Should High School Students Be Required to Pass Financial Literacy Test to Graduate?

The Wall Street Journal's The Wallet Blog ponders the question in a blog post today with several interesting new developments:

• First, as to whether there is a need for this type of education, the post cites the fact that high school seniors on average only answered 48.3% of the questions in the 2008 JumpStart Coalition's Financial Literacy Exam correctly.
  • Quiz yourself by downloading the 2008 Survey of Personal Financial Literacy here.

• In terms of current requirements, the article noted:
  • Three states (Utah, Missouri and Tennessee) require students to complete a personal finance course for graduation
  • Thirty states don’t require anything at all.
  • Click here to see how your state stacks up.

• Several states are considering adding a personal finance requirement
  • In Ohio, public schools must offer money-management classes or incorporate the subject into other courses by 2010;
  • Virginia is mulling a similar requirement
  • Colorado will test students on the subject in 2010. 
  • New Jersey is working on a pilot program that would require seniors to learn the basics of personal finance as well.

I also came across this press release regarding efforts at the national level.  The National Financial Literacy Act of 2009 would amend the Community Reinvestment Act to allow banking institutions to receive credit for offering community-based financial literacy programs. It provides for small businesses and corporations that offer free financial education to receive preferential treatment for government contracts, and for those small businesses to receive tax breaks. 

I have to admit being a bit surprised (or maybe even shocked) about the wisdom of relying on financial institutions to administer these programs given recent history.  A similar bill in 2007 didn't go anywhere so maybe this one won't either.  It would seem to make sense that these programs should be administered by institutions NOT affiliated with the banking industry to avoid any potential conflicts of interest.  Let's just imagine if Countrywide was providing programs in low-income communities on  finding a mortgage.  Does anyone truly believe that they would be warning folks about the dangers of taking out teaser rate mortgages?  Inefficient markets provide greater opportunity for shareholder profits.  Simple example; the lack of transparency for private student loans makes direct comparisons difficult.  This situation creates more profits for lenders than if there was price discovery where a borrower could easily receive 4-5 offers from lenders without the risk of hurting their credit score or spending an inordinate amount of time completing the applications.  So, my simple question to the legislators sponsoring this bill is:   What incentive do financial institutions have to educate consumers, thereby creating more efficient markets and reducing their profits?  

So, this got me wondering about the efficacy of financial literacy education in molding consumer's behavior.  Here was something I came across from a Federal Reserve paper titled "Financial Literacy:  An Overview of Practice, Research and Policy (Braunstein and Welch)": 

Interested groups, including policymakers, are concerned that consumers lack a working knowledge of financial concepts and do not have the tools they need to make decisions most advantageous to their economic well-being. Such financial literacy deficiencies can affect an individual’s or family’s day-to-day money management and ability to save for long-term goals such as buying a home, seeking higher education, or financing retirement. Ineffective money management can also result in behaviors that make consumers vulnerable to severe financial crises.

Seems quite prescient in describing a vulnerability to severe financial crisis, when you consider it was written in November 2002.  The paper goes on to note however that:

The findings of studies of the effectiveness of financial literacy training have been mixed.  Although some programs, particularly those having discrete objectives, have succeeded in improving certain aspects of consumers’ personal financial management—such as maintaining a mortgage, increasing savings, or participating in employer sponsored benefit plans—improved financial behavior does not necessarily follow from increased financial information. 

It then goes on to cite the rise in questionable mortgage practices.  It's too bad the Federal Reserve policymakers didn't read their own research back before subprime entered the public's lexicon:

Investigations and public hearings by federal, state, and local government agencies to identify possibly unethical or predatory mortgage lending practices revealed that in many cases the terms of such contracts are not technically illegal but rather are inappropriate for and disadvantageous to consumers. An example is a loan structured with relatively small fixed payments in the early years but a large ‘‘balloon’’ payment at the end of the loan term.

The paper goes on to compare results from a variety of financial literacy programs including National Endowment for Financial Education and Jumpstart Coalition and goes on to provide a list of challenges to policymakers and educators:

• Who is the targeted audience and what are the group’s information needs?
• What does the audience need to know to understand personal financial circumstances, identify future goals, and implement behaviors consistent with attainment of those goals?
• When is the appropriate time to expose individuals to both general and specific information about financial issues and options?
• Where should financial literacy education be provided to reach the broadest audience?
• How can financial literacy education be effectively delivered, both at specific points in time and over time, to assist households in adjusting their financial plan to suit their circumstances?
• How can the effectiveness and impact of financial literacy programs be measured?

What research are you aware of on the efficacy of literacy programs?  What programs or curricula do you find most effective in educating your students? 

Comments

[school supplies]

The questions sound interesting but the resulting figures don't.