Analysis: Is forcing students to study personal finance a waste of time?
It's post-tax/pre-graduation season, when articles about making better financial decisions crop up faster than spring flowers. Each year around this time, you can expect to see column after column about how Americans don't understand money matters, packed with advice to new graduates (and others) about saving for retirement, creating a strict budget and sticking to it, and avoiding coffee shop lattes. These articles will lament the horrific state of Americans' finances -- probably noting that the savings rate has plummeted while consumer credit has surged, that roughly half of Americans say they would borrow to cover a $400 emergency, and that about 60 percent of Americans can't pass a basic financial literacy test.
Statistics like those are inspiring more states to pass laws requiring students to take financial-literacy classes. According to the Council for Economic Education, 19 states now require the study of the subject as a condition for graduating from high school, up from 13 in 2011. The irony is that requiring schools to spend time and money teaching financial literacy is a worse financial decision than any that those high-schoolers are likely to make anytime soon.
That's because financial education simply doesn't work. It doesn't change behavior -- as numerous studies have shown. Indeed, the fact that giving people information does not, by itself, change how they act is one of the most firmly established in social science, whether the subject is the dangers of drug use, the value of getting vaccinated or the calories in a restaurant's bacon cheeseburger. The same is true of finance.
Financial-education programs in schools vary, of course, but they commonly cover such concepts as making a budget, calculating interest, comparing prices, and the importance of saving for emergencies and the long term. Scholars have studied thousands of these financial-literacy programs the world over -- programs using different methods and curriculums, aimed at kids, high-schoolers, adults, immigrants, lower-income households, provided in schools, libraries, bank branches, online and elsewhere.
The findings are consistent. It's easy to boost financial knowledge: Lots of programs show positive outcomes when you ask people a few questions before and after a financial-ed course. Unfortunately, the impact disappears when you measure what people who take the courses actually do (not just what they say they do, which is a problem with a lot of studies that claim to find an impact).
The most comprehensive meta-analysis of financial-literacy program evaluations, published in the journal Management Science in 2013, examined 168 papers covering more than 200 studies. It found that financial-literacy education was responsible for a 0.1 percent change in financial behaviors, like increased savings or reduced borrowing. (Yes, that's point-one percent.)
A more recent meta-analysis of 37 experimental studies (which are more reliable than observational studies) of financial education in schools trumpets more-promising effects. But if you dig into the details of the working paper, by scholars at the German Institute for Economic Research, you find that with careful controls, the estimated effect on actual financial choices is also vanishingly small (with zero being in the range of possible effects).
Another recent working paper, by scholars at Goethe University in Frankfurt, Germany, suggests that even those alleged minor positive results might be overstated. They analyze 14 papers (nine of them in the United States) focused on students, low-income earners or migrants -- populations you might think would benefit the most from a financial crash course -- and conclude that there is some increase in short-term knowledge about financial matters but "no proven evidence on long-term behavior."
The failure of financial education to change how people handle money is important, but the blind faith in such lessons to fix Americans' financial problems also obscures important facts about the U.S. economy. The reason most Americans' finances are in terrible shape is not a failure to budget, not because they don't understand interest rates and most definitely not because they buy too many lattes (as the personal-finance writer Helaine Olen recently laid out in The Washington Post). No, Americans' finances are in terrible shape because the cost of higher education, health insurance, child care and rent have all increased far faster than paychecks.
No amount of financial literacy is going to close budget gaps like the one laid out by Rep. Katie Porter, D-Calif., in her grilling this month of Jamie Dimon, CEO of JPMorgan Chase. Porter explained how a full-time Chase bank teller in Irvine, California, making $16.50 an hour, ended each month with a $500 deficit, after paying for child care, a bare-bones food budget and a one-bedroom apartment.
How is it possible that financial education would have no effect? After all, financial choices are hard and complicated and confusing. Surely providing education will help! What's more, financial literacy among the wealthy is much higher than average.
The latter point is a classic example of reverse causality. On the face of it, it's much more likely that being wealthy gives you lots of exposure to financial choices, and a margin of safety to make and learn from financial mistakes, than it is that financial literacy helped the wealthy acquire their money. The push for financial-literacy classes is the equivalent of looking at chess champions, seeing they are very smart and deciding the key to increasing intelligence is teaching kids chess (which also happens!).
But there's another factor that explains why financial-literacy classes don't make a difference: The curriculums of most financial-literacy programs don't match up with the economic realities and actual financial choices many Americans face.
Financial literacy is often measured by whether you can correctly answer a question like, "You have $100 in a savings account paying 10 percent interest, compounded annually. After two years, will you have a) $100, b) more than $120, or c) $120?" To borrow a joke from Bloomberg columnist Matt Levine, the correct answer is: You will have zero dollars, because anyone offering 10 percent interest these days is a con man who is going to steal your money.
More seriously, recent research like the U.S. Financial Diaries (a project I helped manage that followed the lives of 235 low- and moderate-income families for a year) and the Federal Reserve's Survey of Household Economics and Decisionmaking has found that Americans' incomes and expenses are far more volatile -- month to month and year to year -- than most financial advice takes into account. And this is especially true for those making less than the median.
The financial decisions that matter are less about creating a stable budget than figuring out how to make ends meet when a family's paychecks suddenly dive unexpectedly 25 percent below the monthly average. Or how to manage the (relatively) huge spikes in income that are a side effect of the nation's most effective anti-poverty program, the Earned Income Tax Credit. (When the EITC kicks in, as much as 45 percent of a household's annual income can be delivered in one lump sum). Or how to protect themselves from predatory lenders when Mick Mulvaney guts the agency that's supposed to be watching out for them.
There are programs that positively influence people's actual financial choices, but they deliver information at the precise moment they are making a decision; for example, providing people applying for a loan with information about the average cost of loans for their neighborhood has been shown to be effective. For most kids, consequential financial decisions are not being made right after class. (By all means, schools should provide targeted information on financial aid, and specifically about different types of loans, as students weigh how to pay for college.)
Maybe we could design financial education more closely aligned with the financial needs and choices of average Americans, and divine a way to deliver it at the exact right moment. But until we do, kids would be much better off spending more time in ordinary math classes rather than trendy financial-education courses. One study -- which also found no effect for financial education -- found that additional math courses did lead to better economic outcomes for students in adulthood, including increasing home equity by about $10,000 and lowering risk of foreclosure by about 3.5 percent.
For now, it's the height of economic folly to make schools spend money on useless personal-finance classes -- and to force students to take them.
Ogden is managing director of the Financial Access Initiative, a research center focused on financial services for low-income households at New York University's Robert F. Wagner Graduate School of Public Service.