Thursday, March 28, 2013


Financial Literacy

I’ve been in D.C. for the past few days at a Project Directors’ meeting for several Federal grant programs.  The conference was heavy on plenary sessions, which I’ll admit is not my preferred style.  Much of the oratory has been of the “hooray for us” variety, which keeps the peace but doesn’t really help us do our jobs better.  

That said, though, I found a useful breakout session about improving students’ financial literacy.  The session was standing-room-only, which I actually took as a good sign; at least there seems to be widespread recognition that this is a real issue.

Given that the folks doing the presentations mostly work at colleges, they tended to present ‘financial literacy’ in the context of student loan default rates.  It’s a start.

The single strongest predictor of the likelihood of default on student loans is whether the student dropped out or graduated; dropouts default at more than four times the rate that graduates do.  Which makes sense, if you think about it.  The dropouts have lower incomes, on average, and may well feel that they didn’t get what they paid for.  To the extent that we can improve graduation rates, there may be a positive effect on loan repayment rates.

A host of panelists presented various websites, workshops, and on-campus coaching sessions they offer students around financial literacy.  Strikingly, though, nobody had any longitudinal data on which forms of outreach actually work, if any.  

The lack of an evidence base for the effectiveness of any given intervention is a major gap, but one that could be closed with some effort.  I’d guess upfront that student loan defaults are best read as a subset of student (and recent graduate) economic struggles generally.  Students who are doing well economically tend to repay.  This may be a case in which the best way to effect a narrow goal -- reducing default rates -- is to attack a much larger goal, which is something like “how to manage money as an adult in the real world.”  

For example, some students don’t know the difference between subsidized and unsubsidized loans.  Some may not understand the logic behind paying down the highest-interest loan first.  They may not understand the concept of a “credit rating,” and the effect it can have on, say, apartment hunting.  (At 22, I had no clue about credit ratings.)  I’ve been told by an economics professor on campus that her students recoil in horror when she goes through the details of how credit cards make their money; they simply didn’t know.  (I can only imagine how they’d react to learning the details about payday lenders.)  Young adults who’ve never dealt with insurance may not have any sense of what a “deductible” is -- the word always struck me as misleading -- or why it matters.  

If anything, I’m wondering if financial literacy might make a good substantive focus for a freshman seminar.  Yes, it could cover student loans, but it should go well beyond that.  As a subject, the relevance should be obvious.  Better, it would allow students to exercise the various general education outcomes that most colleges profess: communication skills, critical thinking, and quantitative reasoning all leap to mind.  The actual math involved may be relatively simple, but the way of looking at the world is both powerful and complex.  I remember reading, somewhere around the age of 30, that paying off a student loan at 8 percent interest -- yes, kids, that was what we were charged back then -- was the equivalent of an investment with a guaranteed after-tax return of 8 percent.  If you could find an investment like that, you’d take it.  So paying down the student loans faster was a good financial move.  The math is pretty basic, but simply flipping the concept around made a concrete difference in my financial behavior.

Hell, I remember being flummoxed at my first paycheck when I saw the difference between “gross” pay and actual take-home pay.  That was a rude shock.  Giving students a heads-up on that, and the real costs of commuting, could help them make decisions in their own benefit later.  

Admittedly, a freshman seminar with this kind of focus might be a challenge when the ages of entering students are as disparate as they are at community colleges.  But it could also give the older students a chance to share some real-world experience, and to gain some respect for what they’ve been through.  James Baldwin famously noted that poverty is expensive; people who have actually lived broke know exactly what that means.  If the students learn enough so that they later steer clear of payday lenders, then they’re empowered to lead lives in which their choices are their own.   

Ideally, we could use our outcomes assessment protocols to look not only at the gen ed outcomes, but eventually, at students’ economic outcomes.  Is financial literacy simply an interesting academic exercise, or does it actually improve students’ lives?  And do some ways of teaching it work better than others?

As educators, we don’t control the job market.  And I’ll concede upfront that we need to do a better job on tuition.  But even granting both of those, students who leave with a sense of real-world economics strike me as empowered in a way that students who don’t, aren’t.

Wise and worldly readers, what do you think?  Is financial literacy a potentially useful subject for a freshman seminar?  Or is this all just dancing around the recession?

We are doing seminars for seniors. So far the freshmen are not interested.
Shouldn't the push be for financial literacy in high school?

They need it before taking on loans. It may help students see the value of community colleges.
I think it is an excellent topic. As you note, returning students can share life experience with kids who still live at home.

Another interesting application is the economics of buying a house with the intent of renting it to students. Many are unaware of property taxes and insurance costs on top of the mortgage interest.

Our college covers some of the credit card and savings topics you mention in the first math class where they learn about exponential functions, but the math need not be challenging if they are given the equation and own a decent calculator.

PS - We also lived by the "pay off loan as an investment". Sure beats what you get from a savings account or a CD. Another trick is to put a monthly car payment into a CU account after the car is paid off. After 5 years you can buy the next car for cash and you can't spend what you can't see.
As a career services professional, I have offered these types of "real world skills" workshops before, although admittedly not in a full-blown course. The challenge, as always, is getting students to show up and participate in something that's "good for them," but not required. So, my advice is that you'd better incentivize it through academic credit, some kind of registration benefit ("do this, and you get first crack at registration next term"), a discount at the bookstore/student activity fee, or some combination.

In my experience, all types of students (4 year, non-trad, 2 year, grad students, etc.) have poor financial literacy skills and often bemoan the this when they see their student loans come due. But you generally can't get them to pay attention to loan issues (because the repayment is so far in the future for them) and planning for retirement NOW is even worse.

That said, I have gotten some traction with the more motivated students--you know, the ones who come to everything and are generally on top of their game. But the other 70-80% act as if you're the teacher in the Peanuts specials ("wanh wanh wanh-wha"), only without responding.

Student life divisions have all kinds of in-person and online programs about drug and alcohol use, sexual behavior, and civility/tolerance. Some of them are undoubtedly trying to put financial literacy into the mix. What I have not seen is whether any of these are effective (because it's hard to follow up directly after people graduate) or what the student participation rates are like. One resource that may be useful and/or cheap is: which bills itself as a non-profit, free resource to assist students in building money management skills. I have not used this myself, but it may be that it could serve as the basis for the kind of course you're talking about.
Have you seen this article about Dean Tech?
While I do agree that this is a valuable topic, I am not so convinced that adding yet another mandatory seminar/class to the mix is the way to go. In grad school I used to teach a mandatory "study skills" course for marginal admits and for students on academic probation. Despite the fact that it was probably "good for" them, all the data showed that it was highly ineffective. Most of the students saw it as a punishment and as make-work. Nearly all of them resented having to pay tuition for these classes, which they didn't want to take in the first place. The older students, who were also more goal-oriented, resented having to jump through this hoop.

While the comparison is not perfect, I can imagine that a mandatory (credit bearing) financial literacy class would be viewed by many in the same light. And there's a bit of an irony in making students pay to take a class on financial literacy.

I tend to think that Geoff is probably right about it being difficult to get students to pay attention to loan and retirement issues because these issues are so far off in the future.

Similarly, I would add (based on my own experience) that it's also hard to teach things to students that are mostly theoretical to them. When I graduated from school 20 years or so ago, I got an entry level job paying in the mid-30's, which was about 4 times more than the highest amount of money I'd ever made (That being my $8,000 stipend in grad school). But I also had a bunch of new expenses - I needed professional clothes; I wanted to furnish my apartment with furniture I didn't take out of the dumpster; and my social life now involved going to restaurants where I would spend $20 (it's more now!) rather than the $3 for the one beer I would get at the grad student bar.

What I really needed was someone to help me with financial literacy after I'd been working for about 3 months and would be better able to prioritize.

I also think it's going to be difficult to provide good advice concerning student loans to students in school because: (1) they already have the loans; (2) there often aren't good options to avoid the loans; and (3) most importantly, they don't know what kind of salary they will be making. (Not that one shouldn't explain the workings of these things, but I don't see it making a large difference).
Yes, a lot of people don’t really know how the American financial system works, and they often make bad decisions that get themselves into deep financial doo-doo. I think that some sort of financial literacy course would be a good idea. However, I think that it is important that it is not offered with even a hint that it is some sort of remedial course and is offered for full credit, lest prospective students imagine that taking the course indicates that they are somehow substandard and that there are under some sort of punishment.

I did some checking and I found out that Proprietary Art School where I work does indeed offer a financial mathematics course, but I think that the emphasis in the course is primarily on mathematics (things like interest and amortization) rather than on the dos and donts of one’s financial life.

Perhaps a financial literacy course could use mathematics as the basis, but concentrate more fully on what the student should do to maintain a sound financial future and to avoid getting ripped off in the marketplace. Some things that the course could concentrate on are listed below.
1. The importance of saving for retirement. Yes, the student is now a youngster, but someday they will indeed need to retire and they will have to figure out some way that they can continue to live indoors after retirement.
2. The retirement pension system. The difference between defined contribution and defined benefit retirement pension plans, and why the defined benefit pensions are rapidly disappearing.
3. 401(k), Roth 401(k), IRAs and Roth IRAs, and various other pension systems. Their advantages and disadvantages.
4. How the Pension Benefit Guaranty Corporation works. Can you count on it if your employer’s defined benefit plan (if it offers one) goes bust?
5. How compound interest works—exponential growth.
6. How Social Security works. Suggestions for strengthening or even saving it for the future.
7. Medical insurance and its hassles
8. How Medicare works. How to save it for the future. Difference between Medicare and Medicaid.
9. How the American federal income tax system works
10. The stock market
11. Financial derivatives, options, forwards, futures, swaps, credit default swaps.
12. How student loans work
13. How the credit score system works and why maintaining a good credit score is so important.
14. Buying a house.
15. Buying a car
16. Why payday loans are such a bad idea.

Wow! I am already excited! I would like to take such a course myself. Maybe all adults should do so as well.

It's all just dancing around the recession. No job = no resources. 9% unemployment as the new normal = no job security. You can't finesse that. It's the Third World-ization of the US. Hope you stayed close to your family and didn't move for your "career".

I actually took a financial literacy class in college. Loved it. The most revealing thing about it was making a budget and accounting for things you don't think about: dry cleaning if you wear suits to work, car repair, etc. I learned about shorting and deductibles in the same class. I can't say I'm good at managing my finances, but at least I'm not driving blind.
ArtMathProf, I would take that class today. Reading through this, it sounds like what we really need is a Coursera course for this, so that students/adults can take it when they need it. I'm not much for MOOCs, but this one might actually work.

Also, DD--okay, Matt--I was also at that conference. I wish I had known you were there; a lunchw/ you discussing higher ed topics might have been the most productive thing I attended.
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