American students falling behind in financial literacy
It’s an increasingly complex world, and young people transitioning from high school to college and into the working world are faced with momentous decisions related to their personal finances. A solid start is essential, for errors made early on can hang around their necks like an albatross long after graduation.
The results of a recent international test to measure the financial acumen of 15-year-olds is less than encouraging.
Every three years, the Organization for Economic Cooperation and Development (OECD) administers an exam aimed at assessing competency in math, science, reading and basic financial skills among 10 participating nations. Results from the Programme for International Student Assessment or PISA test were released in May for the 2015 exam, showing that American students languish around the middle of the pack, slightly below average and significantly behind Chinese and Russian kids.
Roughly one in five U.S. students failed to evidence a minimally acceptable understanding of common financial concepts considered essential to making everyday money decisions. In China and Russia, the number is closer to one in 10. Furthermore, American students’ performance did not improve from the previous assessment in 2012. This has important implications.
Consider, for example, the student loan crisis. By now, most of us realize that college debt exceeds both auto loans and credit cards, and is growing explosively. Of all the financial decisions that stick around to haunt young people once they leave the campus, this one is the most burdensome. Today we are witnessing the first wave of baby boomers who both collect Social Security and make student loan payments.
Much of the blame falls upon the federal government, which has made it too easy to borrow too much relative to future income potential. But the bottom line responsibility resides with the borrowers. Lack of basic financial literacy often contributes to poor decision making at the loan window.
Consider this. We previously noted that on average Americans’ knowledge of money basics did not improve since 2012. At the end of that year, total student loan debt stood at $966 billion. Today it is a staggering $1.44 trillion, almost a 50 percent increase. And more than 10 percent of debtors are currently delinquent. It is difficult to get on with a happy and successful life while carrying such a crushing burden. Almost certainly, some training in basic financial concepts could have led to better decisions.
It is indeed the case that school administrators and teachers are juggling many demands and dealing with dozens of (largely unfunded) mandates. But if ever a subject cried out for more attention in school, it is the impartation of the foundational financial competency necessary to inform important decisions like balancing a bank account, managing debt and saving for retirement. And yet just 17 states have passed legislation requiring a semester-long course for high school students covering the basics.
Tennessee has created a Financial Literacy Commission chaired by the state treasurer with the aim of improving financial education in the state. This is particularly welcome, since our state leads the nation in personal bankruptcies, a dubious honor to be sure (don’t laugh Georgia, you’re number two). But efforts to encourage the adoption of curriculum are conducted district by district, and even the few successes have involved only cursory elementary-age lessons slipped into the social studies or math curriculum. What is needed is full-scale statewide incorporation of a financial education class at the high school level.
The aim of the PISA study is to suggest routes for improvement in education. Many participating countries have already made changes in response. The United States should take a lesson.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.