As the United States economy wobbles its way past the Great Recession, a national movement is pushing for personal finance to be taught in public schools. The Treasury and Department of Education are sending lesson plans to schools and encouraging them to compete in a national test on financial capability. There have even been calls to nationally mandate financial education for all school children. Advocates say the earlier children learn about issues such as savings and debt, the less likely they'll be to find themselves in the kinds of credit messes that contributed to the country's economic crisis.
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But efforts to get schools on board are stalling, and there is debate about whether such education even works.
A review by the Council for Economic Education shows that only 13 states require high schools to offer courses in personal finance -- two fewer than in 2009 (see map). Only four require students to take a course in order to graduate. "We've really failed our citizens and particularly our children as a society with economic and personal finance education," says Nan Morrison, the council's president and chief executive. "We have two generations of parents that haven't gotten this kind of education in school, so how do you expect them to pass it on to their children?"
Children appear to be hungry for knowledge on the subject. A 2011 Charles Schwab survey of 1,132 American teens aged 16 to 18 showed 42% of the respondents would like their parents to talk more to them about how to establish good credit. That same study shows a decline in knowledge. In 2007, 43% of 18-year-olds claimed they knew how credit card interest and fees work. In 2011, that fell to 32%.
Those numbers are significant when you think that freshmen bring an average of $1,585 in credit card debt to college. That's despite the fact that unless those under 21 have an independent income, parents must co-sign for their children to have a credit card at that age.
Even parents who teach their children about financial literacy at home see the need for a public role. Peggy Brady is a mother of two in Portland, Ore. She says she talks to her two boys about debt and is instilling the value that they shouldn't live outside their means. A whole semester on personal finance seems excessive for her kids, but she knows that many children aren't getting the same messages at home that hers are. "It seems like there are the people who understand the game and the people who don't," says Brady. "And to level the playing field on a societal level, there probably should be some kind of education."
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Finding time for financial literacy
Tackling the problem is harder than it might seem. No matter how much educators may want to teach personal finance, they are constrained by budget cutbacks and mandates to concentrate on subjects such as math and language arts. "It's really a challenge in schools today to fit in yet another subject when teachers are very focused on rolling out the common core and No Child Left Behind," says Morrison.
Then there's the question of who exactly is qualified to teach personal finance. It often falls to social studies or math teachers, but many of them lack the confidence to teach children about money when they're struggling with their own finances. "Teachers are not prepared at all," says Connie Lambert, a personal finance teacher at Alcorn Central High School in Glen, Miss. "In college, there was never really a class on this. Some teachers have gone through their entire college career without ever having to take economics."
Mississippi has started a program to train teachers through the state Council on Economic Education. Lambert completed 50 hours of free training and received a Master Teacher of Economics distinction, qualifying her to teach personal finance. She has since attended multiple workshops put on by the state council and by the Federal Reserve.
Along with teaching her students about savings, bank accounts and car loans, she covers credit cards. A lot of her students have not been exposed to credit education at home. "This is a rural area," explains Lambert. "Many parents are scared of credit cards, or they've gotten deeply in debt, so we do simulations on managing a credit card and how to pay your bill in full at the end of the month so you don't have to pay interest."
Besides teaching a stand-alone course in personal finance, Lambert integrates those principles into the math and English classes she teaches, and she conducts workshops so that other teachers can do the same. "Kids always ask why do we have to study this or that, but when they see real world examples it makes more sense," she says. "You can use algebra to evaluate different cellphone packages."
Scoring better on tests
Studies show that students who take financial literacy courses test better after taking the class than before. In the Smart Tennessee program, which targets kindergarten through 12th grade students, only 10.2% of elementary school students reached the 70% benchmark before taking the class, compared to 43% after. For middle school students the change was even more dramatic. Only 2.6% hit the 70% benchmark before the class; 39.5 achieved that goal in post-tests.
Making it sticky
Yet critics say that most financial literacy education doesn't work. Scores on the Jump$tart High School Survey fell 9 percentage points between 1997 and 2008, the most recent year the study was undertaken. The average score of 48.3% is well below the 60% considered to be a passing score. Even more discouraging is that students who took a personal finance class in high school scored no differently than those who didn't. "We haven't figured out a very good way to educate people in a sticky fashion so they'll remember it," says economist Lewis Mandell.
Of the respondents to the 2008 survey, about one-third used a credit card belonging to either themselves or their parents. The students who did not use a credit card scored five points better, on average, than those who used a credit card. In fact, they scored better than card users on questions directly related to credit. Students who used an ATM/debit card for their purchases had scores that were 5.7% higher than credit card holders.
Still, Mandell says there's less incentive now to teach high school students about credit cards because the Credit CARD Act of 2009 restricts credit card access until they're 21. He likens it to teaching 17-year-olds about pensions. "Diligent kids will study whatever you tell them to and spout it back on an exam to get an A," he reasons. "But when you measure recall at some point afterward, we tend to find they're not retaining it because they're not interested in it."
Other experts say today's financial world is too complex for anyone to master. A CreditCards.com study found that cardholder agreements are written at a 12th grade level, making them incomprehensible to four out of five adults. The average American adult reads at a ninth grade level, and almost half cannot read beyond the eighth-grade level. Mortgages and investments have also become much more difficult to decipher. "The complexity of financial decisions we're faced with today and that kids are going to be faced with tomorrow if regulation doesn't change is just too complicated," says Lauren Willis, a law professor at Loyola Law School Los Angeles.
Regulatory reforms are tackling some of those criticisms. The Dodd-Frank Wall Street Reform and Consumer Protection Act, for instance, has banned kickbacks to mortgage brokers who upsell more expensive and high-risk loans than the ones applicants have qualified for. And the CARD Act aims to make credit card agreements more transparent -- though it introduced a host of new terms that consumers and even credit counselors have trouble understanding.
Willis suggests we need more emphasis on basic math. "People who can add, subtract, divide and multiply do a lot better financially than those who can't," she says.
Knowledge is not enough
Figuring out how to address the emotional component of financial decision-making is another. A 2011 study published in the Proceedings of the National Academy of Sciences found that children with poor self control as early as age 3 struggle financially when they grow up. As adults, they reported more money management difficulties and had accumulated more credit problems.
But self-control can be nurtured, especially when children are very young. A program called Tools of the Mind aims to do just that. The research-based curriculum is devoted to teaching children how to regulate their behaviors and emotions in nearly every daily activity. It's been shown to have a significant impact on the self-regulation of preschoolers, which in turn has been proven to impact scores in early literacy and math. "It's not financial literacy, but it may be more important," says Willis.
Finding what works
That doesn't mean financial education is useless for children who are older now. Even critics admit some programs show promise, especially those that are hands-on.
In the Jump$tart survey, high school students who had played the Stock Market Game scored consistently better on the test than those who had taken a personal finance course -- and not just in investing, but across all aspects of the test, including credit. Experts think the game, which gives students a hypothetical $100,000 to invest in an online portfolio, works because it's practical and related to current events. "It's fun, it's interactive, it's team play, but it seems to be really effective in helping to make these lessons stick," says Laura Levine, president of Jump$tart.
Another idea gaining notice is Loot Camp, a program founded by START Community Bank in New Haven, Conn. The bank has partnered with Youth@Work, the city's summer jobs service for disadvantaged teens. After discovering that many of the children were using expensive check cashing services for their paychecks, the bank offered them free bank accounts and helped them set up direct deposit. It even threw in an iPad for the student who saved the most by the end of summer. All of the students enrolled got an ATM card with a $50 a pop withdrawal limit. The only catch: the students first had to complete an intensive 90-minute personal finance class.
Besides teaching them about savings and bank accounts, the course emphasizes consumer self-defense. "They should be raising their eyebrows into their hairline if someone says they can get a cellphone for a dollar," explains START Senior Vice President Lynn Smith, the program's creator.
Smith covers credit cards too, discussing how they can be useful for online purchases and travel. But she also talks about what to do if you can't pay off your bill. "Most of the kids are too young to get a credit card, but we start to talk to them about the time value of money and the concept of using credit wisely," she says.
Looking for silver bullets
Yale researchers are now conducting a tracking survey on the effectiveness of the program. Smith wants to compare the young account holders' behavior to that of the students that opted out of the bank account: Do they save more? Manage money better? Pay fewer check cashing fees?
This type of research is crucial. Experts are still searching for the holy grail of financial literacy education.
"We economists would love it if someone came up with a methodology to teach people how to use credit cards to maximum advantage and do it in high school, when we can reach them, with the notion that it will be retained until they're adults and using credit cards," says Mandell. "We haven't found any silver bullets, but that doesn't mean we're not looking."