Closing the Financial Literacy Gap
Personal finance education may be more important than ever. But not everyone has access to it—especially those who need it most.
April 23, 2020
Yanely Espinal’s obsession with personal finance started as a side-hustle.
After teaching elementary school in New York City as a 2011 corps member, Yanely started working for a nonprofit. At the time, she was living on a tight budget, with hefty credit card debt and a student loan. She knew she needed a plan for improving her financial situation, so she cut all expenses that weren’t essential and focused her time and energy on generating extra income. She tutored in the evenings and on weekends and learned new skills that she put to use making educational videos for local companies.
“Those habits throughout those years really helped me to pay off all of my credit card and student loan debt, which was a total of $20,000,” Yanely says.
Yanely didn’t learn these money-saving habits until early adulthood. After work, she would go home and spend countless hours reading up on how to manage credit card debt and strategies for setting aside savings in case of an emergency. Pretty soon, she began sharing her knowledge on YouTube, through her channel called Miss Be Helpful.
Yanely is now the director of educational outreach at Next Gen Personal Finance (NGPF), a nonprofit organization on a mission to deliver financial education to all students in order to improve the financial lives of the next generation of Americans. The organization provides comprehensive, free financial literacy curricula, runs teacher training programs, and conducts research and advocacy to inspire local, state, and national policies around personal finance education in American high schools.
What NGPF and other researchers have found is that far too few students—particularly those from low-income backgrounds—receive personal finance education during high school. Students graduating from high school are expected to make big decisions about student loans, credit card spending, and budgeting for living expenses. Yet many are making these important decisions in the dark, without a safety net to fall back on.
As the economy reels from the fallout of the coronavirus pandemic, students are entering a world where high unemployment, bankruptcy, and a looming recession could have lasting effects. Providing equitable access to personal finance education is perhaps more important now than ever.
While financial education certainly won’t solve all of the economic challenges so many students and families are facing, it can play a role in helping students build positive habits, find funding for college, save for emergencies, and make fewer financial mistakes that could set them back in the future.
Does Financial Literacy Really Make a Difference?
Financial wellness is generally defined as having habits and knowledge about money that lead to financial security and the ability to weather an unexpected emergency expense. Yet for far too many families, their financial situation is precarious—even more so now, as 22 million people have filed for unemployment in the last month due to coronavirus-related job losses.
In a 2017 survey conducted by the Federal Reserve, 40 percent of adults reported they would be unable to cover an unexpected $400 expense without selling something or borrowing money. In a recent survey from EVERFI, 53 percent of college students reported they felt less prepared to manage their money than to face any other challenge associated with college.
While these statistics are concerning, there is a body of research that links financial literacy education in high school to positive financial health outcomes later in life. Dr. Carly Urban is one of these researchers and works as an associate professor of economics at Montana State University. In a 2018 study of the financial health outcomes for a diverse set of 18-22-year-olds who were required to take some form of financial literacy in high school, she found that overall the group had better credit scores.
In another study, Dr. Urban found students who received financial literacy education were more likely to take out low-interest federal loans to pay for college. And while they tended to borrow more federal student loans, they also worked fewer hours, had higher college persistence rates, and were more likely to graduate.
“We're thinking this is largely coming from an upfront decision to budget better,” Dr. Urban explains. College students are building habits and mindsets about planning ahead for expenses such as textbooks, food, and visits home. “Instead of just throwing them on a credit card, now they're thinking it through and saying, actually I need to take out more money.”
Dr. Melody Harvey, a postdoctoral fellow at the Institute for Research on Poverty at the University of Wisconsin-Madison, also studies the long-term impact of personal finance education that students receive in high school. She found that young adults who received state-mandated financial literacy education in high school were less likely to choose high risk, high-interest alternative financing services such as payday loans (which come with a staggering 300 percent interest rate).
“The research is beginning to build consensus around the fact that high school financial education is improving young adults’ credit outcomes such that there is some value to having these policies in place and offering this type of instruction in schools, especially in high school as they're responsible for their own decisions after that,” Dr. Harvey says.
Without a doubt, kids benefit from receiving education on personal finances, especially at a pivotal moment in their lives as they transition to college, take on student loans, and have more agency over managing their money. But how widely is financial literacy being taught in schools? And who has access to this education?
“There is a massive equity issue within personal finance instruction and personal financial knowledge. Every kid deserves this and not every kid is getting it today.”
The Financial Literacy Gap in K-12 Schools
For the most part, personal finance education is only required in pockets throughout K-12 schools in the United States. A 2017 state report card from Champlain College’s Center for Financial Literacy found only five states required a one-semester course on personal finance instruction as a graduation requirement. The remaining states either embed some personal finance topics within another required course such as math or economics, offer it as an optional elective, or have virtually no requirements for personal finance education in high school.
John Pelletier, the director of the Center for Financial Literacy at Champlain College, says requiring a single semester of personal finance is a good foundation, but it is still not enough to cover the breadth of topics that students should know.
"It's kind of like expecting you to be fluent in a foreign language if you took one semester,” he says. “It's a little bit ridiculous.”
For students from low-income backgrounds, the financial literacy gap becomes even more visible. In 2018 Next Gen Personal Finance reviewed over 11,000 course catalogs from high schools across the United States to see how many schools offered financial literacy, what the program looked like, and whether it was required. In their report, they found only 1 in 6 high schoolers were required to take at least one semester of personal finance for graduation—what NGPF defines as the “gold standard.” At schools in which at least 75 percent of students were eligible for free or reduced-price lunch, just 3.9 percent of students were required to take a personal finance semester course to graduate.
“There is a massive equity issue within personal finance instruction and personal financial knowledge,” says Christian Sherrill, a 2013 Bay Area alum who currently leads business development and advocacy at NGPF. “Every kid deserves this and not every kid is getting it today.”
High school students required to take at least one semester of personal finance for graduation
High school students from low-income schools required to take a personal finance semester course to graduate
While access to an optional financial literacy course is better than nothing, researchers have found there tends to be a selection bias in which kids from more affluent backgrounds are more likely to take financial literacy when it’s offered as an elective, perhaps because these conversations are already happening at home. But making financial literacy a requirement—even if it’s only a portion of a larger course on math or economics—means kids from diverse backgrounds are more likely to be included. And that can make a difference.
Not surprisingly, the reasons more schools don’t offer a required financial literacy course are complex, and a lack of funding often plays a big role. Many teachers also need additional training to effectively teach a course on personal finance. And there is the opportunity cost—potentially taking teacher resources away from other learning and competing with more immediate needs such as mental health services and support for English language learners.
But some states and districts have found creative solutions to get around these barriers. There is an abundance of free educator training on how to teach financial education, including a one-week course offered through Champlain College, as well as free resources available through NGPF. School districts have also partnered with local financial institutions to bring personal finance education into their schools. And some states have gotten creative, enacting policies that require high-cost loan providers such as payday lenders to help fund financial literacy education through annual fees.
Real-World Financial Capability for All Ages
By age 3, kids are able to grasp basic money concepts. By the time they turn 7, many of their money habits are already set. While teaching second grade as a 2014 St. Louis corps member, Chelsea Addison discovered that not only were her students eager to learn about money, but some were already making the connection between financial literacy and life opportunities.
One of her second graders shared that her sister lost her job because she couldn't count the money in the register. This motivated Chelsea to help her students start building good habits around saving, spending, and giving.
“In class, we talk about counting money, a lot, but we don't actually talk about how to use or make money,” Chelsea says. “And it was kind of like an ‘aha’ moment for me. How can I create resources and provide access for students to build strong financial foundations in elementary school? ”
After searching the web and coming up short on financial literacy resources that were culturally responsive and reflected her young learners’ lived experiences, Chelsea launched the Financial Friends Foundation, Inc. and wrote a series of books, beginning with Savannah’s Savings Jar. The book tells the story of “Saving Savannah” who learns important life lessons about saving, spending, and budgeting as she launches her new business, called Terrific Slimerrific, for a class project.
Chelsea has long been interested in the intersection between money, education, and inequity within the Black community. The U.S. has a long and complicated history regarding how communities of color have been cut off from opportunities to build wealth, including decades of discriminatory lending practices and redlining—policies enacted in the 1930s to exclude Black families from purchasing homes in more affluent white neighborhoods. Over the decades, these policies systematically blocked communities of color from a means to accumulate wealth and pass it down to the next generation, resulting in a significant wealth gap.
“I am especially passionate about uplifting my Black community by equipping us with the resources to change our financial trajectory,” Chelsea says. “Our ancestors ensured we had trusted devices and mechanisms to navigate our present circumstances. Without question I see fit to do the same for the youth and families of today, tomorrow, and the future to come.”
Chelsea is currently working on her Ph.d. in education policy and equity at St. Louis University. She’s imagining a future in which financial institutions and communities can innovate and increase opportunities for communities of color to build wealth and financial capability—starting with youth. Through the Financial Friends Foundation Inc., students will be participating in a virtual summer learning experience to learn business basics and earn a portion of sales by selling the foundation’s merchandise. Part of their earnings will go to supporting Financial Friends Foundation and a portion can then be deposited into an early saver bank account.
Eventually, Chelsea hopes to give kids safe ways to participate in more sophisticated real-world investing opportunities such as making small investments in real estate and other community development projects.
“We know that financial literacy isn't enough, we need to couple this with exposure to experiences that help build financial capability,” Chelsea says. “I strive to strategically create opportunities where early intervention is the approach utilized to engage children and catalyze generational wealth.”
“We know that financial literacy isn't enough, we need to couple this with exposure to experiences that help build financial capability.”
Gaining hands-on experience with money is an important object lesson, and schools are finding creative ways to deliver that learning through partnerships with local financial institutions. Stacey Black is a lead financial educator at Boeing Employees Credit Union (BECU), a credit union that serves communities throughout Puget Sound and Spokane. Black's team partners with local schools to provide semester-long financial literacy workshops for students covering the big pillars of financial literacy: saving, spending, borrowing, and planning.
Every year BECU closes its offices for a day of service and employees volunteer in high schools across the region to put on a “financial reality fair” for more than 7,000 students. Students are assigned a persona and income and tasked with navigating real-life scenarios and living within their income, with the support of coaches.
“Instead of just lecturing and saying, you should have a budget, we're walking them through creating a budget,” Black says. “I think it really helps prepare them for emergencies, like what we're going through today.”
The Role of Financial Literacy in a Healing Economy
What we’re going through today is on everyone’s mind as the downstream effects of a global pandemic hit the economy. Many financial experts and economists, including John Pelletier of Champlain College, are having a hard time making sense of the magnitude of impact the coronavirus pandemic will have on the economy in the months and years ahead. As a record number of people file for unemployment insurance, many families are already feeling the shock, especially those who were in a financially vulnerable situation before the crisis.
“What's really scary about this particular crisis is that it’s hitting the financially fragile really hard,” Pelletier says. “I personally think this event is going to make the need for personal finance education—I hope—crystal clear going forward.”
Closing the financial literacy gap is obviously only part of the solution to the complex economic fallout related to coronavirus—in addition to addressing the huge wealth gap that already existed prior to this crisis.
As Dr. Urban continues to research the outcomes of financial education on K-12 students, she suggests that policymakers should give local school districts latitude around how they design and implement a financial literacy curriculum. It should be responsive to the needs of individual communities as they recover from the pandemic, she says. In many cases that means refocusing on how to access financial assistance available from the government and removing the stigma around it.
"I'm not sure that in a case like right now we should just say we need to give people financial education as we have it,” Dr. Urban says. “I think in a case like right now we need to teach people how to use the safety net."
On the policy side, organizations including Next Gen Personal Finance have renewed urgency around making the case for a financial literacy mandate in more states. The organization’s goal is to have all students take a one-semester personal finance course before graduating from high school by the year 2030, what they call “Mission: 2030.”
“Every state has its own demographic of students struggling in families that are facing poverty,” Yanely says. “By being able to give them these tools that they can implement in their own lives in a way that personally fits their lifestyle, we're providing them with the pathway to be able to say, we can become financially stable in the near future."