The upheavals in the financial markets have made us newly aware of how much depends on our financial security—and also how little most Americans understand about financial markets, or even personal finances.
It starts in our schools. Younger Americans are deplorably uninformed about economic and financial matters.
In 1999, researchers at the Securities and Exchange Commission concluded that 66 percent of high school seniors could not pass a basic economic literacy test. Things have not changed for the better since.
In 2008, the Jump$tart Coalition for Personal Financial Literacy administered its financial literacy test to 6,856 high school seniors in 40 states. The overall score was 48 percent. Only 17 percent knew investing in stocks would probably generate the most return over an 18-year period.
Federal Reserve Chairman Ben Bernanke has stated that financial literacy is “vital to the future of our economy” and called for improved financial education. American parents agree—76 percent say schools should be required to teach money management.
But the Young Americans Center for Financial Education recently reported that fewer than 30 percent of students receive even one week’s worth of financial training during high school. In 2004, only seven states made personal finance education a requirement for high school graduation. New York State requires that it be incorporated into other subjects.
Nearly a third of all high school seniors own credit cards, and more have their own ATM cards. But they are not particularly capable when it comes to tracking their spending or understanding the financial instruments they use. A 2007 Charles Schwab study revealed that while 45 percent of teens know how to use credit cards, only 26 percent understand how credit card companies assess interest rates and fees. Jump$tart discovered that more than half of high-school seniors do not realize that paying off a credit card balance more slowly will result in higher finance charges. Only one in three teens knows how to read a bank statement, balance a checkbook or pay a bill.
Colleges and universities also are doing little to address the situation.
Under the Higher Education Opportunity Act, revised and renewed last August, colleges that operate federal programs for disadvantaged students must facilitate opportunities for participants to receive financial counseling. Agencies guaranteeing loans must help colleges develop programs in financial literacy.
But higher ed administrators have found that students breeze through financial aid counseling and emerge as ignorant as ever. Students typically don’t ask for help with finances—and don’t avail themselves of help when it is offered.
Some colleges and universities offer programs such as free and confidential peer counseling sessions or classes that teach undergraduates the nuts and bolts of managing their personal finances. But efforts along these lines are not being made systematically. The American Council of Trustees and Alumni has found that only one of 100 leading American universities requires an economics course.
No wonder that a 2008 Intercollegiate Studies Institute survey revealed stunning levels of economic ignorance among the American people as a whole. Only 16 percent could differentiate free markets from central government planning. Less than 30 percent understood the relationship between taxes and government spending, and less than 40 percent knew what sort of fiscal policy would produce economic stimulus.
These problems are deepened by pre-existing deficits in essential literacy and numeracy skills. Some colleges have no math requirements at all. Even at schools that require quantitative reasoning, it’s often easy to avoid math. At the University of Pennsylvania, to take one example, students can satisfy their quantitative requirement with courses on anxiety disorders, perceptual learning or the family.
Students who can’t do basic math are not likely to make informed choices about spending, debt, investments or retirement planning. Students who do not understand money become adults who are financially irresponsible.
America’s consumer debt now averages almost $20,000 per household—and researchers estimate that 43 percent of American families spend more money than they earn. And we know how important a factor this was in the subprime mortgage crisis.
While colleges and universities struggle to stay afloat during tough economic times, they should also commit to bailing out their students’ educations—to filling in glaring gaps in knowledge and skills, and so to improving our nation’s chances of realizing a solvent, prosperous future.
Maurice Black and Erin O’Connor are research fellows at the American Council of Trustees and Alumni. This piece was adapted from the Manhattan Institute’s MindingTheCampus.com.
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