How Can Our Kids Become Money Smart?
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. •
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.