A recent article in the Chicago Tribune raised important questions about the effectiveness of financial education and challenged the appropriateness of its offering to consumers operating in an increasingly complex financial industry. Author Greg Burns is right to draw attention to the lack of evidence on the impact of financial literacy, but policymakers should not abandon the pursuit of quality financial education just yet.
Financial education should be a complement to, not a substitute for other consumer protections.
For middle and lower income individuals who have fewer financial resources to begin with, learning the warning signs to trouble and the resources to seek support is unquestionably valuable.
Policymakers, legislators, education administrators, and the financial industry should consider five promising existing policy ideas to improve the delivery of effective and high quality financial literacy.
1. Evidence demonstrates that coupling financial education with account ownership improves savings rates, asset accumulation and leads to positive behavior change. Wells Fargo and US Bank have evaluated the impact of providing "just in time" or point of sale education-which provides information and education when the individual is making a decision-and found that educating their customers results in improved cardholder behavior. The private sector should better use these "teachable moments" to transfer financial literacy to their consumers.
2. A major piece of the problem is the shortage of financial education advisors and educators to offer independent, reasonably priced financial services advice. Establishing a Financial Services Corps would connect families hungry for knowledge and individualized guidance with a corps of financial experts, planners and advisors who would deliver financial advice across a broad array of areas (household budgeting, credit repair, emergency savings, higher education, retirement, and homeownership). The Corps could be structured to deliver a tax credit to financial planning providers, or to issue vouchers directly to families who seek professional financial counsel.
3. Building evidence on the effectiveness of financial education (especially group-based) in changing attitudes and behaviors requires policymakers devote federal funding to support more rigorous research and evaluation. Understanding the impact of financial literacy on behavior change requires sophisticated evaluation to determine a causal relation (more powerful than a correlation). Some evidence exists, but more research is needed to make the case.
As my colleague Karen Murrell points out, most financial education programs were developed in the last 10 years and many programs are too new to have long-term tracking in place. As for more established programs, they often lack the resources (cost and technical expertise) to conduct rigorous evaluation.
4. The bulk of current federal funding for financial literacy efforts focuses on credit counseling and home purchase. Problem solving, money management, and economic principles should be incorporated earlier in a person's education, and re-emphasized throughout their schooling years for maximum impact as an adult.
5. We should support the findings from the President's Advisory Council on Financial Literacy and encourage the Treasury Department to provide this newly created body with the authority to enforce their final recommendations.
Financial literacy efforts are not mutually exclusive to pro-consumer regulation or one-on-one counseling. Consumers of all ages need to understand when and how to access financial advice and have affordable, unbiased options for this advice available. For most of America's households, quality financial education is the most reliable vehicle to accomplish this.