These days, it’s widely accepted that colleges have some responsibility for their students’ financial lives.
College affordability and student-loan debt are now mainstream political issues, peppering the speeches of the president and presidential hopefuls alike. While the job market for new degree-holders has shown signs of improvement, the path from graduation to financial independence is, for many, uphill and uncertain. Students have a lot at stake — especially those from disadvantaged backgrounds.
Many colleges have taken those concerns to heart. One common response is offering some kind of financial-literacy program, whether optional or required, inside the classroom or out. Students who know more about their finances, the thinking goes, will make better decisions about college loans, credit cards, and more. And if there’s one thing colleges should be well equipped to do, it’s educating students.
But what, exactly, are such programs meant to accomplish? And are they succeeding? Colleges are still in the early days of answering those questions, and the quality of their programs varies widely. “Financial literacy” is also a slippery idea. Advocates differ in how they define both the term and what the goals of such programs should be. Measuring how students respond to the training presents challenges, as does getting students to show up and pay attention in the first place.
Nicholas W. Hillman, for one, is skeptical that colleges’ efforts are making a difference. “My hunch is that financial-literacy interventions are popular but lack rigorous evaluations of their true effectiveness,” says Mr. Hillman, an assistant professor in the education school at the University of Wisconsin at Madison, by email. Such training, he says, “sort of reminds me of DARE programs in schools — they’ve never really been found to reduce drug/alcohol use, but what principal in their right mind would close down their school’s program?”
There’s some confusion about what “financial literacy” even means, says Beth Akers, a fellow in the Brookings Institution’s Brown Center on Education Policy. Sometimes the term describes teaching students what a checking account is or how credit cards work, Ms. Akers says, but she thinks of it as more encompassing. Ultimately, she says, it should allow students to thoughtfully consider their choices. That goal probably requires a cultural change on campuses, Ms. Akers says, rather than a single notification or money-management class.
Numeracy and Literacy
The philosophy of teaching financial literacy is undergoing a big shift, says Joyce Serido, an associate professor of family social science at the University of Minnesota-Twin Cities. In its early days, the field focused on providing information, but that is now “passé,” says Ms. Serido, who is the principal investigator of the Arizona Pathways to Life Success for University Students project. The name of the game is now changing behavior.
The world doesn’t need one more financial-literacy resource, Ms. Serido says. The real need is to connect people to the resources that are already out there, and to help make sense of them.
Some programs embrace the decision-making model, but experts agree that colleges are all over the place in how sophisticated their approach to financial education is.
Ms. Serido counts herself lucky that her own department has a history of focusing on how information applies to students’ lives. It’s not unusual, she says, for business or economics majors to have a better grasp of companies’ finances than of their own.
The old approach to financial literacy focused on whether students understood inflation, risk, and compound interest, Ms. Serido says. That’s basic numeracy, she says, and it’s a necessary component of being financially literate. But “I’m not so sure that being able to compute compound interest is the same as understanding the power of compound interest,” she says. Grasping the math might lead a student to see that a low-interest savings account isn’t doing much for her money. But figuring out what to do instead takes a more complex skill.
Not all experts agree that financial literacy’s new direction is the right one, however. Annamaria Lusardi is a professor of economics and accountancy at George Washington University’s business school. She teaches a personal-finance course and directs the university’s Global Financial Literacy Excellence Center. “We should not underplay the importance of knowledge,” Ms. Lusardi says.
Ms. Lusardi agrees that financial literacy is about making decisions. But she thinks that students must gain knowledge before they can make good choices. Students will face a host of financial decisions as their lives unfold and the world around them continues to change, she says. Personal finance, like any college course, creates a framework for thinking through new problems.
While some colleges offer it as a quick noncredit seminar, Ms. Lusardi argues that personal finance is an academic subject, just like corporate finance. No one follows up with people who took physics in college to see if they’re thinking scientifically, she says. For that matter, no one tracks students who took corporate finance to see if they become good chief financial officers. What makes personal finance any different?
Ms. Lusardi has another concern about the idea of measuring behavioral outcomes: Who decides which outcomes are desirable? Personal finance, she says, is personal. “There are lots of situations,” she says, “when what is best for you really depends on your circumstances.”
Avoiding Destructive Behavior
For those who believe changing behavior is the goal, measuring the true impact of financial literacy is tricky. Figuring out what works is “the challenge of this field right now,” says Phil Schuman, director of financial literacy for the Indiana University system. The traditional method — giving students pre- and post-tests — is insufficient, he says, as it measures only whether they know definitions, not what they do as a result.
Some evidence is emerging on whether financial literacy changes behavior. J. Michael Collins, faculty director of the Center for Financial Security at the University of Wisconsin at Madison, has examined credit-report data from the Federal Reserve for 18- to 22-year-olds, who are just starting to build their credit histories.
Mr. Collins and his colleagues compared the reports of young people whose states require financial education in high school to those in other states and those who attended high school before the requirement took effect. There was no real difference in how much the young adults borrowed, Mr. Collins found, but those who’d received financial education were somewhat less likely to miss payments, and had slightly better credit as a result.
The Arizona project Ms. Serido runs has found that financial education plays a role in well-being, helping differentiate young adults who flourish after college from those who struggle. Researchers typically ask whether financial training helps students thrive, Ms. Serido says, but she now wonders if that’s the wrong question. So far, her data suggest that the training’s real power is in helping students avoid truly destructive behavior.
Future vs. Present
Relatively few college programs are set up in that way, but financial literacy is part of wellness, says Mary K. Johnson, vice president for financial literacy and student-aid policy at Higher One, a company that helps colleges process student payments and refunds. “Ninety percent of money management is really psychological,” she says. Programs should help students understand their relationship with money — what factors cause them to overspend, for instance.
Such education also has to meet students where they are at key moments. Instead of providing information or counseling students about how to make future decisions, financial-literacy programs should “help students create structures that will help them manage their money,” says Ben Castleman, an assistant professor of education and public policy at the University of Virginia.
“When it comes to money, we run into this tension between what we want in the future and impulses in the present,” Mr. Castleman says. The trick is helping students resolve that tension for themselves.
How would that work? A college could help students set up savings accounts they could direct toward their own particular goals, like saving for graduate school or to buy a car, Mr. Castleman says.
Colleges could start by offering the accounts as a perk to students in work-study programs, Mr. Castleman says. Providing the accounts could even be set up as an experiment, letting researchers determine if a wider group of students would benefit from having them.
Staying Awake
For now, campus financial-literacy efforts face other, enduring challenges. Chief among them is engaging students with material that even those teaching it admit can be dry. “I’m surprised I’m able to stay awake,” says Indiana’s Mr. Schuman. Personality, not just subject-matter expertise, matters.
Indiana is also trying to be creative in branding financial-education efforts. One recent move is an ad on a campus bus showing a wise pig battling a “debt monster.” When classes start up in the fall, staff members in the financial-literacy center will hop on the bus periodically to quiz students on money management and hand out prizes.
Another key is keeping the material relevant. “It’s just hard to get a 22-year-old interested in when they’re 70,” says Bill Gale, director of the retirement-security program at the Brookings Institution. That means talking to middle and high schoolers about paying for college and to college upperclassmen about salaries and benefits.
Such education, in other words, has to be part of a sustained effort. “If there’s one thing we know about financial education,” Ms. Johnson says, “it’s not a one and done.”
Eric Johnson, assistant director of communications in the financial-aid office at the University of North Carolina at Chapel Hill, says he used to be more of a believer in financial literacy. Mr. Johnson, who is not related to Ms. Johnson, still thinks it’s valuable, and something colleges should teach. But he’s less sure it addresses the real financial problems students face.
Sure, educators can explain a complex process like applying for financial aid. But another option is for policy makers to simplify it — an idea many experts support.
Then there are the problems that neither education nor education policy is likely to fix. “There’s no amount of financial literacy that can make up for the fact the job market is not performing as well as it used to be,” Mr. Johnson says. Financial literacy won’t solve broader economic problems. But done well, it can at least help students cope with them.
Beckie Supiano writes about college affordability, the job market for new graduates, and professional schools, among other things. Follow her on Twitter @becksup, or drop her a line at beckie.supiano@chronicle.com.
