Critics Winning? Student Loan Protections, Financial Education Benefits Take a Hit
By Dan Kadlec
August 30, 2018
Two decades into the modern financial literacy movement, a growing list of nations including the likes of Russia, Saudi Arabia, and tiny Azerbaijan are joining Australia, Canada and many others that see individual money smarts as a key to global economic prosperity. Yet the academic debate over the value of financial education rages on.
Critics such as Lauren Willis, professor at Loyola Law School in Los Angeles, and John G. Lynch, senior associate dean for faculty and research at Leeds School of Business at the University of Colorado in Boulder continue to get a lot of play in the media.
Willis cites “negative effects” of financial education that may lead to overconfidence. Lynch calls school-based financial education a “hugely wasteful enterprise,” arguing that the money world changes so fast students cannot benefit from what they have been taught.
Yet the most recent research suggests otherwise. Financial education has been shown to boost savings rates among young people. A 2016 paper out of Germany analyzed 126 studies and found that financial education significantly improves financial literacy and financial behavior.
The German study turned up some serious holes. Financial education is less effective with low- and middle-income groups, presenting an obvious challenge for policymakers and educators seeking to lift the less advantaged. The study also found that financial education works relatively well in the area of saving. But it works less well with credit management, which is where many people stumble.
The German paper also found that financial education is most effective when students opt in, as opposed to being forced into a class. Yet that is not an argument against mandatory money lessons, but rather suggests that mandatory financial education would be more effective if students were given some measure of choice in the topics covered. That’s not a bad idea, given the unlikelihood that any one course can address all aspects of the vast financial landscape.
As academics continue to study the issue it becomes more apparent not just that financial education improves outcomes but that the need is great and growing.
A new survey out of the U.K. found a remarkably troubling turnaround in employer attitudes about financial education at work. Senior human resources executives were asked who should be most responsible for the financial literacy of their employees. Those saying the company should take the lead on this issue was essentially unchanged from two years earlier—13%.
But 42% of employers said workers should be responsible for their own financial know-how, up from 4% two years ago. A quarter said government should take the lead, down from two-thirds two years ago. In this light, you might expect employers to ratchet up their programs. This survey finds that they are not–and that might suggest that employers are thinking about backing away from some financial education benefits.
Couple that with news last week out of the U.S., where Seth Frotman, the top federal official in charge of protecting student borrowers from predatory lenders, resigned saying in a scathing letter that…
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…the Consumer Financial Protection Bureau under new leadership “has turned its back on young people and their financial futures.” The trend is clear: individuals are on their own when it comes to personal money matters.
Among young adults, especially, the need for financial education is clear. A third of emerging adults are in a “financially precarious” situation, according to a recent study from the University of Illinois. Another third is considered “at risk.” These young people lack basic money skills, have unstable income, and have little or no savings.
Another 10% struggle with budgets and credit cards and would put their health in jeopardy by avoiding doctor visits and prescriptions because of costs, the study found. Only 22% were deemed financially stable.
Critics of financial education understand there is a problem. But there is much they do not understand about how to address it. Certainly, the need is great. Individuals increasingly are being left on their own with insufficient money know-how. As newcomer nations to the movement demonstrate, we must keep moving forward.