On Capitol Hill these days, Democrats say they want to promote equity while Republicans say they want more opportunity.
If members of either party were willing to climb out of their partisan bunkers, they’d find there is a priority that could achieve both goals.
Expanding personal finance education is urgent at a moment when consumers are responsible for more financial decisions than ever before. The financial sector is becoming increasingly complex, and each new financial product or service that enters the market makes financial decision-making even more difficult. With the cost of post-secondary tuition on the rise, student debt has increased by more than 100% in the past decade, totaling over $1.7 trillion today. Creating a more inclusive economy can’t happen if Americans don’t have the basic financial knowledge necessary to navigate these important decisions.
But many Americans aren’t equipped with that knowledge:
- In 2019, 63% of Americans reported that they didn’t understand how a 401(k) worked.
- In 2020, 27% of Americans reported that they didn’t know their credit score could affect their car insurance rates, and 31% didn’t know it could affect their options for cell service plans.
- In 2020, 27% of millennials with student loan debt said they did not understand the terms of their loans when they took them out.
- In 2018, only 16% of millennials (aged 18-37) could answer three questions about basic personal finance concepts correctly.
- While the U.S. is the world’s largest economy, it ranks 14th in financial literacy behind Singapore and the Czech Republic. Only 57% of U.S. adults are financially literate as of 2015, which was measured using questions assessing basic knowledge of four fundamental concepts in financial decision-making: knowledge of interest rates, interest compounding, inflation, and risk diversification.
In a 2018 survey conducted by the Financial Industry Regulatory Authority, 56% of credit card owners reported that they had chosen a card without comparing it to offers from other companies. In the same survey, 35% of credit card owners reported that they had only paid the minimum on their credit card bill at some point in the previous year, resulting in interest charges. NerdWallet predicts that the average household with credit card debt will pay $1,155 in interest in 2021.
It’s no surprise that 83% of parents believe high schools are not doing enough to help their kids become financially savvy. Only 21 states require high school students to take a personal finance class, which differs from an economics class in that it focuses on real-world financial concepts that students will inevitably encounter in life — debt, credit cards, budgeting, and saving, for example. And only 24 states require high schools to offer personal finance classes at all.
But the good news is that, in schools where they are offered, personal finance classes are working. In a 2019 study, Montana State University economists found that students in states with financial education requirements were more responsible with student loans, more likely to apply for scholarships and aid, and less likely to hold credit card balances later in life. Another study conducted at the University of Wisconsin-Madison’s Institute for Research on Poverty found that students who took mandated personal finance courses were less likely to take out high-risk payday loans, which can come with interest rates of up to 400%. “It’s a social justice issue,” Nan Morrison, President and CEO of the Council for Economic Education, told CNBC. “Better education equips kids with the tools to make better decisions, to understand their first paycheck and take better care of themselves and their families.”
Thankfully, state legislatures have recognized the importance of this issue as the economic impact of the pandemic continues to strain household finances across the country. Since the beginning of 2021, 25 states in the U.S. have introduced legislation adding personal finance classes to their high school curriculum. Although progress is being made at the state level, the federal government could do a lot more to provide a boost. One great example is the Consumer Financial Education and Empowerment Act, a bipartisan bill introduced in 2020 that would create a grant program within the Consumer Financial Protection Bureau (CFPB) to facilitate financial education programs in schools, libraries, and nonprofits nationwide. The House Financial Services Committee would be wise to consider picking this bill up again for discussion.
With so much discussion on Capitol Hill about what role the government should have in our lives, this is an urgent and commonsense idea that can help every American take control of their own.
Zane Heflin and Julia Baumel are policy analysts with The New Center.