Vermont students and young adults are in a fiscal funk. Financial sophistication is an essential life skill that young people need to succeed and yet too few have this know-how. Our youth have not mastered these topics. They have not learned the basics of personal financial planning in school or at home. And many are in for a rude awakening when it comes time to pay for college and their credit card bills, buy a car or home or in the future when they try to retire.
We owe the next generation of Vermont leaders, job creators, entrepreneurs and taxpayers the training that they need to survive and to thrive in this increasingly complex financial world. Increasing financial literacy of our young citizens not only results in individuals making savvier financial decisions, but it can also help shield them against financial shocks. Vermont’s economy should improve with a more financially educated populace.
Vermont high-school seniors are failing personal finance tests. In a national financial literacy report card, Champlain College’s Center for Financial Literacy (CFL) gave Vermont high schools a D for not requiring financial literacy education. A few high schools in the state do have the requirement, and many have courses as electives.
Despite these efforts, the majority of students who graduate from Vermont high schools are not competent in personal finance topics, according to a CFL survey of superintendents and principals. A national study found that high school teachers, while they endorse the subject, don’t feel confident in their ability to teach it.
Our schoolchildren are not likely to learn personal finance at home either, since a survey reports parents are nearly as comfortable talking to their kids about sex as they are about discussing money. What a scary fact!
When young people in Vermont head off to college, they most likely will not find much financial literacy education there either. Personal finance education often consists of exit interviews for students with federal loans and reminders to Vermont students to repay their loans, which averaged $28,299 for the class of 2012. The national student loan default rate for students out of school for three years was nearly 15 percent. This compares to a national S&P Experian Consumer Credit Default rate of 1.2 percent (this includes principal and secondary mortgages, auto loans and credit card debt).
Today’s college graduates face greater financial challenges than previous generations experienced. Millennials are worse off than their parents and grandparents were at the same age, with more debt and stagnant or lower incomes. They have higher unemployment rates, more live at home with their parents, while fewer own a home, have children or are married. The failure of this generation to launch is having a substantial impact on our overall economy.
Millenials’ lack of savings, poor credit scores and high student debt loads impacts our economy. The homeownership rate nationally for those under the age of 35 has dropped about 20 percent since 2004. The unemployment rate nationally for those age 18 to 29 is 44 percent higher than the average for all adults. The average credit score for Millenials is 628, a subprime credit ranking, according to Experian. This compares to a Baby Boomer average credit score of 700. By the way—you want your score above 700.
At the end of April, the CFL announced the launching of the Vermont Financial Literacy Initiative to help policymakers understand the dimensions of the financial illiteracy problem in our state and to make recommendations to set all Vermonters on the path to prosperity. The task force is composed of 19 residents of the state with expertise in education, government, business and the non-profit sector, and with deep knowledge about the fiscal challenges our citizens face.
Their work begins immediately and will conclude by year’s end, with a series of recommendations to the Vermont legislature, educators, employers and non-profits capable of helping to foster financial literacy in schools, colleges and the workplace.
The work of this task force is critical to Vermont’s continued prosperity. Vermonters need the skills and tools to take control of their financial lives. Ultimately, we hope to materially increase the financial knowledge of all our citizens and enable them to effect positive change in their personal and professional lives.
When they graduate, Vermont high school students need to at least understand how credit works, and how to budget, save and invest. College grads at a minimum should understand the connection between income and careers and how student loans work. And for their future well-being, adults in the state need to understand the critical importance of and amounts they will need in rainy day and retirement funds.
John Pelletier is director of the Center for Financial Literacy at Champlain College and formerly chief operating officer of Natixis Global Associates and chief legal officer of Eaton Vance Corp.
by Scott Giles
Research indicates that an understanding of financial aid for students can result in higher college enrollment rates, especially among low-income students. In fact, according to a 2002 U.S. Department of Education study, 90 percent of students who complete the FAFSA enroll in college.
However, the complexity of the financial aid process may prevent students from taking advantage of all of the programs available. Many do not complete required applications, and among those who do, some file too late to qualify for all of the aid available.
Each year, the federal government awards about $150 billion in the form of grants, low-interest loans and work-study funds to help millions of students pay for college. In addition, grants for Vermont residents are provided by the Vermont Legislature every year through VSAC, hundreds of scholarships are offered by agencies and businesses throughout the state, low-cost education loans are available through VSAC and financial aid is provided by the colleges themselves.
To find out what kind of aid you’re eligible for, it is essential that you fill out the Free Application for Federal Student Aid. The FAFSA is used to determine eligibility for federal grants, education loans and work-study programs; and colleges require the FAFSA to determine eligibility for their own aid. Completing the FAFSA is also the first step in applying for Vermont’s state grants and more than 130 VSAC-assisted scholarships. In Vermont, state education grants are awarded through VSAC until the funds are gone, so it is especially important for students to complete the FAFSA as soon after Jan. 1 as possible.
Some families may be reluctant to fill out the FAFSA because they believe their household incomes are too high to qualify for grants or need-based scholarships. However, filling out the FAFSA can qualify students for federal education loans and campus work–study. Also, it’s important to know that household income isn’t the only consideration in determining eligibility for financial aid — circumstances such as the age of the oldest parent in the home and the number of children in the family attending college are factored in as well.
Other parents may be hesitant to fill out the FAFSA because they aren’t in a position to help pay for college. Filling out the FAFSA, however, does not commit parents to making any payments toward college, it simply provides information that enables their students to qualify for aid.
Visit fafsa.ed.gov for the application and available help. VSAC also provides details on the documents you’ll need, the schedules and links for applying and instructional videos to walk you through the steps — all at vsacroadmaps.org/fafsafirst. Don’t make the mistake of thinking that filling out the FAFSA is a waste of time or effort. Research suggests that 90 percent of high school seniors who complete federal financial aid forms go on to college. Families will benefit by taking advantage of as many options as possible. You’ll never know what you qualify for unless you apply.
Scott Giles is President and CEO of Vermont Student Assistance Corporation.
by John Pelletier
Our retirement system doesn’t work very well for many young employees in Vermont, largely because too many young workers in our state do not have access to a simple payroll deducted retirement plan.
That is unfortunate, because money saved when you are young is more potent than money you put away when you are old. Compound interest is an incredibly powerful tool. With an average annual return on savings of 7 percent, you could accumulate $1 million for retirement by saving $379 dollars monthly from age 25 to age 65. Wait until age 35 and you need to save $815 a month, at age 45 you’d have to save $1,909 and at age 55 you’d have to sock away $4,566 a month.
A survey by the salary website PayScale and Millienial Branding found that 47 percent of young adults between the age of 18 and 30 work at companies with less than 100 people and about a third of these small employers offer 401(k) retirement plans.
More than three-fourths of Vermont businesses have no employees (sole proprietorships) and most employers in the state have fewer than 20 employees. With no 401(k) at work, our young people could go to Schwab or Fidelity to open an Individual Retirement Account (IRA)—but they don’t. Compound interest is powerful, but inertia is even stronger. The Employee Benefit Research Institute (EBRI) estimates that less than half (42 percent) of workers age 25-34 have access to a workplace retirement plan. Sadly, one fifth of young workers fortunate enough to have a 401(k) plan don’t contribute to them.
Millennials also switch jobs a lot. Data compiled by Fidelity shows that 44 percent of younger savers from ages 20 to 29 cashed out of their retirement plan and 38 percent of folks from ages 30 to 39 did the same. These young individuals usually cashed out of their plan when they switch jobs. These withdrawals are taxed as income and are subject to a 10 percent tax penalty.
I can see how a 30 year old could look at an employers’ retirement plan total of $5,500 and say there is no way I am going to retire on that, so why don’t I buy a car or take a great vacation? But if you leave the money in the plan or roll it into an Individual Retirement Account (IRA), you would have $58,721 at age 65, assuming a 7 percent annual return.
How do you know if you are on track for saving for retirement? Fidelity estimates that you should have an amount equal to one year’s salary saved by age 35 and eight times your salary saved by age 67 to be on the right retirement path. So if you are age 35 and you earn $40,000 a year you should have $40,000 set aside for retirement. But most folks are clearly not on track by age 35. EBRI indicates that 60 percent of workers between the ages of 25-34 have less than $10,000 in any type of savings.
President Obama wants more Americans to plan for retirement and he just announced the creation of myRA accounts to help you do this. Unlike IRAs, which usually require a minimum of $1,000 to open, myRA accounts can be opened with as little as $25 and additional contributions can be as small as $5. Employers should like them because they will not need to administer the accounts, contribute funds or invest the money. These accounts will never lose money, so a savers’ account balance will never go down. If you change jobs, you won’t have to switch your myRA, it is portable and can follow you to your new job. You must roll it over into a privately managed Roth IRA when it reaches $15,000.
A myRA, like a Roth IRA, requires that you pay taxes before you deposit money into the myRA account. So you won’t get any income tax deductions. And you won’t earn a lot of interest on a myRA, as they are invested in the Government Securities Investment Reserve, which has offered annual returns over the past few years that are lower than the rate of inflation.
myRA is not a panacea. But it will give workers who lack access to an employer-sponsored retirement plan a convenient payroll deducted way to begin to save for retirement. I hope that many small Vermont employers will participate in this new program to help their young employees save.
John Pelletier is director of the Center for Financial Literacy at Champlain College and formerly chief operating officer of Natixis Global Associates and chief legal officer of
Eaton Vance Corp.
Teaching Kids to Develop Saving Muscle Memory
“Don’t stop thinking about tomorrow, don’t stop, it’ll soon be here.”
Our kids probably have never heard of Fleetwood Mac, much less know the lyrics above. But their lives will be much happier if they know how important thinking about tomorrow really is, especially when it comes to saving for college, a rainy day or retirement.
Make no mistake–the quality of your children’s retirement, if not their entire adult lives, will depend on their ability to save early and often.
Here are some tips to help them get started:
Make Saving a Habit: We always talk about bad habits, but saving is a great one. It’s like a muscle–if you don’t use it, it shrivels up and atrophies. The first step is deciding to do it. Too many people think they can’t save money, but you need to treat savings like food, clothing, shelter and transportation. It is a necessity. So look at your non-essential purchases–junk food or going to the movies–as decisions not to save. Each time you elect to buy something you don’t need, you are not saving for something you do need, such as a car, a home, a college fund or retirement.
The Bucket List: Parents, urge your children to divide their earnings, gifts and allowances into three equal buckets: spending money on those non-essentials; short-term savings for items like a new cell phone or video game; and long-term savings for expensive items that may take years to save for, like a video game console, a computer, a car or college.
This system allows your child to create “saving muscle memory.” Having this discipline will help them as adults prepare for a rainy day and retirement.
Forget the Fed, You Be the Bank: Since the Great Recession, the Federal Reserve Board has made teaching the power of savings to our children virtually impossible. Today, a one-year Certificate of Deposit or CD pays about 0.5 percent annual interest, which inflation, at around 2 percent a year, more than negates. However, you, Mom and Dad, can be the bank. Here’s how: children hand over their savings to their parents, and the parents pay them 5 percent interest. Thus, $100 saved over a year becomes $105, instead of $100.50 of savings at the bank.
Give Your Kids a Compound Interest Lesson: While you are calculating your children’s interest, make sure they understand that the $5 in interest they earn in a year will also earn interest, and that’s how money grows. There is an urban legend that Albert Einstein once called compound interest the greatest invention in human history. It’s a tough lesson to teach in this era of low interest rates, but itís worth showing children how it is possible for money to grow dramatically over time. For example, $100 will double to $200 in 140 years at the current 0.5 percent interest rate, but at 5 percent, it only takes 14 years. At a 7 percent interest rate, your money doubles in about a decade.
Why are lessons about saving so important? Because Americans don’t do enough of it. We are notorious spendthrifts, and our free spending is coming home to roost.
A recent FINRA Investor Education Foundation survey indicates that 55 percent of Vermont adults are not saving and 62 percent do not have a rainy day fund, defined as money set aside to cover three months of essential expenses.
The AARP, estimates that one-third of older Vermonters rely on social security as their only source of income. The average individual receives about $14,000 a year in social security benefits.
According to the Employee Benefit Research Institute, more than half of workers nationally report they and/or their spouse have less than $25,000 in total savings and investments (excluding their home and defined benefit plans), including 28 percent who have less than $1,000.
Parents, you must teach your children how to save. Depending on your situation, you may have to add, “do as I say, not as I do.” But the savings lesson must be taught.
John Pelletier is director of the Center for Financial Literacy at Champlain College and formerly chief operating officer of Natixis Global Associates and chief legal officer of Eaton Vance Corp.
By John Pelletier
Six years ago this summer, the financial crisis that led to America’s recent Great Recession began, when the first warning tremors were felt in our credit markets, and U.S. citizens began to learn about terms like mortgage-backed securities, subprime loans and credit default swaps.
What can we do to make sure that we avoid another financial crisis in the future? One solution is providing personal finance education to our citizens. Studies have shown that financial literacy is linked to positive outcomes like wealth accumulation, stock market participation, retirement planning, and avoiding high-cost alternative financial services like payday lending and auto title loans.
As someone who has spent a career in the financial-services industry, I am concerned that so little personal finance training is given to students in middle school, high school and college, or to employees in the workplace. We would not allow a young person to get in the driver’s seat of a car without requiring driver’s education, and yet we allow our citizens to enter the complex financial world without any financial education. An uneducated individual armed with a credit card, a student loan and access to a mortgage can be nearly as dangerous to themselves and their community as a person with no training who is given a car to drive.
The recent financial crisis and recession have exposed behaviors that indicate low levels of financial literacy across the nation. Many purchased homes they could not afford using unsound financial products they did not understand. As a result, mortgage defaults, foreclosure rates, personal credit defaults and bankruptcy rates reached near record highs. According to the 2013 Consumer Financial Literacy Survey,43 per cent of adults worry that they do not have enough rainy day savings for an emergency, 31 percent have not saved anything for retirement, 31 percent have no savings and 26 percent do not pay their bills on time. The behaviors underlying this data suggest a severe lack of personal finance knowledge and skill.
The most recent Jump$tart Coalition survey shows high-school seniors failing on personal-finance tests. The teaching of personal finance is often an afterthought because it is not a subject tested under the No Child Left Behind law. Twenty states require that personal finance topics be taught as part of a course that must be taken as a graduation requirement. Of those, only four states mandate a standalone personal finance course in high school. Thirty states, including Vermont, do not require that personal finance be taught in high school. A national survey indicated that nine out of 10 teachers believe that students should either be required to take a financial literacy course or pass an exam on this topic prior to graduation from high school, but the study also noted that teachers often do not feel comfortable teaching these topics.
Our children are not learning these important life skills in school or at home. Another study showed that parents are more comfortable talking to their children about sex than money. Learning is being done through personal experience. Making mistakes with your credit is a painful way to learn a life lesson.
Financial literacy in college often consists of exit interviews for students with federal loans, reminding students to repay their loans that averaged $28,273 in 2011 for the two-thirds of Vermont seniors that graduated with debt. Not to mention a study showing that one in five college seniors have more than $7,000 in credit-card debt.
Last month, Sen. Kay Hagan (D. N.C.) introduced legislation to create incentives for states to provide financial literacy programs in our public schools. I hope this legislation passes. We clearly need to offer financial literacy courses to our children, and teachers need to be qualified to teach them.
At Champlain College’s Center for Financial Literacy, we are providing training to approximately 100 Vermont middle- and high-school teachers that will give them the confidence, skills and curriculum tools they need to teach personal finance in their classrooms. This vanguard of educators is trying to bring financial sophistication to our Vermont middle and high school students. They deserve our appreciation and support.
If there is a positive outcome we can realize from the Great Recession, it will be to become a financially literate nation. Perhaps if more of us proactively support personal finance training in our public schools, collegiate institutions and workplaces, we could prevent another horrible economic and financial crisis in the future. •