The Impact Of Financial Literacy Education On Subsequent .

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The Impact of Financial Literacy Educationon Subsequent Financial BehaviorLewis Mandell and Linda Schmid KleinThis study examined the differential impact on 79 high school students of a personal financial management coursecompleted 1 to 4 years earlier. This study used a matched sample design based on a school system’s records toidentify students who had and had not taken a course in personal financial management. The findings indicatedthat those who took the course were no more financially literate than those who had not. In addition, thosewho took the course did not evaluate themselves to be more savings-oriented and did not appear to have betterfinancial behavior than those who had not taken the course. The study raises serious questions about the longerterm effectiveness of high school financial literacy courses.Key Words: financial literacy, financial management, high school students, personal financial management courseThose who study financial literacy generally agree thatmany, if not most, consumers lack the financial literacynecessary to make important financial decisions in theirown best interests (Perry 2008; Braunstein & Welch 2002).Experts also generally agree that financial knowledge appears to be directly correlated with self-beneficial financialbehavior (Hilgert, Hogarth, & Beverly, 2003). However,questions exist concerning the effectiveness of financialeducation in improving financial literacy (Lyons, Palmer,Jayaratne, & Scherpf, 2006). Thus, a paradox exists between the efficacy of education in improving financial literacy and the impact of education on short-and long-termfinancial behavior. How can education, which is correlatedto financial literacy, improve financial behavior withoutfirst improving financial literacy?The seminal work on the impact of financial education byBernheim, Garrett, and Maki (2001) reported that middleage individuals who took a personal financial managementcourse in high school tended to save a higher proportionof their incomes than others who did not. The researchwas based on a Merrill Lynch survey and on historicaleducation records of whether a personal financial management course was required in the state during the time thatthe respondent attended high school. However, surveyresults indicated that many respondents could not remember whether or not they had taken a course in moneymanagement or personal finance in high school. Giventhe nature of the data, as well as the impact of financialliteracy education of the respondents as young adults onfinancial literacy, the effect of education on subsequentbehavior is unclear.In an attempt to reconcile the findings of Bernheim, Garrett, and Maki (2001), which showed a positive impacton savings from high school financial education, withthe Jump tart surveys, which showed little if any impact,Mandell (2008) offered two hypotheses. The first was thatsome of what is learned in high school financial educationclasses may lie dormant in the minds of the students untilmuch later in life when they have sufficient resources toutilize what they have learned. In this situation, a coursein personal financial management or personal finance maynot have an immediate impact on financial literacy untilthe knowledge is actually applied. The second hypothesis is related to the Bernheim, Garrett, and Maki (2001)study. Respondents to their survey graduated from highschool between 1964 and 1983, a time when families hadless discretionary income, and when the proliferation ofeasy-to-use debt vehicles like credit cards had not yetLewis Mandell, Ph.D., Professor of Finance and Business Economics, Foster School of Business and Aspen Institute, University of Washington,Seattle, WA 98195-3200, lmandell@u.washington.edu, (206) 842-2610Linda Schmid Klein, Ph.D., Professor and Associate Dean, School of Business, University of Connecticut, School of Business, 2100 Hillside Road Unit 1041,Storrs, CT 06268, linda.klein@business.uconn.edu, (860) 486-0520 2009 Association for Financial Counseling and Planning Education . All rights of reproduction in any form reserved.15

begun. Also the parents of many of these students hadlived through the difficult years of the Depression andWorld War II and therefore had different attitudes towardsaving. In this situation, the impact of a course in personalfinancial management or personal finance may be a function of the economic environment existing at the time thecourse was taken.The current study extends the work of Bernheim, Garrett,and Maki (2001) by assessing a more direct link betweenfinancial literacy education and financial decision making.We surveyed recent high school graduates from a singleMidwestern school system in which only a portion of thestudents had taken a well-regarded course in personalfinancial management. The sample provided a uniqueopportunity to examine the separable impact of taking apersonal financial management course on the respondents’level of financial literacy and on a wide variety of financial behaviors.BackgroundDeregulation of the U.S. financial service industry sincethe 1970’s has created both opportunities and problemsfor American consumers. On the positive side, those withassets can obtain higher interest rates on their investmentsand lower fees for services. Individuals have enhancedchoices for virtually every financial product. On the negative side, consumers are faced with increased costs. Bankshave eliminated interest rate ceilings on debt and chargegreater fees on low-balance accounts. Over the years, thefinancial services industry has become more complex. Thepassage of the Financial Services Modernization Act in1999 deregulated the industry. Individuals were presentedwith non-conventional lending options such as longerterm and interest only loans. New investment options withincreasingly obscure derivative products and opt-out retirement plans have made financial decision making moreimportant and difficult to understand.While deregulation and the concomitant proliferation offinancial products provide greater opportunities for all consumers, they also provide greater dangers for less financiallysophisticated consumers. The recent expansion of sub-primeloan markets enabled less credit worthy borrowers to buy ahome or obtain a credit card. However, teaser rates for thesedebt products may have enticed some consumers to assumedebt that they ultimately could not afford. The recent collapse of sub-prime mortgage markets has been attributed,in part, to the lack of financial sophistication on the partof borrowers who may not have understood the impact of16“exploding” monthly payments when rates subsequentlyadjusted to the market (McVicker, 2007).The Federal Reserve Board of San Francisco (2005)reported that U.S. households are less savings-orientedand more consumption-oriented than they were in thepast. Americans have had a negative savings rate andolder Americans have insufficient savings for retirement(Guidolin & La Jeunesse, 2007). According to a recentsurvey by the Employee Benefits Research Institute (Helman, VanDerhei, & Copeland, 2007), workers who had notsaved for retirement had limited savings, with 70% havingless than 10,000 in total assets. Additionally, about halfof those who had saved for retirement reported total savings and investments for retirement of less than 25,000,excluding the value of their primary residence and definedbenefit plan. The decline in personal savings rates raisesconcerns about consumers having sufficient resources tomaintain their desired lifestyle in retirement.In general, consumers’ inability to make self-beneficial financial decisions in key areas relating to consumer financing can have negative ramifications on the entire economy.Potential problems include exacerbated business cycles,further inequality in the distribution of income and wealth,inadequate savings for retirement, low savings rates andcapital formation, a weakening in the value of the dollar,and inflation. In part, concern for the economy has led theFederal Reserve to focus on the importance of financialeducation and understanding basic financial applications(financial literacy) in the functioning of the financial markets (e.g., Morton, 2005; Greenspan, 2003, 2005; Hilgert,Hogarth, & Beverly, 2003; Braunstein & Welch, 2002).Many policy makers believe that the impact of poordecision making due to lack of financial knowledge canbe overcome through mandated financial education. Forexample, the recent report of the National Association ofState Boards of Education Commission on Financial andInvestor Literacy (NASBE) recommended that “Statesshould consider financial literacy and investor education asa basic feature of K-12 education” (NASBE, 2006, p. 20).According to the National Council on Economic Education(NCEE) 2007 data, 40 states had personal finance standards or guidelines, 28 states required these standards to beimplemented, 9 states required a course with personal finance content, 7 states required students to take a personalfinancial management course, and 9 states tested personalfinance knowledge (NCEE, 2008).Journal of Financial Counseling and Planning Volume 20, Issue 1 2009

Level of Financial LiteracyConcerns about financial preparedness are documentedin recent studies demonstrating that both young and olderadults lack the basic knowledge needed to make goodfinancial choices. These concerns were heightened in a 2005report by the Organization for Economic Co-operation andDevelopment (OECD) indicating that financial illiteracy iswidespread across age groups and geographical areas. Various surveys demonstrated that Americans lack the ability tomake good financial choices (Chen & Volpe, 1998; Volpe,Chen, & Pavlicko, 1996; Volpe, Chen, & Liu, 2006). ANellie May report (2005) indicated that 56% of undergraduate college students have four or more credit cards in theirfinal year and that these students have an average balance ofclose to 3,000. Only 21% of the undergraduates with creditcards pay their balances in full each month, and 11% paidless than the minimum amount. The average balance wasover 999 for 49% of the students while 7% had balancesgreater than 7,000.Several researchers have reported that poor financial decisions hurt productivity in the workplace (Garman, Kim,Kratzner, & Brunson, 1999; Garman, Leech, & Grable,1996; Joo & Grable, 2000; Kim, Bagwell, & Garman; Kim& Garman, 2004). Volpe, Chen, and Liu (2006) surveyedcorporate benefit administrators who cited basic personalfinance as an important area in which employee knowledgeis deficient and recommended educational programs thatfocus on improving basic personal finance knowledge.Using the 2004 Health and Retirement Study (HRS) totest basic financial knowledge of adults over the age of 50,Lusardi and Mitchell (2006) developed questions related tothe understanding of interest compounding and the effectsof inflation and risk diversification. They found widespread financial illiteracy that is particularly severe amongthe elderly, females, and those with limited education. Theresults with respect to the elderly were particularly surprising since most respondents over age 50 tend to have moreexperience with credit cards and bank accounts and havetaken out at least one mortgage.Studies by the OECD (2005) and Lusardi and Mitchell (2007) reviewed international evidence on financialliteracy and found that financial illiteracy is common inmany developed countries such as Australia, Japan, andKorea, as well as developed countries in Europe. Thesefindings are similar to those of Christelis, Jappelli, andPadula (2006) who found that most respondents in Europescore low on financial literacy scales.Journal of Financial Counseling and Planning Volume 20, Issue 1 2009Financial Literacy and BehaviorSeveral studies showed that financial literacy is positively related to self-beneficial financial behavior. Hilgert,Hogarth, and Beverly (2003) added financial behavior andfinancial literacy questions to the nationwide Survey ofConsumer Finances. They formed a Financial PracticesIndex based upon behavior in four variables: cash-flowmanagement, credit management, savings, and investment practices. Comparing the results of this index withscores on the financial literacy quiz, they found that thosewho were more financially literate had higher FinancialPractices Index scores, indicating that financial knowledgeis related to financial behavior.In a study of Dutch adults, van Rooij, Lusardi, and Alessie(2007) found that those with low financial literacy are morelikely than others to base their behavior on financial advicefrom friends and are less likely to invest in stocks. Mandell(2006) found that high school seniors with higher financialliteracy scores were less likely than others to bounce acheck and more likely to balance their checkbooks.Financial Education and BehaviorWhile financial behavior seems to be positively affected byfinancial literacy, the effects of various forms of financialeducation on financial behavior are less certain. Researchon the impact of retirement seminars has shown mixedresults. Bayer, Bernheim, and Scholz (1996) found thatemployer retirement seminars increased the participationin and contributions to voluntary savings plans. Dufloand Saez (2003) reported that retirement seminars had apositive effect on participation in retirement plans, butthe increase in contributions was negligible. Lusardi andMitchell (2007) found retirement seminars had a positive wealth effect; however, this effect was found mainlyfor those with less wealth or education. Choi, Laibson,Madrian, and Metrick (2006) and Madrian and Shea(2001) found that participants in retirement seminars hadmuch better intentions than follow through.Outside of retirement planning, Elliehausen, Lundquist,and Staten (2003) reported that credit counseling tendedto improve both borrowing behavior and creditworthiness. Hirad and Zorn (2001) found that pre-purchasecounseling programs for potential home buyers decreaseddelinquency rates.17

The Impact of Financial Education Courses onFinancial LiteracyUsing a national survey of students who completed the highschool personal finance curriculum supplied by the NationalEndowment for Financial Education (NEFE), Danes (2004)and Danes, Casas, and Boyce (1999) found that in the shortrun, self-reported financial behavior improved immediatelyafter exposure to the NEFE curriculum. They conducted a3 month follow-up survey and found that over half of therespondents reported that they had made changes in theirspending and savings habits. Students were more apt tocomparison shop, set money aside for the future, and repaydebts on time. The researchers also found that the studentsfelt that they knew more about the cost of buying on creditand believed that the way they managed their money wouldaffect their future.On the other hand, the large-scale, biennial surveys of highschool seniors carried out by the Jump tart Coalition forPersonal Financial Literacy consistently found that studentswho had taken a high school class in personal finance ormoney management are no more financially literate thanthose who have not (Mandell, 2009). Specifically, a financial literacy index was developed from student responses tobasic age-relevant questions relating to financial knowledge.The four key areas covered in the survey included income,money management, savings and investing, and spendingand credit. Six surveys have been administered from 1997through 2008, and the average grade has never exceeded58%. Furthermore, students who took a full semester highschool class in money management or personal finance wereno more financially literate than students who had not takensuch a course. Mandell and Klein (2007) did find evidencesupporting the presence of student motivation as a factorin increasing the financial literacy of respondents, indicating that motivated adults benefit from targeted financialeducation. This study provides further evidence of thesemixed results concerning the impact of financial educationby analyzing a longer term impact on both financial literacyand subsequent behavior.Data and MethodologyThe results of the current study are based on a survey administered to a matched sample of students. These studentswere 2001 to 2004 graduates from three high schools within a single school system. Each of the schools offered ahighly regarded course in personal financial management.The course lasted a full semester and covered all aspectsof personal financial management that were thought to berelevant and important to students.18The sample was segmented by high school and year ofgraduation. Half of the 400 student sample took a personalfinancial management course while the other half did not.Since the students came from the same environment andeducational system, this population provided an opportunityto examine the separable impact of the personal financialmanagement course on subsequent financial behavior. Whilethe program was voluntary for the students, college boundstudents were no more likely than others to take the course.The superintendent of schools wrote letters to the sampled students (N 400) explaining the importance of thestudy and asking for their cooperation. In addition, a localfinancial institution provided a 25 incentive for eachcompleted questionnaire. In many cases, letters to studentswho were no longer living at home were forwarded byparents. The letter contained the Web address for an onlinesurvey and a coded identification number that could beplaced at the end of the survey to qualify respondents forthe 25 payment. Altogether, 79 completed questionnaireswere received, a response rate of 19.75%. Of the totalrespondents, 39 students had taken the course in personalfinancial management and 40 had not. See Table 1 for sample demographics.Table 1. Respondents by Graduation Year forStudents Who Had and Had Not Taken thePersonal Financial Management Course2001200220032004TotalTaken course No course1914413133932240Total33653579A questionnaire consisting of 49 questions was partitionedinto 3 sections. First, the entire 2004 Jump tart questionnaire (Mandell, 2004) was included to test the current levelof financial literacy. Second, questions about the students’financial behavior and attitude toward risk were included.Third, demographic questions, such as educational attainment, were included.Journal of Financial Counseling and Planning Volume 20, Issue 1 2009

Table 2. Mean Financial Literacy Scores byWhether Respondents Had and Had Not Taken aPersonal Financial Management CourseCurrent studyTaken courseNo course51.4%52.0%2000 Jump tart2002 Jump tart2004 Jump tart2006 Jump tart2008 Jump 8.5%Data Analysis and ResultsResults are divided into categories that address three issues. The first category addresses whether a well-regardedhigh school course in personal financial managementincreased the financial literacy or knowledge of the studentin the post-high school years. The second category addresses if the course had a lasting effect on the student’sattitudes, particularly the propensity toward savings or“thrift.” The final category addresses whether the coursehad an impact on subsequent financial behavior.Course Impact on Financial LiteracyThe average personal financial literacy score, amongall respondents, on the Jump tart questions was 69.3%.Although these scores were high in comparison to thenational Jump tart results, there was virtually no difference between those who had taken the course and thosewho had not. Students who had taken the course averageda score of 68.7%, and those who had not averaged a scoreof 69.9%.Table 2 shows that these results are consistent with thosefrom the biennial Jump tart surveys from 2000 through2008. In fact, only the 2004 Jump tart survey showed thatthose who had taken a course in personal financial literacyhad a slightly higher mean

financial management or personal finance may be a func-tion of the economic environment existing at the time the course was taken. The current study extends the work of Bernheim, Garrett, and Maki (2001) by assessing a more direct link between financial literacy education and financial decision making.

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