In a thicket of complex policy prescriptions for the nation’s student-debt crisis, few carry the homespun appeal of the financial-literacy seminar. Like a warm bowl of chicken noodle soup, lawmakers, families and college officials increasingly savor the simple notion that students might be less broke if they better understood how to manage their money.
But a provocative recent paper, which drew attention on social media this week, dragged the seemingly innocuous subject of money management into much thornier territory, casting popular financial-literacy programs as racially insensitive and downright degrading to low-income minorities. "The Political Economy of Education, Financial Literacy, and the Racial Wealth Gap," written by a pair of public-policy professors, argues that the political appeal of basic financial training perpetuates a false narrative that students of modest means have run up debts not because they are poor, but rather because they are irresponsible.
"The problem with this language is the implicit notion that the racial wealth gap is a matter of financial literacy, choice, and agency, as opposed to inheritance and structure," write Darrick Hamilton, an associate professor of economics and urban policy at the New School, and William A. Darity Jr., a professor of public policy, African and African American studies, and economics at Duke University.
The paper was published in the most recent issue of the Federal Reserve Bank of St. Louis Review.
Financial-literacy programs, which often include counseling on how to manage credit-card debt and student loans, have come ever-more in vogue in higher education over the last decade. Amid growing scrutiny over the cost of college and concerns about prospective earnings for graduates, a number of colleges have encouraged or required students to participate in some form of education on the basics of personal finance. The Department of Education has given competitive preferences for some grant awards to institutions that provide such programming, and lawmakers in some states have pushed for colleges to offer it.
Last month, representatives from Kentucky and Oregon introduced a bipartisan bill in the U.S. House of Representatives that would mandate additional financial counseling for federal loan recipients.
Financial-literacy programs have, up until now, engendered little public debate. Few could argue that understanding personal finance is without benefit. But Mr. Hamilton and Mr. Darity have, at least in some small way, reframed or complicated the discussion. The researchers suggest that financial-literacy programs feed on a problematic assumption that low-income borrowers, who are often African American, would struggle less if they exercised better judgment and assumed greater personal responsibility.
That narrative has found its way into political discourse. The paper cites, for example, Barack Obama’s 2004 Democratic National Convention speech, in which the future president argued that African Americans should "turn off the television sets" and read instead. Building a better society, he said in another speech, during the 2008 presidential campaign, "means taking full responsibility for our own lives."
Similar language was employed by Bill Cosby when he spoke at a 2004 event commemorating the 50th anniversary of the Supreme Court’s Brown v. Board of Education decision.
"The lower economic and middle lower economic people are not holding up their end in this deal," said Mr. Cosby, who at the time had yet to suffer a public downfall over sexual-assault allegations. "These people are not parenting. They’re buying things for the kid — $500 sneakers, for what? They won’t buy or spend $250 on ‘Hooked on Phonics.’"
These sorts of arguments, the researchers suggest, ignore the structural inequities of wealth that put black students at a profound disadvantage in financing higher education. It is the result of these wealth disparities, not some deficiency in savings discipline, that leads black students to borrow more than their white counterparts, the paper asserts.
"When it comes to liquid assets — financial assets that can be readily converted into cash — blacks and Latinos are nearly penniless," the researchers say.
White families have $23,000 in median liquid assets, more than 100 times that of black families, who have $200 in such assets, according to the U.S. Census Bureau’s 2011 Survey of Income and Program Participation. For Latino families, the median is just $340. No amount of money-management education, Mr. Darity said in an interview Wednesday with The Chronicle, can deal with these sorts of inequities, which make upward mobility so elusive for college-going minorities.
"People are always looking for easy ways to address racial economic inequality," Mr. Darity said.
David Wilson, president of Morgan State University, a historically black institution, says that financial-literacy programs "overshadow the real issues here, and those issues are the tremendous disparities we have in this country with wealth."
"I was the first in my family to go to college," he said. "My parents could not give me anything towards my college expenses. I don’t care how much financial literacy I received or they received, the money was just not there."
At Morgan State, where nearly 60 percent of students are eligible for federal Pell Grants, students are confronted with just one choice: Take out a big loan or remain poor, Mr. Wilson said.
"I decided, like scores of students like me, that I was not going to live a life in poverty, even if I had to end up borrowing an ungodly amount of money, which I did," said Mr. Wilson, who thinks he owed $100,000 by the time he completed four postsecondary degrees, including a doctorate in administration, planning and social policy from Harvard University. "That is the price that students living in poverty unfortunately must pay if they are committed to breaking the cycle of poverty through higher education."
Case for Financial Literacy
Sara Goldrick-Rab, an outspoken advocate of free college, seized upon the Hamilton-Darity paper as an argument for increasing funding for higher education. She trumpeted the researchers’ work this week on Medium in a post titled "Shut Up About Financial Literacy."
"It’s not that students of color — or students from low-income families — don’t understand the importance of saving," wrote Ms. Goldrick-Rab, a professor of higher-education policy and sociology at Temple University. "It’s that they don’t have money to save!"
But proponents of financial literacy say the programs can benefit even the poorest students. At the University of Kentucky, which recently announced plans to dramatically reduce its use of merit-based financial aid in favor of need-based aid, about 60 percent of freshmen take an orientation course that includes a financial-literacy component. This spring, the university teamed up with iGrad, a private company, to offer additional help for students on their "continued financial wellness journey."
Timothy S. Tracy, Kentucky’s’ provost, says that the university’s changes in financial-aid strategy acknowledge that what low-income students need most is money. An internal analysis showed that students with $5,000 or more of unmet need, which is defined as the amount remaining after family contributions and other aid, had significantly lower retention rates than those of greater financial means. At the same time, Mr. Tracy says, all students could use help making financial decisions.
"We believe addressing unmet need is the critical first step," he said, "and you complement that with financial literacy."
There is no doubt that low-income students’ choices are constrained, Mr. Tracy says, but they still have decisions to make with important financial implications. Is a freshman better off, for example, living at home than on campus, even though that may add transportation costs and mean that the student, statistically speaking, is less likely to graduate?
"That’s a financial-literacy question," Mr. Tracy says. "Are you able to determine the cost of living off campus versus living on?"
Philip A. Schuman, director of student financial literacy at Indiana University, agrees with Mr. Hamilton and Mr. Darity’s underlying premise that low-income students have fewer financial options. Homelessness and hunger are real problems in higher education, he says, and students facing those crises "do what they can to keep going, to survive." But Mr. Schuman rejects the idea that financial-literacy programs assign blame to those who struggle the most.
"I can understand the argument that’s being made," he said. "But we are intentional about not seeking out people and saying ‘You demographically are bad at handling finances.’ Our job is to provide financial education to all students at Indiana University."
Mr. Hamilton and Mr. Darity conclude their paper with a blue-sky proposal: A grand "baby bonds" program, which would provide young adults with an average of $20,000 to $60,000, depending on familial wealth, to put toward debt-free college, homeownership, or entrepreneurial activity. Only then, the researchers say, would there be real wealth for low-income students to learn how to manage.