November 24, 2009
The Financial Literacy (or Lack Thereof) of Young Americans
Posted by Lisa Fairfax

In connection with a story I was reading about the SEC’s outreach efforts to promote financial literacy among elementary students, I stumbled across a pretty depressing survey on financial literacy in young Americans.   Last Friday, officials from the SEC, FINRA and the Jump$tart Coalition for Personal Financial Literacy visited 18 elementary schools throughout the county to teach a class on financial literacy.  The program is part of a joint partnership among the organizations called Project C.H.A.N.G.E: Creating Habits and Awareness for the Next Generation’s Economy.  In talking about Project C.H.A.N.G.E, Chairman Schapiro noted “Teaching children about money is an investment in the future, because an investment in financial literacy can pay a lifetime of dividends.” And apparently young Americans are in dire need of such an investment. 

A 2008 national Jump$tart survey found that the financial literacy of high school students had fallen to its lowest level ever, with students scoring an average of 48.3%--that would be a failing grade.  The survey notes that basic and critical financial concepts are simply not getting through to the next generation.  To be sure, college students fare better on the survey and hence, the survey concludes that “American college graduates are close to being financially literate and probably will be so with more life experience.”  However, because only 25% of our youth graduate from college, the survey's results mean that 75% of young American adults “are likely to lack the skills necessary to make beneficial financial decisions.”

As the survey notes, these numbers are particularly troubling because they have emerged despite concerted efforts over the last decade to improve financial literacy.  Indeed, when Jump$start first began measuring financial literacy eleven years ago, the average financial literacy score for high school students was 57.3%.  Since then, the numbers actually have declined falling to 51.9% and then rebounding to 52.4%, but the latest numbers reflect a new low.  And this low comes even though, since the organization’s inception, hundreds of efforts and initiatives at the state and federal level have emerged aimed at promoting financial literacy.   In some cases, these actions have proved beneficial.  Interestingly, early surveys found that students from families in the top income range fared worse than students from lower income ranges.  This result was attributed to the thought that "students from more affluent homes did not have to be as financially literate as their less affluent counterparts since they were almost universally college-bound and would probably be "cocooned" from most financial responsibilities for at least four more years." However, student scores from families in these higher income brackets have now improved.  The survey hypothesizes that this improvement stems not only from the financial literacy movement, but also from the fact that such students are in environments most capable of offering them a solution. By stark contrast, students in other income brackets have not seen similar success.  Instead, sometimes educational efforts appear to be having the opposite effect.  Hence, the survey found that students who take high school courses in personal finance tend to fare no better than those who do not take such a course.  The overall result is that student scores remain low and there is now an increasing divide between the financial literacy of students.

The survey's executive summary ends with this thought:

Since standard of living is a multiplicative function of both financial resources (income and wealth) and the ability to use those resources efficiently (financial literacy), we find it increasingly disturbing that those with less income and education are saddled with the additional disadvantage of not possessing the ability to spend what they have efficiently.  It is no great surprise to learn that the current financial crisis began with the sub-prime mortgages that were marketed primarily to those with less income, education, and presumably less financial literacy than those who were eligible for prime mortgages.  Financial literacy clearly has ongoing macroeconomic ramifications.

In the end, the survey is a sobering commentary on the financial literacy of all young Americans.  And I certainly finished the survey convinced that we need to do significantly more work in this area.

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