By Maurice Black & Erin O'Connor
The current upheavals in the financial markets have left everyone confused. But in the midst of all the confusion, one thing has become crystal clear: A free country simply must be an economically and financially literate country. Amid the waves of failing banks, roiling stock exchanges, massive government bailouts, and wildly fluctuating currency and energy markets, we have become newly aware of how much our nation's wellbeing, and, indeed, our freedom, depends on our financial security. Disturbingly, we have also become newly aware of how little most Americans understand about financial markets, or even about their personal finances. American colleges and universities should take note---and should act swiftly to ensure that their students are economically and financially literate.
State of Ignorance: What Young Americans Don't Know about Money
Younger Americans are deplorably uninformed about economic and financial matters. In 1999, researchers at the Securities and Exchange Commission concluded that 66 percent of high school seniors could not pass a basic economic literacy test. Things have not changed for the better since then. In 2008, the Jump$tart Coalition for Personal Financial Literacy administered its biennial thirty-question financial literacy test to 6,856 high school seniors in 40 states. The respondents averaged an overall score of just 48 percent, down four percentage points from 2006. Students were most oblivious when it came to investment strategies: Overall, only 17 percent knew that investing in stocks would probably generate the greatest financial return over an eighteen-year period.
When Federal Reserve chairman Ben Bernanke attended a Jump$tart news conference in 2006, he stated that financial literacy is "vital to the future of our economy" and called for improved financial education in our nation's schools. American parents agree---76 percent say that schools should be required to teach students about money management. But schools are not addressing the problem in any consistent or systematic way. The Young Americans Center for Financial Education recently reported that fewer than 30 percent of students receive even one week's worth of financial training during their entire high school careers. In 2004, only seven states made personal finance education a requirement for high school graduation.
Many teenagers have ready access to credit and banking facilities: Nearly a third of all high school seniors own credit cards, and still more have their own ATM cards. But they are not particularly capable when it comes to tracking their spending or understanding the financial instruments they use. A 2007 Charles Schwab study revealed that while 45 percent of teens know how to use credit cards, only 26 percent understand how credit card companies assess interest rates and fees. Meanwhile, Jump$tart discovered that more than half of all high-school seniors do not realize that paying off a credit card balance more slowly will result in higher finance charges. Only one in three teens knows how to read a bank statement, balance a checkbook, or pay a bill. In short, young adults have ready access to finance, but not to education about finance.
Higher Ed's Curricular Deficit
Colleges and universities are doing little to address a situation that approaches crisis-level proportions. Under the revised and renewed Higher Education Opportunity Act, colleges that operate federal TRIO programs for disadvantaged students must facilitate opportunities for participants to receive financial counseling. The law also stipulates that agencies guaranteeing loans must help colleges develop programs that improve students' financial literacy.
But can such measures work? Higher ed administrators and staff have found that students breeze through their financial aid counseling---and emerge as ignorant as ever about the realities of debt repayment. To make matters worse, students typically don't ask for help with their finances---and don't avail themselves of help when it is offered. According to American University financial aid director Brian Lee Sang, students often adopt a "wait and see" mentality toward financial problems---approaching parents for assistance with financial difficulties, and seeking professional help only as a last resort. "Most students don't get involved [in educating themselves about finance] until something goes wrong," he noted.
Some colleges and universities have sought ways to educate students about better financial management. Since 2002, Texas Tech has run the financial education program Red to Black, which lets undergraduates avail themselves of free and confidential peer counseling sessions. In New York, Barnard College runs a Financial Fluency Program that teaches undergraduates the nuts and bolts of managing their personal finances, and educates alumnae about the principles of investing and long-term financial planning. Other schools provide financial literacy information through dedicated websites, freshman orientation sessions, online courses, and residential living programming. But efforts along these lines are not being systematically made.
Meanwhile, colleges and universities are failing to integrate financial and economic education into their core curricula. The American Council of Trustees and Alumni has found that only one of one hundred leading American universities requires students to take an economics course. The University of Alaska at Fairbanks was the outlier, requiring students to take a course on political economy that covers such core topics as "the nature of interaction between markets and governments in the United States, including the nature of economic and political institutions, regulation, fiscal and monetary decision-making, taxation, and welfare policies, foreign trade and finance policy, electoral politics, and campaign financing."
The extent of the negligence registered by this widespread curricular gap is suggested by a 2008 Intercollegiate Studies Institute survey that revealed stunning levels of economic ignorance among the American people. The study found that only 16 percent of Americans could differentiate free markets from central government planning. Less than 30 percent of those surveyed understood the relationship between taxes and government spending, and less than 40 percent knew what sort of fiscal policy would produce economic stimulus.
All of this is to say that college students today are woefully uninformed on two vitally important, interlocking fronts: they lack a basic grasp of the economic principles behind today's soaring deficits, frozen credit markets, and volatile commodity markets, and they are also sorely in need of practical training in budgeting, saving, and investing.
And that's not all. These problems are deepened by severe pre-existing deficits in essential literacy and numeracy skills. A 2006 study by the American Institutes of Research found that fully a fifth of college seniors lacked the ability to perform such simple computations as totaling up the cost of office supplies, or calculating whether a car has enough gas to get to the next filling station. And small wonder. Some schools have no math requirements at all. And even at schools that require students to fulfill quantitative reasoning requirements, it's often easy to avoid doing math. At the University of Pennsylvania, to take one typical example, students can satisfy their quantitative requirement with courses on anxiety disorders, perceptual learning, or the family. Students who can't do basic math are not likely to make informed choices about spending, debt, investments, or retirement planning.
We have produced a generation of students that is functionally disabled when it comes to managing money, and that lacks even the most rudimentary financial literacy. Today's students do not know how to pay bills, balance their checkbooks, or handle loan payments. But in 2004, the average undergraduate carried four credit cards, and only 21 percent of students paid off their cards each month. Another 44 percent carried a balance forward---by students' senior year in college, that balance had swollen to $2,864 on average---and 11 percent reported that they paid less than the minimum required payment each month. Many struggle with budgeting---some spend $2,000 a year at Starbucks without even realizing where their money is going---and few grasp the fundamentals of credit, interest, and taxation. It is difficult to exaggerate the depth of some students' ignorance. In a September 2008 Chronicle of Higher Education article, for example, a Stanford financial aid officer describes students asking where they can cash their W-2 forms, and others who think that the money withheld from their paychecks is being stolen by their employer.
As college costs continue to outpace inflation, this deep-rooted economic, financial, and mathematical illiteracy is having a profound impact on students' lives---both during and after college. Although many variables are beyond students' control, inept budgeting and overreliance on credit cards and loans can only make a bad situation worse. In a 2004 study of retention rates at four-year public colleges and universities, ACT---which conducts research in addition to administering the ACT exam for college-bound students---found that "inadequate financial resources" was the single largest reason for student attrition. "Too many job demands" was another significant factor, reflecting the fact that many indebted students find themselves working more hours, and more jobs, in a desperate effort to stay afloat financially---only to see their academic work and social integration fall by the wayside.
Students who drop out are ten times more likely to default on their loans than those who graduate, thus creating bad credit histories that can haunt them for years to come. But even those who make it to graduation often find themselves beginning their adult lives under a mountain of debt. People aged 18 to 24 now spend 30 percent of their income on debt repayment---more than double what they did fifteen years ago.
Bailing Out Our Future
Students who do not understand money become adults who are financially irresponsible. America's consumer debt now averages almost $20,000 per household---and researchers estimate that 43 percent of American families spend more money than they earn. Financial problems are a major contributor to the breakdown of relationships and marriages. And financial woes can be lifelong. A recent study suggests that at their current rate of saving, less than a fifth of Americans will be able to meet their projected retirement needs---leaving them dependent on the state, on family members, or on private charities. In other words, many Americans will get into debt in their teens---and will struggle with monetary problems for the rest of their lives.
Today's college students are tomorrow's civic and political leaders. They belong to a generation that will inherit trillions in national debt and an unprecedented ratio of retirees to workers. They are going to have to solve the many financial problems that our nation now faces. But they are extraordinarily uninformed and unprepared for that task.
Colleges and universities must act swiftly to implement serious curricular reform. They must integrate rigorous mathematics, economics, and financial literacy requirements into their core curricula, and they must educate students about the history of American freedom, with special emphasis on our proven tradition of economic liberty.
The newly passed Higher Education Opportunity Act offers strong incentives to do just this. In addition to the longstanding Business and International Education Program, which provides federal funding to improve the economic education of future businesspeople, the Act introduces the new American History for Freedom Program. The program authorizes federal funding for educational initiatives that focus on "traditional American history," defined as "the significant constitutional, political, intellectual, economic, and foreign policy trends and issues that have shaped the course of American history; and the key episodes, turning points, and leading figures involved in the constitutional, political, intellectual, diplomatic, and economic history of the United States" (emphasis added). The program also makes funding available to colleges and universities wishing to collaborate with "local educational agencies, for the purpose of providing elementary and secondary school teachers an opportunity to enhance their knowledge of traditional American history, free institutions, or Western civilization," where a "free institution" is defined as "an institution that emerged out of Western civilization, such as democracy, constitutional government, individual rights, market economics, religious freedom and religious tolerance, and freedom of thought and inquiry" (emphasis added).
In recent weeks, various higher ed constituencies have begun asking for a piece of the economic stimulus bill, placing particular emphasis on boosting financial aid so that students can stay in school. But while colleges and universities struggle to stay afloat during tough economic times, they should be devising ways to help their students do more than just keep their loans. Colleges and universities should also commit to bailing out their students' educations---to filling in glaring gaps in knowledge and skills, and so to improving our nation's chances of realizing a solvent, prosperous future.
Maurice Black and Erin O'Connor are research fellows at the American Council of Trustees and Alumni.