Most Americans cannot perform basic financial calculations. The ignorance is costly. Research shows that people who are not "debt literate" use high-cost credit and are overindebted. That is a particular concern for young adults, who have no experience managing debt yet make major borrowing decisions. In 2008, two-thirds of graduates from four-year colleges had student loans averaging $23,200. Over 75 percent of college students have at least one credit card, and median credit-card debt for them is $1,645, a 74-percent increase since 2004. While the 2009 Credit Card Act limits credit-card marketing on college campuses and makes it harder for students to get cards, it will not eliminate young adults' indebtedness.
For young people, financial mistakes can quickly snowball, marking them as subprime borrowers. Low credit scores can drive up their costs of borrowing, make it difficult to borrow, and can even affect insurance rates and job prospects.
Many observers call for financial education in the schools to arm young adults with necessary financial skills. While such standards exist in 44 states, and while some cities and states are demonstrating successful programs, delivering this material nationally and effectively is a challenge. Teachers, already stretched thin, have to be trained in the subject. Space must be carved out of existing school days. And it all must be coordinated over nearly 20,000 public high schools and over 3,000 private secondary schools across America.
Three simple lessons from the business world might help us grapple with this important topic. First, we manage what we measure. Second, self-interest is extraordinarily powerful. Third, small steps can sometimes lead to big outcomes.
This fall millions of frenzied high schoolers will apply to colleges. By leveraging the applicants' energy and self-interest, college admissions tests can play a new role in advancing the students' financial understanding. Gaston Caperton, president of the College Board, which oversees the SAT and PSAT, has identified "the urgent need ... to provide better guidance and improved financial literacy for students before they take out loans that will get them into trouble down the road." That need could partly be met by including financially related questions on the SAT, PSAT, and ACT exams, which more than five million high-school students take each year. Doing so would not require adding more content-based questions, but rather reframing the context of existing questions in the critical-reading and mathematics sections.
For example, in the critical-reading section of the SAT, test takers are given passages—about the theater or population control, say—and asked what they mean. Those passages could be about credit cards, or insurance. In the math section, students solve word problems. Reframing some questions around key financial principles, such as interest compounding, would be straightforward. Testing services already have experience with this material, which is included in the GMAT, taken by M.B.A. applicants.
If changes in the exams were publicly announced, test-prep organizations, along with students, parents, and schools, would have incentives to upgrade teenagers' financial capabilities. If financial numeracy gave students even a slight edge, self-interest could be quite powerful. This small change, while neither universal nor complete, would reach the more than 50 percent of all high-school seniors who take these tests each year and who will soon have the highest debt loads. It would signal that financial skills are important even for top academic achievers, moving those topics from remedial subjects to core priorities. It might even have a broader ripple effect: Studies of education programs in civics and public health show that student participation can improve parents' knowledge and behavior.
More broadly, there are other, even bigger opportunities to embed financial matters as the context for testing quantitative reasoning. Initiatives to develop new, common curricular standards for secondary-school students, such as CommonCore.org and P21.org, may create platforms to bring personal-finance education into schools nationwide. Using financial problems to teach and test math and reasoning might enhance skills while making the underlying subjects more accessible. Another alternative is to require college students to pass a financial-literacy course before taking out student loans.
Sometimes systemwide changes emanate from unlikely sources. Teaching to the test is often criticized, but in this instance, harnessing self-interest may not only increase financial capabilities directly, but also stimulate bigger interventions to arm our youth to handle their complex financial lives.