Do you know what a treasury bond is? Can you explain a stock dividend? How compound interest works? Amortization of capital? If you’re like the majority of America’s young people, these concepts are as foreign as borscht. Yet, in a country which prides itself on its free-market principles, economic knowledge should be commonplace. America’s public schools need to incorporate financial literacy into their curricula, starting in primary school and culminating in a year-long business, economics, and personal finance course in high school.
Most American students leave high school, and even college, without learning basic personal finance skills, greatly raising the likelihood for high levels of personal debt. According to research conducted by Dartmouth economist Annamaria Lusardi and her co-authors, Olivia Mitchell and Vilsa Curto, financial literacy among young people is distressingly low. Drawing data from the Bureau of Labor Statistics’ 1997 National Longitudinal Survey of Youth, the authors noted that “fewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification.” They also highlighted the tight correlation between “sociodemographic characteristics and family financial sophistication,” finding that “a college-educated male whose parents had stocks and retirement savings was about 45 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents were not wealthy.”
In a 2009 National Bureau of Economic Research working paper, Lusardi and Tufano concluded that low financial literacy correlates strongly with “incurring higher fees and using higher-cost borrowing”, while “[t]he less knowledgeable also report that their debt loads are excessive or that they are unable to judge their debt position.” Lusardi and Tufano found that “as much as one-third of the charges and fees [on credit card accounts] paid by less knowledgeable individuals can be attributed to ignorance.” Lusardi, Mitchell, and Curto noted that low financial literacy also led to lower rates of investing and retirement planning.
Participants who started the 1997 survey were between 12 and 16 years of age, placing their years of birth between 1980 and 1984. Each year from 1997 to 2007, researchers circulated surveys, tracking the aggregate progress of thousands of American students from adolescence to young adulthood. In 2007, surveyors added questions about financial literacy to the annual questionnaire for the first time. Lusardi, Mitchell, and Curto asked subjects questions about interest rates, inflation, and investing, and found “that lack of financial knowledge is widespread among the young.”
This cohort of Americans, currently aged 26 to 31, came of age financially (getting their first jobs, obtaining credit cards, making their first housing purchases) during the years immediately preceding the great recession of 2008. It is not coincidental that the subprime mortgage crisis occurred at time when financial literacy in this country is at such a low level. Planet Money, a co-production of NPR News and This American Life, has the definitive story of unscrupulous lenders originating variable rate mortgages for ignorant or negligent borrowers. Many borrowers were surprised when their interest rates adjusted upward and their previously affordable monthly payments skyrocketed.
Anecdotally, my experiences confirm the work of Lusardi, Mitchell, and Curto. Many of my friends and I struggle with our understanding of borrowing agreements, taxes, and investing, even though most of us are highly-educated. Much of my understanding of personal finance comes from informal conversations with my father, a pattern of financial education observed by the researchers. While a simplification of credit card agreements and the tax code would go a long way to increase financial comprehension, young people crave the opportunity to gain financial literacy. According to a 2009 study conducted by Sallie Mae, “[e]ighty-four percent of undergraduates indicated they needed more education on financial management topics. In fact, 64 percent would have liked to receive information in high school and 40 percent as college freshmen.”
Who would benefit from an increase in financial literacy? A more financially-literate society would benefit everyone; the dissemination of economic principles in the wider population would almost certainly produce a more stable, more dynamic American financial system. A reduction in personal debt, the deleveraging of the American public, may only be possible with a substantial increase in financial literacy. An increase in financial literacy might one day lead to a society-wide increase in retirement savings, helping to ease reliance on Social Security. Increased microeconomic knowledge could boost entrepreneurial drive in this country.
The stakeholders and structural obstacles lined up against increased financial literacy are formidable, though. Wealthy parents pass their financial expertise on to their children; in some sense, guarding financial knowledge helps to protect high-class status. Credit card companies, for all their posturing on financial literacy, derive most of their profits from the interest and fees charged on outstanding debts. No one stands to lose more from an increase in financial literacy than credit card companies; and perhaps, few industries have a stronger lobbying presence in Washington than credit card companies. Discomfort in talking about financial issues persists in a society where television and radio shows about financial planning are ubiquitous.
None of these obstacles are insurmountable though. In a society awash with entrepreneurial spirit, kids should be learning how to balance the books along with their grammar rules and periodic tables. Financial literacy should be as American as apple pie.
Most American students leave high school, and even college, without learning basic personal finance skills, greatly raising the likelihood for high levels of personal debt. According to research conducted by Dartmouth economist Annamaria Lusardi and her co-authors, Olivia Mitchell and Vilsa Curto, financial literacy among young people is distressingly low. Drawing data from the Bureau of Labor Statistics’ 1997 National Longitudinal Survey of Youth, the authors noted that “fewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification.” They also highlighted the tight correlation between “sociodemographic characteristics and family financial sophistication,” finding that “a college-educated male whose parents had stocks and retirement savings was about 45 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents were not wealthy.”
In a 2009 National Bureau of Economic Research working paper, Lusardi and Tufano concluded that low financial literacy correlates strongly with “incurring higher fees and using higher-cost borrowing”, while “[t]he less knowledgeable also report that their debt loads are excessive or that they are unable to judge their debt position.” Lusardi and Tufano found that “as much as one-third of the charges and fees [on credit card accounts] paid by less knowledgeable individuals can be attributed to ignorance.” Lusardi, Mitchell, and Curto noted that low financial literacy also led to lower rates of investing and retirement planning.
Participants who started the 1997 survey were between 12 and 16 years of age, placing their years of birth between 1980 and 1984. Each year from 1997 to 2007, researchers circulated surveys, tracking the aggregate progress of thousands of American students from adolescence to young adulthood. In 2007, surveyors added questions about financial literacy to the annual questionnaire for the first time. Lusardi, Mitchell, and Curto asked subjects questions about interest rates, inflation, and investing, and found “that lack of financial knowledge is widespread among the young.”
This cohort of Americans, currently aged 26 to 31, came of age financially (getting their first jobs, obtaining credit cards, making their first housing purchases) during the years immediately preceding the great recession of 2008. It is not coincidental that the subprime mortgage crisis occurred at time when financial literacy in this country is at such a low level. Planet Money, a co-production of NPR News and This American Life, has the definitive story of unscrupulous lenders originating variable rate mortgages for ignorant or negligent borrowers. Many borrowers were surprised when their interest rates adjusted upward and their previously affordable monthly payments skyrocketed.
Anecdotally, my experiences confirm the work of Lusardi, Mitchell, and Curto. Many of my friends and I struggle with our understanding of borrowing agreements, taxes, and investing, even though most of us are highly-educated. Much of my understanding of personal finance comes from informal conversations with my father, a pattern of financial education observed by the researchers. While a simplification of credit card agreements and the tax code would go a long way to increase financial comprehension, young people crave the opportunity to gain financial literacy. According to a 2009 study conducted by Sallie Mae, “[e]ighty-four percent of undergraduates indicated they needed more education on financial management topics. In fact, 64 percent would have liked to receive information in high school and 40 percent as college freshmen.”
Who would benefit from an increase in financial literacy? A more financially-literate society would benefit everyone; the dissemination of economic principles in the wider population would almost certainly produce a more stable, more dynamic American financial system. A reduction in personal debt, the deleveraging of the American public, may only be possible with a substantial increase in financial literacy. An increase in financial literacy might one day lead to a society-wide increase in retirement savings, helping to ease reliance on Social Security. Increased microeconomic knowledge could boost entrepreneurial drive in this country.
The stakeholders and structural obstacles lined up against increased financial literacy are formidable, though. Wealthy parents pass their financial expertise on to their children; in some sense, guarding financial knowledge helps to protect high-class status. Credit card companies, for all their posturing on financial literacy, derive most of their profits from the interest and fees charged on outstanding debts. No one stands to lose more from an increase in financial literacy than credit card companies; and perhaps, few industries have a stronger lobbying presence in Washington than credit card companies. Discomfort in talking about financial issues persists in a society where television and radio shows about financial planning are ubiquitous.
None of these obstacles are insurmountable though. In a society awash with entrepreneurial spirit, kids should be learning how to balance the books along with their grammar rules and periodic tables. Financial literacy should be as American as apple pie.
Yes, I can certainly see the forces in society that wouldn't want me to understand interest rates and finances (the credit card companies.) But clearly, someone (the government) needs to ensure that young people are educated early about borrowing and basic finance.
ReplyDeleteWhile I believe your assertion that " television and radio shows about financial planning are ubiquitous" it doesn't mean they are on a platform that young people (especially low income young people) are accessing or are aware of. I only listen to NPR because my upper-middle class, financially savvy parents did.