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With a mural of a bull and a bear in the background, Ariel Community Academy teacher Connie Moran, center, works with sixth-graders Jamie Hunter, left, and Kaimara Herron, in their personal finance class at the corporate-sponsored school on Chicago's South Side.
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In early January, with near-unanimous support, New Jersey legislators passed a law mandating financial literacy instruction for all middle school students across the state. The law says that lessons should provide students with the skills for “sound financial decision-making” and that topics addressed should include budgets, savings, credit, debt, insurance, investment, “and other issues associated with personal financial responsibility.” Courses could involve teaching 11-year-olds how to save for retirement, or 12-year-olds about mutual funds. The primary sponsor of the bill pledged to keep fighting until schools start teaching the topics as early as kindergarten, insisting the next generation couldn’t afford to wait.
Across the country, a movement to teach financial literacy in public schools has gained tremendous traction. Nineteen states now require financial education to graduate, according to the Council for Economic Education, up from 13 in 2011. In 2018, 29 states and Puerto Rico introduced bills around financial literacy, and 17 states enacted laws or adopted resolutions.
The movement mirrors a similarly vigorous push in Washington to promote financial literacy. In just 2019, Congress introduced at least six pieces of legislation to promote financial education—ranging from a House resolution to “support the goals and ideals of Financial Literacy Month” (which falls in April) to a Senate bill that competitively awards grants to school districts that teach financial literacy. The push has gained even more momentum thanks to Kathy Kraninger, the new head of the Consumer Financial Protection Bureau. She announced in April that her federal agency will focus less on enforcement action and more on education.
Legislators from both parties have embraced financial literacy—undeterred by both its cost and the dearth of research supporting its effectiveness. They argue that in a world where citizens must make ever more complicated and high-stakes decisions, empowering the public to be competent economic actors is the most important thing we can do.
But critics counter that nothing would make financial institutions happier than placing the onus of responsibility on individual consumers. Indeed, some of the most enthusiastic backers of financial literacy come from the financial services industry itself—with banks, investment firms, and insurance companies eager to sponsor trainings and school curricula, even as they lobby hard against regulation for their own businesses.
THE NATIONAL MOVEMENT to teach financial education in schools dates back to the mid-1990s, with the push to sell subprime auto loans. As financial journalist Helaine Olen traces in her book Pound Foolish, when the nation’s bankruptcy rate shot up, auto companies responded not with more prudent lending, but by offering new high-interest loans to high-risk consumers. Then-CEO of the Ford Motor Credit Company William Odom said that the trick was to teach people how to better handle credit. With the backing of the American Financial Services Association, he aired a public service announcement on auto leasing to 2,000 radio stations in the fall of 1995.
Odom pivoted to K-12 shortly after, helping to launch the Jump$tart Coalition, an initiative dedicated to boosting personal-finance education in America's schools. It fit snugly with the general ethos of the era—that our nation and our students were at risk of falling behind other countries. At Jump$tart's first convening in December 1995, as Olen reports in Pound Foolish, attendees discussed “a plan to create the demand for personal finance education through various publics, including the general public, business leaders, parents, students, administrators and teachers.” By 1998, Jump$tart released the first-ever set of national standards for financial education.
A flurry of federal, state, and local action soon followed. In 2003, Congress passed the Financial Literacy and Education Improvement Act, which established a commission to develop a national strategy. A congressional caucus dedicated to financial literacy formed in 2005, and the National Association of State Boards of Education established its own financial literacy commission by 2006. In early 2008, George W. Bush issued an executive order to create the President's Advisory Council on Financial Literacy, a body that would ultimately recommend expanding and improving financial education for students in kindergarten through high school.
The enthusiasm was not limited to the United States. Beginning in 2005, the Organisation for Economic Co-operation and Development (OECD) issued a recommendation that financial education be taught in schools and start as early as possible.
Yet despite the excitement, nobody seemed to know how to actually teach financial topics in a way that could meaningfully change behavior. All anyone agreed on was that it was surely important to do, and increasingly so, as the economy started to tank in 2008. That spring, Federal Reserve Chairman Ben Bernanke championed its importance: “In light of the problems that have arisen in the subprime mortgage market, we are reminded of how critically important it is for individuals to become financially literate at an early age so that they are better prepared to make decisions and navigate an increasingly complex financial marketplace.” In other words, his response to cascading frauds at every point in the mortgage process was to say borrowers must be smarter shoppers.
While the Obama administration failed to prosecute banks responsible for the mortgage crisis, Congress did create the Consumer Financial Protection Bureau, designed to centralize enforcement of consumer protection statutes and safeguard the public from predatory bank schemes. But in a nod to the faith in teaching our way out of the problem, “Consumer Education and Engagement” was made one of the six divisions of the agency. A year later, the U.S. Senate would hold a hearing entitled “Financial Literacy: Empowering Americans to Prevent the Next Financial Crisis.”
All of this was driving Lauren Willis, a law professor at Loyola University in Los Angeles, up the wall. Willis was studying predatory mortgage lending, and noticed that Bernanke had praised financial literacy as a way to avoid personal ruin. “I remember looking at the literature [Bernanke] cited and I was just aghast at their quality,” she recalls.
She's since emerged as a leading critic of financial literacy education, which she says is pushed by large financial interests that fight commonsense reforms to help consumers make safer choices. “We don't ask consumers to fix their own cars,” she says. “People aren't dumb, they're just busy, and we should regulate around those things, with the assumption that there are certain things a consumer can do and other things they can't, and that it would be silly to ask them to do.”
Willis also notes that there's nothing about financial education that's designed to teach students how to challenge the economic system. For example, it does not involve teaching people how to organize unions and collectively bargain for defined-benefit retirement plans—even though we know pensions have helped millions lead more financially secure lives. “Financial literacy education sends the message to people that if they're in financial trouble, then they must have failed to make the right decisions,” she says. “It's not designed to say, ‘Hey, society is not organized in a way that gives everyone equal opportunity and we want to teach you the skills to challenge that.'”
For skittish policymakers, financial literacy offers too many benefits. “Financial literacy is always a go-to for corporate-friendly Democrats who want to look like they're doing something but don't actually want to regulate bad conduct,” says one congressional staffer. “Or it can be useful for banks to bring up in meetings that would otherwise be adversarial.” Raj Date, the former deputy director of the CFPB, goes so far as to say it provides “a fig leaf for people who don't want to do other things that are technically or politically harder.”
After Willis started publicly critiquing the research studies Bernanke and other advocates relied on, the hate mail started pouring in. Olen, the journalist, says people reacted with similar agitation whenever they'd read her criticisms of the field. “Yeah, it makes me feel like a total grouch, like I'm coming out against apple pie,” she says. “But they can't seem to accept that I have this opinion and I formed it for a reason, and short of significant research that shows I'm wrong I'm not changing it. People just tell me, ‘We will make this work, it's too important to not make work.'”
IN 2010, THE National Endowment for Financial Education (NEFE), a nonprofit founded in 1972, launched an effort to review the hundreds of studies conducted on personal finance over the previous 25 years, and then present the most significant findings to an invite-only colloquium in Denver with 50 of the field’s top researchers and practitioners. The goal for this so-called “Quarter Century Project” was to identify gaps in knowledge and chart out future steps.
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John Gannon, then president of the Financial Industry Regulatory Authority's Investor Education Foundation, presented one of the conference's four summary papers. Among other things, it concluded that the evidence behind the efficacy of financial education is very thin, and given diminishing resources, experts should proceed with caution. “While it is too early to give up totally on school-based financial education, the difficulties inherent in successful implementation must cause us to look to alternative solutions to major consumer financial mistakes,” his paper said.
John Lynch, the director of the University of Colorado's Center for Research on Consumer Financial Decision Making, was an attendee at the 2010 colloquium, and he says other guests “went nuts” during the Q&A session, pleading with Gannon to not include criticisms of financial literacy programs in his public report. Gannon, who is now a Vermont legislator, says he doesn't recall that specifically, “but it could have very well happened.” (He did include those findings in the public report.)
Shortly after the conference, NEFE hired Lynch and two other business professors to conduct meta-analyses on financial literacy and financial education, which they published publicly in 2013. Looking at 168 papers covering 201 prior studies, they concluded that financial education is not particularly helpful at changing behavior, especially for low-income people. They also found that unless the educational intervention came just before one planned to use the information—say, before shopping for a mortgage—then consumers would inevitably forget it and it’s not worth the cost.
In October 2011, Lynch was invited to present his findings to the newly created Consumer Financial Protection Bureau, and a year later he participated in a panel at the President's Advisory Council on Financial Capability. “The cause of financial literacy education is so good, and it sounds so plausible, but to me that's like saying obesity is a major problem so let's give billions of dollars to some particular fad diet,” Lynch says. “It's an utter waste of time to be teaching this stuff, the effect sizes are trivial in magnitude.”
Moreover, studies began to show that despite all the new attention being paid to financial literacy, teenagers' self-reported financial knowledge was getting worse. In 2011, a Charles Schwab Corporation survey found teens’ self-reported financial knowledge had declined since 2007, though more than three-quarters of teens surveyed believed they were in fact knowledgeable about money management.
WITHIN THE FIELD of financial literacy, critics like Lynch, Willis, and Gannon have largely been cast as naysayers. “I have to be candid and say that I get a little ticked off when I read about how personal finance education doesn’t work,” complained Tim Ranzetta, founder of Next Gen Personal Finance, which seeks to “revolutionize the teaching of personal finance in all schools.” And indeed, the movement to spread financial education in public schools has marched assertively on, aided substantially by two new organizations that came on the scene at the beginning of this decade.
One is the Global Financial Literacy Excellence Center housed at George Washington University, which launched in 2011 to be “the world's leading center for financial literacy research and policy.” Its founder and academic director Annamaria Lusardi, an economist at GW's business school, has emerged as the nation's most devoted advocate for financial education, regularly touting its value, and the need for more of it. She generally dismisses negative research findings, especially the 2013 meta-analyses. “This comes from people who really do not understand what education is, and do not like what education is, and do not understand the power of education,” she tells me. “So that's my take on that study.”
Ultimately, to Lusardi and her colleagues, financial literacy is so important that negative empirical research findings could never really convince them that the practice is not worth pursuing; it just means we haven't cracked the code on how to do it well enough yet. “The answer is not let's not do it,” Lusardi says. “It's how do we make it effective? To me this is a basic skill. Ignorance is not an option.”
The Global Financial Literacy Excellence Center also doesn’t shy from partnering with and fundraising from the financial industry. Its advisory board includes individuals like StormHarbour investment banker Nicoletta Zappatini, and John Woerner, president and chief of strategy for insurance and annuity company Ameriprise Financial. The center’s website lists supporters like Wells Fargo, T. Rowe Price, and Commonwealth Bank. While Lusardi says most of the grants come from foundations, she doesn’t shirk from working with the financial industry “because we can understand better how they work and think and we want to have that direct connection and to tell them how important financial education is.” If banks want to promote financial education, she adds, “I think we should let them.”
Then there's the Center for Financial Literacy at Champlain College in Vermont. After working as the chief legal officer for several investment companies, such as asset management firm Eaton Vance, John Pelletier says he hit a personal transition point. In 2010, he decided to pitch the president of Champlain College with setting up a center, and volunteered to do all the fundraising himself. “I thought a center focused on financial literacy tied to a collegiate institution might be able to move the dial on some public-policy issues,” he explains.
His center also has ties to the financial industry. “NEFE can be pure as the snow because they have a multimillion-dollar endowment,” Pelletier says. “I look for partners who believe in the mission and I think you can partner with financial institutions without somehow being corrupted.”
By 2011, Pelletier was organizing a national financial literacy summit, and starting in 2013, he developed a national report card to grade states’ efforts on teaching financial literacy in high schools. The report cards, released every two years, don’t attempt to measure whether schools or certain kinds of curriculum are successful at teaching financial literacy. They just give high marks to states that require high schoolers to take at least a half-year personal financial course or its equivalent to graduate.
“I wanted to focus on where I thought I could make a difference, which is providing research for advocates like a governor, a treasurer, a banking commissioner, a legislator, and maybe the head of an education committee or citizens who want to lobby their local state senator,” Pelletier says. His strategy seems to be working. Since the end of 2017, when his last report card was released, six states that received poor grades legislated changes that brought their scores up.
Meanwhile, two more meta-analyses have been published since 2013—both by the World Bank—which include a greater number of randomized experiments. The first found financial education could help with savings and record keeping, but did not help to prevent loan defaults. The second found that, while financial education can boost financial literacy, teaching financial literacy has less of an impact on low-income populations, and borrowing behavior is more difficult to impact than savings behavior. Yet another study published in 2015 found personal-finance lessons had no impact on financial outcomes, though additional math instruction did.
Proponents commonly cite a separate 2015 study, where researchers looked at three states with financial literacy mandates—Georgia, Idaho, and Texas—and compared the credit scores of graduates before and after graduation. The researchers found that at age 22, students who graduated after the mandate went into effect had higher credit scores and lower default rates than those who graduated before the mandate.
Carly Urban, one of the study's co-authors, quibbles with earlier research that found less-encouraging results. She says financial-education standards implemented before the year 2000 were less focused on “salient topics” like credit card debt and auto loans, and more focused on general concepts like defining compound interest. So when academics find those standards to be ineffective, she claims that doesn't surprise her. “There's no reason it should have worked,” she insists.
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Urban, like Lusardi, thinks Lynch's meta-analyses combine too many disparate interventions and do not consider the newer school-based research studies. She also criticized them for treating all types of financial education the same. “For practical purposes,” Urban says, “this means that being handed a brochure has the same effect as a 3-month class.”
Lynch defends his methodological approach and says all the meta-analyses certainly looked at whether there was something special about one form of financial education versus another. “Meta-analysis is the standard rebuttal to someone who wants to cherry-pick one finding or another from a broad literature, claiming that one set of results are somehow special and not to be compared to other results,” he says. “It is the gold standard tool for summarizing diverse studies in the social sciences.”
One might ask Lynch and other skeptics: Does teaching financial literacy really hurt? If it helps even a few people stave off financial misery, then might that be worth it?
Few in the field have addressed these questions rigorously. While some, like Gannon, Lynch, and their co-authors have tried to spark discussion around the price tag required to teach financial education, hardly anyone seems interested in those practical details. In one of the World Bank meta-analyses, the researchers note the “surprising and yet common omission” that virtually all financial-education studies included no cost-benefit analysis, or really any discussion of potential alternatives.
“The hopes and desires and aspirations for financial education are woefully out of step with the actual reality of results delivered, and the reality is that even when results are delivered they are distressingly sub-scale and not obviously scalable,” says Date, the former CFPB deputy director. “In other words, if you take some of the seemingly successful models and then added money—even a LOT of money—there's no evidence that you could effectively cover a country of 300+ million people.”
AS ACADEMICS BICKER, the number of providers offering financial literacy training in schools has exploded. Even Ivy League schools like Penn and Harvard now have personal-finance courses, along with growing numbers of K-12 schools. Educators can select among hundreds of different lesson plans, online videos, and games developed by banks, foundations, advocacy groups, and for-profit companies. They can pick “Money Smart Curricula” from the Federal Deposit Insurance Corporation; or H&R Block’s “Budget Challenge” game; or the online “Stock Market Game” offered by the Securities Industry and Financial Markets Association Foundation; or Biz Kid$, videos and lesson plans underwritten by the National Credit Union Foundation. There’s “Better Money Habits” provided by Bank of America and Khan Academy, and “Practical Money Skills” developed by Visa. There are educational resources produced by the Federal Reserve, Jump$tart, NEFE, and the Council for Economic Education. The choices expand every year.
“I think we're drowning in a sea of curriculum,” admits Pelletier. “We don't even know what is really good.”
Urban agrees. “We don't know a lot about who is using what and which one is better, but no one really wants to fund that study,” she says. “The big funders [of financial education] all have free curriculum and they probably don't want to come out and say, ‘Well, this one is better than ours.'”
Gannon, the Vermont legislator, also thinks foundations are deterred from investigating which financial literacy curriculum actually works. “There's the fear that if research shows a curriculum is ineffective what does that mean for your program, especially if it's something you've been touting for years?”
Many financial literacy programs are offered to schools for free or at a low cost—often sponsored by banks that say they believe in the mission, but are also intrigued by the marketing and public relations opportunities associated with branded content. The educators, students, and even their parents all represent potential customers.
But even if foundations or financial companies cover the up-front costs of curriculum, schools still need to pay the salaries of the educator, and in most cases that teacher will require training and ongoing professional development. One study published in 2010 found more than 80 percent of teachers say they don’t feel competent teaching personal finance. Advocates for financial literacy in turn say if past research shows that financial literacy has not been effective, then the solution is to empower the teachers to teach it better. Pelletier calls training the educator “the leverage point” in the system, where he thinks advocates can find the most cost-effective investment. “If we can give educators the confidence and skills to really succeed in the classroom,” he says, “we can change so many lives.”
So does it fall on states and school districts to pick up the tab on this teacher training? “I hope not,” Pelletier says. “In a perfect world, if Bill Gates or Warren Buffett wanted to … I wish someone like that would step to the gate and throw some money at it.”
In 2018, financial trade groups like the American Bankers Association even urged the federal government to let financial institutions claim more Community Reinvestment Act credits by providing financial literacy training and creating online education materials.
And then there are programs sponsored by for-profit companies like EverFi, which currently offers financial literacy curriculum in 7,000 school districts around the country. Financial institutions typically pay EverFi for the software, and then underwrite its offering in public schools. It’s good advertising and PR for banks, credit unions, and insurance companies. As Sean Tynan, the vice president of sales for EverFi, explains, financial institutions “are increasingly wanting to give back to the community, at scale and in a measureable way.” Since school districts are more likely to direct resources to subject areas that are subject to standardized testing, Tynan says EverFi’s “public-private partnership model really helps out” to bring teachers technology their schools might otherwise not have purchased.
Beyond that, every choice regarding what to teach in schools involves opportunity costs. Time spent on financial literacy is time not spent on other subjects, like foreign language or computer science. In Virginia, for example, one of the 22 credits required to graduate high school must be dedicated to personal finance. Meanwhile, school districts across the state and the nation—citing budget shortfalls—have eliminated courses like physical education, art, and music.
Susan Sharkey, the senior director of NEFE's High School Financial Planning Program, says she understands it's not necessarily an easy task for a school district to add financial literacy to their course offerings. “Schools have to make decisions based on the number of students and the money they have available, and in some cases they may have to drop one program or reduce it if they see a need for something else,” she acknowledges. But getting an F on a well-publicized state report card, as Pelletier knows, is a useful way to pressure school districts into investing in financial literacy courses.
Though it's not even just about finding the resources to dedicate one semester to personal finance in high school anymore. Advocates for financial literacy have largely coalesced around the idea that schools should be teaching financial literacy as soon as possible, and throughout a child's entire academic career. If a study shows that financial literacy training did not improve financial outcomes, well maybe the problem is their training just started too late.
IN STATE LEGISLATURES and throughout D.C., it’s proven difficult to raise concerns about financial literacy. One Senate aide reflected on how the advocacy has helped shift the policy conversation toward one of victim-blaming. “Every moment that we spend on financial education is a moment that the financial institutions are winning in defining what’s wrong with the economy,” they said. “I credit the financial services industry for making this such a big deal. No politician really wants to use up their political capital opposing education.”
But things might finally be changing. In mid-May, for the first time, the top Democrat on the Senate Banking Committee spoke about the normalization of financial literacy as a salve for unsafe financial products.
In a financial regulator oversight hearing, Ranking Member Sherrod Brown (D-OH) posed an unusual question to one of the witnesses, Joseph Otting, the Comptroller of the Currency.
“Mr. Otting, if a car manufacturer cut corners and sold unsafe cars that harmed millions of American families, would you recommend that the government respond by recommending car mechanic literacy so they could decide for themselves if the car is safe? Yes or no.”
Otting looked confused. “I … I … I don't think it's a yes or no answer,” he said. “I think you'd have to understand the …”
Brown interrupted him. “Well, it kind of is.”
The senator then turned his attention to another witness, the chairman of the National Credit Union Administration.
“Mr. Hood, if a drug company cut corners and sold tainted prescriptions that hurt millions of Americans, would you suggest that we adopt a pharmaceutical literacy program in our schools so students could decide for themselves which drugs are safe?” Brown asked.
“I would need a bit more information on that, but likely … I would need to …”
“Well, common sense would be the information that would come to mind,” Brown interjected. “It begs the question, why can't we protect Americans from dangerous financial products like we do in every other industry?”
Pelletier argues that there's an equity element to his work. He points to a study sponsored by Next Gen Personal Finance, which shows that students from low-income backgrounds are half as likely to have taken a financial literacy class in high school than their wealthier peers, and another study showing that rich adults have better financial skills than the poor. “So you have people who are subject to high user lending fees not really understanding the APR,” Pelletier says.
But is the problem that low-income people can't adequately describe annual percentage rates, or is it that they are paid too little as their costs of living go up, and financial institutions capitalize on their desperation? Few in the financial literacy world speak of “scarcity mindset”—a powerful psychological state that occurs when people are struggling to manage with less than they need. The concept was pioneered in 2014 by Sendhil Mullainathan, an economist at Harvard, and Eldar Shafir, psychology professor at Princeton, who explain in their book, Scarcity: Why Having Too Little Means So Much, how scarcity “captures” the mind, and leads inexorably to dealing with one’s most pressing needs, at the expense of any other longer-term goals or considerations.
They call this mental phenomenon “tunneling” and note that when people tunnel, they can't make decisions using a careful cost-benefit calculus. It's why, they say, poor farmers in poor countries often resist purchasing rainfall insurance even though such decisions might appear financially prudent. “To a farmer who is struggling to find enough money for food and vital expenses this week, the threat of low rainfall or medical expenses next season seems abstract,” they write. “And it falls clearly outside the tunnel. Insurance does not deal with any of the needs—food, rent, school fees—that are pressing against the mind right now. Instead, it exacerbates them—one more strain on an already strained budget.”
Pelletier says the point is “valid” and concedes that people need not just educational training but “better alternatives.” Lusardi also insists she's not trying to supplant regulation with financial literacy, and that we need both. But actions can speak louder than words. CFPB Director Kraninger has said her agency would be focusing more on “giving consumers the tools they need to understand how to make the best decisions possible for themselves and their families,” and she means it: This year, she suspended a federal rule on payday lending designed to protect borrowers from ballooning debt, a rule which lenders had ardently fought.
More than 420 civil rights, labor, faith, senior, and consumer protection organizations sent a letter to Kraninger in mid-May, pleading with her to reverse her decision. “We have known since before the 2017 Rule was finalized that the payday lenders—a powerful, well-resourced, savvy lobby—would pull out all the stops to preserve their debt trap business model, including through Congress and through the courts,” they wrote. “We did not expect, however, that new Bureau leadership would side with payday and car title lenders at every turn.”
Date, the former CFPB official who now works as a managing partner at a financial services investment firm, likens the enthusiasm for financial literacy to the movement for greater consumer disclosure on products like loans and credit cards.
“If I were five years old and gullible, and heard that we're going to just use disclosure to even the playing field, I might have thought that made sense,” he says. “But after decades of evidence to the contrary—that is, evidence that in general people don't read the damned disclosures, at least not the interminable legalese that often passes for disclosure—at some point you have to admit that it doesn't work like you thought it would.”
