Wednesday, July 10, 2013

After the Great Recession, where’s the financial education?

The economy may be slowly recovering from the Great Recession, but Americans continue to carry debt and still don’t understand basic financial concepts.

According to the 2012 National Financial Capability Study (NFCS), whose findings were released on May 29, 2013 here at the George Washington School of Business, Americans are more satisfied with their personal financial condition today than they were three years ago, and they are finding it slightly easier to cover their monthly expenses. But financial strain is still evident; only 41 percent of Americans make more than they spend, and in excess of one-in-five have been late with a mortgage payment in the last three years. 

Individuals are tapping their retirement assets: 14 percent reported borrowing from those accounts. In fact, many Americans are turning to high-cost borrowing methods such as payday or auto titles loans, pawnshops or tax refund advances. As many as 30 percent of U.S. adults have used these methods in the last five years, and a startling 43 percent of young respondents have done so, suggesting that the young are growing accustomed to borrowing outside of the traditional banking system.
The NFCS, supported by the FINRA Investor Education Foundation, was launched in 2009 to assess and establish a baseline measure of the financial capability of American adults. The 2012 study, which was developed in consultation with the U.S. Department of the Treasury, other federal agencies and the President’ Advisory Council on Financial Capability, updates key measures from the 2009 study and covers new topics. Its timing gives insight into what has transpired since the Great Depression.

The study found that Americans continue to grapple with debt. More than a quarter have unpaid medical bills, 14 percent report that their houses are worth less than they paid for them and 35 percent carry a balance on their credit cards. Student loan debt haunts citizens across the age spectrum—and half of those carrying loans are concerned they might not be able to pay them. While 36 percent of respondents age 18 to 34 had student loans, a surprising 19 percent of Americans age 35 to 54 still carry student loan debt. 

In tandem with these troubling statistics, the survey revealed that financial knowledge has not improved over the last three years. The level of financial literacy, as measured by questions that assess fundamental financial concepts—such as compounded interest, inflation, and investment risk—shows no change. Only 39 percent of respondents correctly answered at least four of the five quiz questions. A mere 14 percent answered all five questions correctly.  

Financial illiteracy is pervasive. And the most vulnerable demographic groups face the greatest struggle:  women, the young, the old and those with low educational attainment. The survey findings underscore the need to rigorously explore innovative and scalable ways to build financial capability in the United States.   

Despite this, we have failed to add financial education to the curriculum in most states.

In the study, fewer than 30 percent of respondents were offered financial education at a school, college or workplace. But 89 percent responded “yes” when asked whether financial education should be taught in school. A key recommendation of President Obama’s Advisory Council on Financial Capability is that financial education should take its rightful place in American schools. 

As the NFCS made evident, it is time to heed the council’s call.