Can Schools Really Teach Personal Finance?

The average teen may know when Columbus set sail and the speed of a car traveling from Poughkeepsie to Buffalo in five hours, but too many have no idea how much their savings account can earn. With financial literacy stuck at dismal rates, the call for better financial education in public schools is amplifying.

But while the intentions behind this push are laudable, questions linger about how financial subjects should be taught -- and whether they're even teachable for school children.

The financial education movement has been gaining momentum for more than a decade. The Consumer Financial Protection Bureau added its considerable weight in 2013 with a set of recommendations for teaching financial topics to all grade levels. "We are deeply committed to a vision of an America where everyone is financially educated," said CFPB Director Richard Cordray in the white paper outlining the bureau's recommendations. "We should start where all good education starts -- with our children."

Among his organization's recommendations: Teach personal finance at every grade level, include the material on standardized tests and require students to take a stand-alone personal finance class before graduation. The U.K. and Australia are already mandating such actions. (See Lessons from overseas on financial education.)

The bureau's advice echoes that of the President's Council on Financial Capability, which recommended in January 2013 that states incorporate personal finance into the Common Core Standards for English and math. The Common Core is a set of benchmarks adopted by 45 states spelling out what K-12 students should know at the end of each grade.

Numbers tell the storySurvey after survey show Americans don't understand basic financial concepts. In the 2012 Financial Capability Study by the Financial Industry Regulatory Authority, for example, less than half of respondents scored a passing grade on five simple questions about financial fundamentals. Only 39 percent answered three or more questions correctly, down from 42 percent in 2009.

High school students fare even worse. Nearly three-quarters failed the quiz in the 2008 survey by the Jump$tart Coalition for Personal Financial Literacy, with fewer than 5 percent earning the equivalent of a C or better.

New payment products such as prepaid debit cards, gift cards and mobile payments make the financial landscape even more complex for today's teens.

How costly is ignorance? Look no further than the recent financial crisis, says the CFPB. It was brought on partly by Americans ensnared in debt and credit products they couldn't afford. The bureau says education is the best hope for preventing a recurrence. "Young people today and future generations should not have to repeat the financial mistakes made by earlier generations," wrote Cordray in the CFPB white paper.

State records are spottyThe feds are pushing financial literacy because states, which control education policy, are inconsistent in their approaches. Forty-six now include personal finance in their educational standards, compared to only 21 in the 1990s. But only 17 states require high school students to take a personal finance class and five require testing on economic topics. "When the law does not require implementation of specific education standards, they become voluntary and less effective, tending to take a back seat to the required education standards," says the CFPB's white paper.

Just ask Stuart Greenfeld, adjunct economics professor at Austin Community College. Until the 2013-14 school year, Texas high schools were not required to offer personal finance courses. When Greenfeld surveyed his classes at the beginning of the 2013 school year, only eight of his 84 students had taken a high school personal finance course. But 47 had credit cards -- including 10 high school students in an early college start program. Less than a quarter of his students knew the difference between simple and compound interest. "I was sort of shocked at the lack of knowledge they had," he says.

Julia Angelem remembers all too well the limitations of the personal finance lessons she received in a lifestyle class at her Seattle high school in the late 1980s. "It was taught by a coach," she laughs. "That's how much they cared about it."

Although she learned basics like how to write a check, she says the lessons never covered real-life budgeting challenges. A few years later, she left college with thousands of dollars in credit card debt.

Her mother finally sat her down and talked to her about money -- a discussion Angelem wishes they'd had a decade earlier. With Mom's help, she learned how to manage on her modest starting salary and eventually she dug her way out of debt.

Now a mother herself, she is teaching her own children about money and credit so they won't make the same mistakes she did. She thinks schools have a role to play, too. "If we're going to have lifestyle classes where the kids carry around a baby for a week, it should be much more realistic," she says. "It should look at why debt is bad. If we could slice out 10 percent of the curriculum for something kids will really use in the future, I would support that."

But does it work?Trouble is, there's not much evidence that formal education in financial concepts works for children as young as five -- or even for teens. The 2008 Jump$tart survey famously showed that students who took a personal finance class in high school scored no differently than those who didn't. Critics note research flaws in the study, but the results turned the survey's author, economist Lewis Mandell, from a financial education proponent into its loudest skeptic.

Mandell now argues it's better to wait to teach financial information until just before it's needed. Your motivation to learn about, say, mortgages is highest when you're buying a house. Teaching material "pre-need" is a waste because students forget it, says Mandell. "If you measure the amount they've learned by their scores on the final and contrast it with what they knew going into it, they will show incredible learning," he admits. "But if you ask them a year later, they'll have no recollection of it because there's no real reason why the material should be sticky."

Harvard professor Brigitte Madrian, co-director of the household finance working group for the National Bureau of Economic Research, agrees. "There's only so much we could expect of any initiative to increase financial literacy in the public schools just because a lot of what you'd like people to know how to do, you're going to have a hard time teaching successfully because the decisions aren't relevant," she says.

Mandell goes even further, arguing that pre-need financial education is not just ineffective, it's unethical. The few kids who do well in it are those who excel in most other subjects, too, he says, and they tend to come from wealthier, better-educated families. "To waste very scarce educational resources on something that we know is just going to be of interest and advantage to those who are already holding all the marbles, just strikes me as very pathetic and very, very unfair," Mandell says.

What's more, the focus on education neglects the fact that some economic hardships are beyond the control of individuals, say Mandell and other critics. Their alternative: make financial systems simpler. For example, studies show that when the default 401(k) option for employees is automatic enrollment, participation rates increase. Chile is considering applying this principle to its student loan program by limiting loan amounts based on extensive research into what students can expect to earn in their chosen fields.

Better than ignoranceProponents of financial education in public schools counter that policy changes won't suffice -- and education is less expensive than the alternative. "People make too many financial decisions for a few policy changes or changes in the choice architecture to be enough," says Annamaria Lusardi, distinguished professor at The George Washington University School of Business and founder of the Global Financial Literacy Excellence Center. "It's going to be much cheaper to equip people with the tools they need to make decisions than to rescue them later on when they've gotten into trouble."

Education advocates also complain that the bar is higher for financial education than other subjects. "Just because you don't remember logarithms doesn't mean that math failed," says Jeanne Hogarth, vice president of policy at the Center for Financial Services Innovation and a former economist with the Federal Reserve. "We need to cut financial education a bit of slack."

While no solid studies show that K-12 financial education leads to better decision-making later in life, some experts find hope in research by Bill Skimmyhorn, an assistant economics professor at West Point. Skimmyhorn looked at the effects of the Army's Personal Financial Management Course (PFMC), an eight-hour, mandatory class rolled out in 2007 and 2008 for all new active-duty enlisted soldiers. The largest study of its kind, it examined the behaviors of soldiers who took the class over a two-year period.

"The most significant finding was that the course had a very powerful effect on retirement savings and some moderate but important effects on savings and credit behaviors," says Skimmyhorn. Soldiers who took the PFMC were twice as likely to participate in the military's retirement plan and saved twice as much as those who did not take the course. At the same time, the credit balances of PFMC graduates were 10 percent to 12 percent lower than those of soldiers who did not take the course. So it appears the graduates were saving more and spending less.

Which teaching methods are best?Even if those results translate for public school children, experts disagree on the best methods of instruction. Skimmyhorn notes that personal finance is different from math or reading because the student has to not only absorb the lessons, but be disciplined enough to apply them. He thinks the implication of his research for public schools may be that the curriculum needs to be very relevant to student needs -- the sort of "just-in-time" approach Mandell recommends. "Teaching juniors and seniors in high school how to do a net present value analysis will prove very difficult and probably won't affect their behavior," he advises. "Instead you might provide them with some rules of thumb, some advice for their situation or direct them to other available resources."

Others say that while just-in-time learning is important, you can't wait until the last minute to get basics, such as the difference between a need and a want. (See What to teach.) They maintain that schools should teach principles -- early and often -- because kids form impressions about money early, and cumulative learning drives increasingly responsible financial behavior as they grow up. "I think people mistake the teaching of financial literacy with a particular event when it's really about teaching habits of thought," says Nan Morrison, president and CEO of the Council for Economic Education. "Opening a bank account is a one-time event. We're trying to teach kids skills and tools they can apply to any decision they may face going forward."

Schools can do that without breaking the bank by incorporating financial lessons into other subjects, says the CFPB. That's what Colorado schools are doing. In fall 2013, the state integrated personal finance into its math and social studies standards, which schools are required to teach. Melissa Colsman, executive director of the teaching and learning unit at the Colorado Department of Education, says the move fills an important gap. Before the standards were implemented, most schools did not take a comprehensive approach to teaching students how to make good financial decisions, she says.

As for lesson style, the CFPB and most educators say that hands-on, experiential learning is the way to get through to kids. Holly Winter is among them. She devised a system for her junior high math and literacy students at Denver's Morgridge Academy where they each owe $1,200 a week in play money to rent their desks. They earn the funds by coming to class on time and doing their homework and extra credit assignments.

If they do everything they're supposed to, they end up with a little extra to save toward rewards such as a no-homework pass. Mostly, though, Winter tries not to give prizes. "I want them to know that it feels really good to be in the black and it feels bad to be in the red," says Winter, who once struggled with credit card debt. "And they do. They hate going into the red."

According to Mandell, though, play money isn't enough. The real learning doesn't begin until you're teaching with genuine cash. "Everyone has to have some skin in the game," he says.

The one type of public school program he supports involves setting up savings accounts for students. San Francisco's Kindergarten to College (K2C) program is a great example. Since 2012, San Francisco has put $50 for each kindergartener into a college savings account that parents and others can contribute to. The schools are also integrating financial subjects into the children's math curriculum, using the accounts as a teaching tool. Educators are watching closely to see what effect the program has on future behaviors.

In fact, experts are all eager for better research on the efficacy of school financial literacy programs. Even Harvard's Madrian, a skeptic, admits that if she had a niece or nephew who didn't have the benefit of her economic instruction, she would want them to be able to take a class in school. But she would want the curriculum to be rolled out on a small scale and tested over time. "That would then inform how you would want to change things going forward," she says. "We're not going to have any data until we go out and do something."

In the meantime, "I have to believe education works," says Hogarth.