quarterly Report on Household Debt and Credit.” http:// www.newyorkfed.org/householdcredit/2015-q1/data/pdf/HHDC_2015Q1.pdf