Require Students Take Financial Literacy 0317 (1)

Wall Street Journal – March 19, 2017

Should College Students Be Required to Take a Course in Personal Finance?

QUESTIONS FOR DISCUSSION:

Are you surprised that financial literacy is so low in the U.S.?

Are you surprised that “more than half of millennials take on student loans without even attempting to calculate what their payments will be?”

Is Willis right to conclude that “Common sense thus suggests that college courses won’t enable people to make the kinds of financial decisions society currently demands?”

Do you agree that “financial wounds are usually inflicted by hardship and fraud—not poor money management?”

Supporters of the idea say financial literacy is crucial in today’s world. Opponents say courses miss the real issues.

Americans don’t score well in financial literacy, and instruction in personal finance is limited in high school. 

Being knowledgable about money management, budgeting and finance is no guarantee of success in life.

But ignorance about such concepts often comes at great cost.

When it comes to financial literacy, however, the U.S. gets a failing grade at least by one count. The U.S. ranked 14th in a 2015 global study conducted by Standard & Poor’s Ratings Group and others, with a financial literacy rate of 57%.

One solution would be to have colleges require students to take a personal-finance course. Would that help? Two experts weigh in.

Experts advise to start talking to children about philanthropy when they’re young and continue as they grow.

Investors have more choices than ever when it comes to getting advice, and paying for it.

Annamaria Lusardi, Denit Trust chair of economics and accountancy at the George Washington University School of Business, argues that for people to survive and thrive in today’s financial environment, knowledge of personal finance is a necessity, and that requiring college students to take personal-finance courses begins to fill the gap.

Lauren E. Willis, professor of law and Rains senior research fellow at Loyola Law School in Los Angeles, looks at reasons why such courses shouldn’t be required, topped by what she says is a lack of evidence that they are effective.

YES: Ignorance Carries a High Price – By Annamaria Lusardi

Think about driving. To ensure orderly traffic, we create speed limits and roadway rules. We erect signs to warn where turns are difficult or roads are treacherous. And before we allow someone behind the wheel, we make sure they understand the basics. That’s where a driver’s license comes in. We take those precautions to protect the drivers and to protect others.

It is time to extend that type of thinking to financial knowledge by making personal finance a required course at U.S. colleges and universities. For people—especially young people—to survive and thrive in today’s financial environment, knowledge of personal finance is a necessity.

We’re already seeing what happens when young adults juggle high-impact financial decisions without the benefit of financial knowledge. Take the well-known burden of student-loan debt. Student loans are the second-largest part of the consumer credit market, after mortgages. The lion’s share of that debt sits in the hands of millennials—and our research shows they worry about their ability to pay off those loans. As well they should. The default rate on student loans is sobering.

Multiple studies confirm that students have little understanding of how student loans work. Our analysis of the latest National Financial Capability Study, or NFCS, finds that more than half of millennials take on student loans without even attempting to calculate what their payments will be. Given that student loans are pursued to acquire an education, it seems only prudent to have that education include the knowledge needed to manage that debt.

But student debt is just one of the challenges. These young people will have to support long retirements on savings and investments managed throughout their careers. To accomplish that feat, they will depend on interest compounding—a basic concept that they don’t fully understand. They also struggle with two other critical concepts: risk diversification and inflation.

These are the ABCs of personal finance, the benchmarks by which we measure financial literacy. By age 40, when a majority of Americans have already made most of their important financial decisions, only 1 in 3 has mastered these concepts, according to the NFCS. Unless something changes, millennials will become part of that disturbing statistic.

Such courses must be well designed to be effective. There is mounting evidence that personal-finance courses with a rigorous curriculum and trained teachers are influencing behaviors of young people in matters such as debt and defaulting on debt. Teaching personal finance is not about describing financial products, it is about teaching the principles of financial decision-making so that people understand how financial instruments work. When people are knowledgeable, they also are better able to benefit from the services of financial advisers.

Those opposed to requiring personal-finance courses say that the main thing students should learn is skepticism about the financial industry and its products. Some skepticism is always warranted, and I teach my students about the potential conflicts of interest that financial advisers may have. But the purpose of a personal-finance course goes beyond those topics.

Financial literacy is about prevention. Regulators simply cannot keep up; they tend to come in when a problem already exists. This is why regulation is not enough.

The lack of financial literacy—just like the lack of a driver’s license—is more than a personal problem. It is dangerous for our country’s economic health. The Great Recession was driven by mortgages and loan terms consumers didn’t understand. The entire nation went into an economic tailspin as a result of that lack of understanding.

Looking ahead, will young people saddled with student loans be less likely to buy cars and homes? Will their ability to engage in transactions that require not just liquidity but good credit ratings be hampered? Will they veer away from starting their own businesses or pursuing advanced degrees? If they are not saving enough for retirement, will they have to be rescued from poverty in old age—and at what price to the country?

One of the basic lessons in personal finance is that time is money. But time is starting to run out. Young people are already behind the steering wheel of their financial decision-making. It’s time we step in to make sure they know how to navigate the highway ahead.

Dr. Lusardi is the Denit Trust chair of economics and accountancy at the George Washington University School of Business. Email her atreports@wsj.com.

NO: Courses Will Miss the Real Issues – By Lauren E. Willis

There is scant evidence that personal-finance courses lead to better financial decisions. Part of the problem is simply what many of these courses teach—namely about specific products, without giving students the context to evaluate these products. One recent study, for instance, found that after receiving personal-finance training, participants knew more about the availability of products but couldn’t determine the lowest-cost loan or identify the best savings or insurance product, even when offered cash prizes for correct answers.

What’s more, even experts disagree about the right investment and retirement-savings strategies. Financial offerings change too quickly for regulators to keep up, never mind educators. In addition, compared with the salesperson across the table, consumers will never be as knowledgeable about financial products and services—or about the psychological maneuvering with which they can be sold.

Common sense thus suggests that college courses won’t enable people to make the kinds of financial decisions society currently demands.

Making personal-finance courses a college requirement sends a message that financial success is largely the result of personal decisions. But government policies affecting employment, health care and benefits have a vastly greater effect than personal financial acumen on Americans’ financial health. The main causes of bankruptcy are medical expenses, pay cuts, job loss and divorce, not profligate spending. Credit cards, payday loans and overdrafts are used as band-aids in emergencies, and spiraling fees can widen the gash, but financial wounds are usually inflicted by hardship and fraud—not poor money management.

Consider the high default rates on student loans. The problem here is not financial illiteracy. The problem is schools that offer an “education” in name only; student-loan defaults are concentrated among young people who attended these primarily for-profit schools.

The financial industry profits when consumers make poor financial choices—buying overpriced credit insurance, paying late fees and interest, investing in high-fee funds, etc. Yet industry players from credit-card issuers to debt collectors all support personal-finance classes, raising the suspicion that they are ineffective.

Worse, the courses may lead to overconfidence. People often leave the classes excited to do their own financial planning, then craft poor plans. Overconfidence in financial ability is linked to susceptibility to fraud; victims of investment scams and predatory mortgages are more financially literate than many people who aren’t victims of such crimes.

It has been suggested that the basics of personal finance are as necessary to teach as driving skills. But beginners don’t learn to drive from driver’s ed; they learn from driving—from the immediate feedback one gets when oversteering, or when late braking leads to a jolting halt. Similarly, having a financial coach at one’s side might help consumers learn good daily financial habits through practice. But there are no “practice” mortgages. By the time the consumer receives feedback that the mortgage was a poor choice, it is too late to steer back on course.

Instead of requiring college courses about managing money, society should subsidize prenatal and early childhood care. Paying more attention to developing young brains can have an enormous impact on financial wellness. Teaching basic math skills, which strongly influence financial decisions, is also key.

Colleges should also consider consumer self-defense classes. Financial illiteracy did not lead to the Great Recession. Advanced degrees in finance did not stop sophisticated investors from losing millions or bankers from running Lehman Brothers into the ground. The problem on the consumer side was too much trust in those selling mortgages and a lack of regulation to ensure that those selling mortgages could be trusted.

Personal-finance classes work hard to garner trust, especially of communities previously excluded from mainstream financial services. But consumers need to know when “my broker,” “my car guy” and “my bank” work for themselves rather than their customers. A little more skepticism might improve financial health more than financial knowledge.

Better regulation of products, sales and advisers, plus a few simple teachable rules, will do more to improve our financial lives than requiring ineffective college courses.

Prof. Willis is a professor of law at Loyola Law School in Los Angeles and an advisory board member for FoolProof, a nonprofit that offers free consumer self-defense educational materials. Email her at reports@wsj.com.