By J. Michael Collins, Ph.D., Center for Financial Security, University of Wisconsin-Madison
The growing complexity of financial decisions facing American consumers has prompted an increased emphasis by policymakers on promoting financial education at all stages of life. One group of specific concern is young adults, as they have been shown to have particularly low levels of financial literacy (Lusardi et al., 2010 http://www.nber.org/papers/w15352.pdf ).
The 2008 financial crisis further demonstrated the need for broad-based financial education. However, the existing body of research on the effectiveness of financial literacy education has yielded limited evidence that it improves financial outcomes and behaviors according to research (Fernandes et al., 2014 http://pubsonline.informs.org/doi/pdf/10.1287/mnsc.2013.1849 and Willis, 2011 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1869323).
Policymakers have promoted financial education in schools as a means of combating negative financial behaviors and low levels of financial knowledge. However, research on the effectiveness of financial education has found, at best, mixed evidence in terms of education resulting in changes in financial behaviors. Even in the absence of evidence on the effectiveness of financial education, policymakers at the state level have expanded and strengthened personal finance and economic education requirements for K–12 students, a topic which has been taught in K–12 public schools in the U.S. since the 1950s. Determining which particular financial education programs yield the greatest benefits would allow states to design an effective curriculum.
Yet, we have natural “experiments” in states all the time, where school systems implement new mandates for courses that must be taught–and tested–before a student can graduate. At least 2 states, Georgia and Texas, did so in 2007. Thanks to data from the Federal reserve, my CFS [http://www.cfs.wisc.edu/] colleagues Carly Urban [http://www.montana.edu/urban/ ] and Max Schmeiser [http://www.federalreserve.gov/econresdata/maximilian-schmeiser.htm ] were able to obtain a sample of credit records for people in these states and nearby states (New Mexico and Florida–both states with no change in financial education mandates for high school graduation).
We then compared the changes in credit scores and loan delinquencies in states after implementation of the mandate to the changes in comparable states that did not pass mandates. Both GA and TX implemented well-documented requirements and testing, so we are confident students who graduated after 2007 were exposed, at least on average, to more financial education. Overall, we find that if a rigorous financial education program is carefully implemented in schools, it can improve the credit scores and lower the probability of delinquency for young adults. In Georgia, graduates after the new education mandates have credit scores 11 points higher and 30 day delinquencies are lower by 4.2 percent. In Texas, graduates after the mandate have credit scores over 31.7 points higher and lower 90-day delinquency rates by 6 percent, a relative decrease in delinquency rate of 33 percent (view full report: http://www.finra.org/sites/default/files/investoreducationfoundation.pdf ).
All young people have lower credit scores—they are learning by experience. And, according to our data, nearly a quarter of young people are 30 or more days behind on at least one account. Yet, payments have big effects on the credit score of someone with a brief credit history and therefore, avoiding missed payments can have real long run effects.
More work needs to be done to understand what forms of education best benefit young people, if starting earlier has larger effects, and if less intense requirements might result in similarly sized benefits. We still do not know how well these effects will persist into later adulthood—but formal education may jump start trial and error learning that young adults often experience in credit markets.