To combat financial illiteracy, education needs to start early in the classroom, advocates say
(State of financial education: Many money problems Americans face could have been avoided if financial literacy was taught earlier in school. That knowledge helps create a foundation for students to build strong money habits early and avoid many mistakes that lead to a lifelong of money struggles. This story is part of a series looking at the current financial education landscape in this country.)
The lack of personal finance education in this country has proven to be devastating.
It has led to many people racking up credit card and student loan debt, living paycheck to paycheck, and not saving enough for retirement. It has resulted in people not being able to buy a home or, in some cases, not able to put enough food on the table.
As a country, we've seen millions of Americans, with a general lack of financial planning, struggle every day with their money, only to wind up deep in debt.
Various industry research found that 2 on 3 families lack any type of emergency savings; 78% of adults live paycheck to paycheck, and 3 in 5 adults do not maintain a monthly budget.
Additionally, on average, U.S. adults correctly answered only 50% of the questions on the TIAA Institute-GFLEC Personal Finance Index in 2021.
That's why it is so crucial to start teaching kids personal finance in high school, financial literacy advocates say.
However, what many researchers have found is that far too few students — particularly those from low-income backgrounds — receive any personal finance education during high school. Yet they are expected to make big financial decisions about student loans and budgeting for living expenses after graduation.
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"If we are going to make sure everyone in this country has food to eat and a roof over their heads, we have to teach them how to manage their money," said Nan Morrison, president and CEO of the Council for Economic Education (CEE) and a member of the CNBC Invest in You Financial Wellness Council.
However, only five states require high school students to take a separate finance class, according to the CEE. A sixth, Missouri, also requires a stand-alone class, according to an analysis by Next Gen Personal Finance, a non-profit group that creates free courses and funds training for high school teachers.
Fifteen states that require some coursework integrate it into another class, and another five mandate a personal finance course be offered, but not required for graduation.
There may be some additional positive changes ahead, however, as 25 states and the District of Columbia have introduced bills in their 2021 legislative sessions to increase access in financial education. These bills range from forming task forces and commissions to developing standards for what should be taught in a course to ensuring that every high school student takes a course prior to graduation, according to Tim Ranzetta, CEO and co-founder of Next Gen Personal Finance.
To be sure, financial literacy advocates stress that early education is essential.
"How can we expect people to make complex [money] decisions without an education?" said Annamaria Lusardi, a professor at George Washington University School of Business and the founder and academic director of GWSB's Global Financial Literacy Excellence Center.
"My students come in and they don't even know how credit cards work," she added. "Many of them didn't know how student loans work."
Even integrating the coursework into another class comes with the danger of it not being taught at all, Ranzetta said. Only about 36% of schools in states that have embedded topic mandates actually require the coursework, an April 2020 research paper found.
However, it doesn't have to be that way, advocates say. Many of the financial problems Americans face could have been mitigated if financial literacy was taught earlier, in school, they say.
To that point, financial literacy advocates point to a mountain of research they say proves a financial education results in better outcomes for the lives of students.
For instance, it's been shown to reduce the likelihood of using payday loans among young adults and is positively correlated with asset accumulation by age 25.
One study that compared three mandate states with three that don't require the coursework found that credit outcomes improved in the mandate states. Three years after education was implemented in Georgia, Idaho and Texas, all three states saw a reduction in severe delinquency rates and saw their credit scores rise.
Another study found that education increased the likelihood that college-bound students would apply for financial aid and reduced private loan balances by about $1,300 for borrowers.
In Utah, the first state to mandate a separate financial literacy course for its graduating class of 2008, there has been a slight but steady increase in student performance. Yet Breckon Heywood, who oversees the state's general financial literacy education program, agrees its value goes well beyond the students' high school years.
"Educational experiences require adequate time to take root and change behavior within each of us," said Heywood, who once worked with a bankruptcy law firm and saw first-hand the value of financial education.
In states that don't have such a mandate, schools, nonprofits, and community centers are stepping up.
In Philadelphia, Niche Clinic runs a program for high school students that not only teaches them them about saving, budgeting and investing, it also gives them an opportunity to earn up to $5,000 for creating meaningful change their school or community.
Students come into the class not knowing much about money, like the debt creation process, how insurance works and the entire world of investing, said Dan LaSalle, who created the program in 2015 when he was an English teacher at Olney Charter School.
"Some had credit cards with thousands of dollars of debt," said LaSalle, who now runs his nonprofit full-time.
For 17-year-old Jeiber Colon-Marquez, the education has been a game changer. His parents told him about the importance of saving and not overspending, but that was about it.
"This program has changed my life completely," said Colon-Marquez, a Olney Charter School senior.
"I know about investing," Colon-Marquez said. "How to buy a house. How to negotiate a car deal. How to pay for college."
More financial education to come?
While personal finance classes may not be top of mind for educators struggling to teach students virtually and safely reopen schools amid the pandemic, now is the time when students need it the most, advocates believe.
While the financial devastation and hardships people suffered during crisis couldn't have all been avoided, it may have been mitigated a little bit with more widespread financial education, CEE's Morrison said.
"It is not the only tool in the toolkit for financial stability and economic mobility, but it is an essential one if we are going to help people to move ahead in their lives."
Next Gen's Ranzetta hopes the pandemic can be a turning point.
"It's clear that the pandemic-induced recession has focused minds on the need to bring this essential course to more high school students," said Ranzetta, who is also a member of the CNBC Invest in You Financial Wellness Council.
Legislation doesn't necessarily mean it's a done deal. For instance, New Mexico's bill that requires students to take a financial literacy course to graduate high school passed the state's House of Representatives but was never brought to a final vote in the Senate.
One of the bill's primary sponsors, State Rep. Antonio "Moe" Maestas, is hopeful that it will be passed in the next year or two as part of an overhaul of the state's education curriculum.
"A lot of our educational institutions are kind of stuck in the 1950s," he said. "We need to update what students are learning to succeed in complex twenty-first century society."
Colon-Marquez, from the Olney Charter School, certainly feels his education will help him succeed.
"It opened my eyes to so much things that I never knew," he said. "It is bringing me one step closer to becoming financially free."
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