A lot of us don’t know much about money.
In surveys across age groups, it’s clear that many Americans don’t understand fundamental concepts about the economy – from compound interest to APRs to government health care offerings.
The question is: How much can we be taught?
Not much, according to Lauren Willis, a professor at Loyola Law School in Los Angeles and author of the recent article, “Against Financial Literacy Education.” Willis argues that the economy is too complex, too fast-moving, too heavily marketed and too unregulated for the average consumer to keep up. And the evidence so far suggests that those who take financial literacy courses do no better on tests than those who don’t.
“The gulf between the literacy levels of most Americans and that required to assess the plethora of credit, insurance and investment products sold today – and new products as they are invented tomorrow – cannot realistically be bridged,” Willis wrote.
Her paper has been met with incredulity and hostility from proponents of financial literacy. In recent years, the push for financial education has come from all corners – from former President George W. Bush on down – and the recession has added to calls for better consumer education in schools and elsewhere.
“When I read that report it actually made me mad,” said Stacy Augustine, senior vice president of the Washington Credit Union League and a board member of Washington JumpStart, a group of financial professionals and others that supports financial education. “It made me mad because it assumes people are too stupid to comprehend these issues.”
Now more than ever, supporters argue, people need to understand the way credit operates, the value of budgeting and saving, and the pitfalls and rewards associated with investing.
Lewis Mandell, a professor at the University of Washington and one of the first researchers to explore the effectiveness of financial literacy programs, performed studies that show high school students who take the courses did no better on subsequent tests than those who didn’t.
Still, he said he’s not ready to give up on the idea. He said that other studies have shown – perhaps paradoxically – that students who take such courses exhibit smarter behavior as adult consumers, even if they don’t post big gains on the tests. And it may be that reaching students at different ages – either in middle school or in college – would be more effective, he said.
“I can no longer say that these courses don’t do any good,” he said. “I just think we haven’t futzed around with it enough, tried it in enough different contexts. I’m unwilling to say that people are uneducable.”
No one would argue that the typical American’s understanding of the financial world is solid. A few examples:
•Fewer than a fifth of baby boomers in a 2006 survey could calculate a 10 percent interest rate on a $200 savings account over two years.
•Just 10 percent of people who had applied for a home loan could correctly identify the difference between the interest rate on the loan and the APR (annual percentage rate), which includes fees and other costs.
•High school seniors in Washington could answer just 48 percent of the questions on a 2008 questionnaire prepared by JumpStart.
In an effort to offset this pattern, financial literacy programs have sprung up in schools, at nonprofit organizations and credit counseling firms, as part of bankruptcy proceedings, and in other forums. Banks and financial services companies are among the biggest proponents of financial literacy, and calls to bolster the programs, particularly in schools, have become common at all levels of government.
The Washington Legislature created the Financial Literacy Public-Private Partnership five years ago in an effort to promote financial literacy in the state.
“We saw the falling savings rate of consumers,” said Augustine, a partnership member. “We saw concern in legislators about payday lending. We saw consumers making really unwise decisions, and there was no requirement to teach this.
“As the years passed, people started to understand how important this was, and in the past couple of years, as the economy has started to take a downturn, people have really started to understand,” she said. “We would like to make sure that every child gets a grounding in financial literacy basics.”
The group has been reviewing standards and curriculum across all kinds of programs, and has advocated adding financial literacy requirements in the school system. A bill currently moving through the Legislature would set standards for teaching financial literacy statewide and would require the addition of the subject as a graduation requirement in 2010.
A separate Washington state work group recently completed a report recommending that all state agencies incorporate financial literacy into their efforts, that a central clearinghouse for materials and standards be created, and that financial education be expanded in public schools.
“Everyone seems to agree on the importance of a financially literate society,” said a letter of support for the plan sent by JumpStart board members. “Indeed, this country’s current economic crisis and subsequent recession and record high unemployment might have been avoided had Americans been aware of the basic fundamentals affecting their personal finances.”
Willis notes in her paper that bankers and investors all played a role in the current crisis – making bad loans and investing in risky mortgage-backed securities – with the benefit of graduate-level educations in finance. She said that the “educated consumer” model of finance is a way of blaming people for their inability to negotiate a complex system, rather than regulating that system to protect consumers.
Efforts to mandate financial education in the public schools have run into opposition on several fronts – some object that it would be another unfunded burden on schools, and others point out that the number of requirements students already face leave little room for more.
Lisa White, director of career and technical education for Spokane Public Schools, said the district incorporates personal finance education into its economics courses, as well as other programs. Students taking courses in the trades, for example, might receive education in the nature of seasonal work, while those bound for college might get advice about financial aid and borrowing.
She said graduation requirements already fill up student schedules, and it could be hard to shoehorn in another one.
Statewide, decisions about financial education are made on a district-by-district basis. Idaho is on the verge of implementing new standards for math and science that include a course in personal finance as an elective, but districts aren’t required to offer it, said Melissa McGrath, spokeswoman for the Idaho Department of Education.
Willis said she understands the value of teaching some fundamental economic skills, such as budgeting, saving and investing. But when it comes to more complicated matters, she said it would be cheaper and more effective to simply provide access to financial experts – the kind of assistance that wealthy and “responsible” consumers rely on, she said.
“I would not want to live in a world where we all had to learn medicine – we all had to go to med school to treat ourselves and be our own doctors,” she said. “I don’t think there’s any reason we should all have to keep up with these financial products, either.”
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