This year, total student loan debt for Americans rose to a staggering $1 Trillion.i This rise in student loan debt has been a hot topic in contemporary politics. Some argue that college should be funded by the federal government and that student loan debt should be forgiven. This approach is like having a bucket with a hole and trying to fix the problem by pouring more water in the bucket: to make the bucket usable, we must first fix the hole in the bucket. The real problem Americans are facing is that they have not been educated financially. I will be addressing the current financial problems in America, the key benefits of financial education, and the important educational changes needed.
The Current Financial Problems in America
Simply put, Americans are struggling to effectively manage their finances. This financial struggle is not limited to student debt either. Lack of financial education leads to a number of other financial struggles for Americans. A 2018 report by the Federal Reserve showed that 40% of Americans could not cover a $400 emergency expense without going into debt or selling personal belongings.ii A $400 emergency expense really isn’t that large of an expense when compared to most other expenses, so the fact that 40% Americans couldn’t cover the amount without outside funding is significant. If 40% of Americans cannot manage their finances well enough to pay a $400 emergency expense, how can we expect them to be able to pay off their college tuition or to know how to save for retirement?
Other studies bring additional weight to the issue. Gary Mottala—the research director for the FINRA Investor Education Foundation—conducted a study in which he found that only 24% of Millennials could answer four out of five questions correctly on a financial literacy quiz.iii The financial literacy quiz, published by the FINRA Investor Education Foundation, can be found at https://www.usfinancialcapability.org. The quiz asks questions about basic saving and investing principles, regarding interest, inflation, bonds, mortgage payments, and stocks. As someone who has taken numerous financial courses, I found the quiz quite easy, but I can see how someone who had never taken financial education courses would find it difficult. Forgiving student loans would temporarily benefit some, but Americans’ financial struggle runs much deeper.
The Key Benefits of Financial Education
Studies show evidence that when students obtain financial education in high school, their financial knowledge improves,iv and they are more likely to make wise financial decisions.v A study from the Journal of Money, Credit, and Banking explained some key advantages of high school financial education:
Firstly, Students who receive financial education finance their education more through federal loans than through private loans.vi This is significant because most federal student loans are subsidized by the government and will not accrue interest until students complete their education. This delay in interest can significantly improve college students’ financial position after graduation.
Secondly, Financial education shows to decrease the amount of college workers with low EFC’s (expected family contribution). This flexibility allows these students to focus on college and increases their chances of finishing.vii
Financial education can also help to improve a student’s credit usage. The Council for Economic Education found that students with financial education are more likely to use credit responsibly.v Credit is not exclusive to college, so we can assume that these benefits would extend to post graduate life as well.
Quality financial education puts people in a much better position to finance school. On top of that, financial principles will help Americans to better manage finances after college, as the same principles they learn for financing college will be applicable later on in life.
The Important Educational Changes Needed
In order to provide Americans with an adequate financial education, each state will need to implement quality financial education into its high school curriculum. Each year, the Council for Economic Education conducts a survey that tracks how financial education is being implemented in each state. The graphic below helps to illustrate how many states are including financial education in their curriculum:
As can be seen, less than 50% of states require any form of financial education in their curriculum, and of the 21 states that do require financial education, only 6 require it as a stand-alone course.v
With so few states requiring financial education, it’s no wonder that so many Americans are struggling financially. To improve America’s financial management, more states need to implement financial education courses into their curriculums. It should be proposed that each state has at least some minimal requirements as part of another course, but the best-case scenario would be for each state to require personal finance as a stand-alone course.
I would also add that financial education courses need to be implemented with measurable standards. I’ve noticed that some required courses in high school tend to feel like they are being shoe-horned in. They become just another class that needs to be taught. In order to combat this, national standards must be established for financial education. These standards could include key tasks that each student would need to complete like filing taxes and drafting a personal budget. Congress could then incentivize the states who are making these changes by providing them with additional funding. This change would allow the whole country to have access to the same level of financial education.
With each passing day, those who are financially educated grow more financially secure, and those who are not fall deeper into financial ruin. Investing in financial education now will pay dividends in the future by empowering the younger generations with financial knowledge and skills. To this day, I still remember the day I was taught how to make a budget in the personal finance class. I used what I learned that day to significantly reduce my college education costs, and as of now I have not needed to take out any student loans—imagine if every college student were allowed this same privilege. I guarantee we wouldn’t be having the same student debt crisis we currently face. I implore you to contact your legislators and ask that they push for legislation incentivizing states’ implementation of financial education in high school curriculum.
i Friedman, Zach. 2020. Student Loan Debt Statistics In 2020: A Record $1.6 Trillion. February 3. Accessed October 24, 2020. https://www.forbes.com/sites/zackfriedman/2020/02/03/student-loan-debt-statistics/#1d66936b281f.
ii US Federal Reserve. 2018. Federal Reserve Board Issues Report on the Economic Well-Being of U.S. Households. May 22. Accessed October 2020. https://www.federalreserve.gov/newsevents/pressreleases/other20180522a.htm.
iii Mottala, Gary. 2014. The Financial Capability of Young Adults. March. Accessed October 24, 2020. https://www.usfinancialcapability.org/downloads/FinancialCapabilityofYoungAdults.pdf.
iv Walstad, William. 2010. “The Effects of Financial Education on the Financial Knowledge of High School Students.” Journal of Consumer Affairs 271–336.
v Council for Economic Education. 2020. “Survey of the States.” February. Accessed October 24, 2020. https://www.councilforeconed.org/wp-content/uploads/2020/02/2020-Survey-of-the-States.pdf.
vi Stoddard, Christiana. 2020. “The Effects of State-Mandated Financial Education on College Financing Behaviors.” Journal of Money, Credit and Banking 747–776.