Acknowledging the problem raises a big question: Whose job is it to teach children about money when many parents struggle with it themselves?
Some groups say the answer is to start young — as in elementary school.
The idea is that children creating things with Play-Doh can learn about production and trade. Third graders counting jelly beans can come to understand saving and the power of compound interest, says Nan Morrison, chief executive of the Council for Economic Education, an organization that advocates for expanding financial education from Kindergarten through high school.
“If they start to understand that and … how it works, we think that when they get to be teenagers they’re going to be thoughtful about how to turn their dollars into more dollars,” she says, “just like they saw those jelly beans grow into more jelly beans.”
Studies show that young people who graduate in states that mandate personal finance education are better with money as adults. They have higher credit scores and are less likely to default on credit cards. Yet, most states don’t require the classes.
Only 22 states require students to take an economics class before they can graduate high school, unchanged since 2011, according to the Council for Economic Education. The states requiring schools to teach personal finance increased slightly to 17 in 2014, from 13 in 2011, but only six states test students on that knowledge.
The Consumer Financial Protection Bureau released a tool-kit this week to help policymakers lay the groundwork for expanding financial education for K-12 students. “We have watched too many Americans struggle to manage their affairs within our complex financial system,” CFPB Director Richard Cordray said in a statement. “Financial education in our schools is critical to the financial well-being of future generations.”
Recent studies show that students taught about personal finance often have better financial habits as adults. “There’s a real opportunity as well as a huge need to help young people make better financial decisions,” says Louisa Quittman, director of financial education at the Treasury Department.
One report released last year by the Federal Reserve found that young people in the states that mandated personal finance teaching had higher average credit scores by the time they were 22 than people from similar states that didn’t require the courses. They were also less likely to default on their credit cards.
The biggest difference was seen in Georgia, where credit scores were 29 points higher, on average, after the state began requiring schools to teach personal finance. A year-long class introduced in 2006 covers micro- and macroeconomics along with personal finance. Students play a simulated stock market game, and are taught about saving, insurance and credit.
Other research shows that money lessons are more likely to stick when children are given a chance to practice what they’ve learned. College students coming from states that require financial literacy classes were more cautious about debt and scored higher on a short quiz about financial knowledge, according to a report from Higher One, a financial firm that issues prepaid or debit cards to college students. The students who also had a checking account scored slightly higher on the quiz.
Many of the concepts that are key to personal finance are not included in the standardized tests mandated for graduation, which reduces the incentive for them to be taught in the classroom. And many teachers feel unqualified to teach the subjects.
To get a better idea of what’s working in classrooms teaching money basics, the Council for Economic Education recently created a series of tests meant to assess how much students know about personal finance by elementary, middle school and high school. The hope is that the test, based on education standards set by the council, will help schools and educators know if the students from states that focus on financial education have a deeper understanding of finances than those from other states.
It may also help researchers find models that are promising. “This will be a way for us to start to drill down and understand what works,” said Chris Caltabiano, chief program officer for the Council for Economic Education, which is also making the tests available to teachers online. Results should be in by summer.