Financial Literacy

The Personal Financial Section of the Wall Street Journal recently asked the question, “Should college students be required to take a personal finance course?” I personally think they should at least in high school.  With so many of today’s parents not feeding or clothing their children, it is left up to others.  One excellent program that does reach children is Junior Achievement, but it probably is not enough.

George Washington University Professor Dr. Annamaria Lusardi says ignorance carries a high price.  She starts with the example of driving.  Before we allow someone behind the wheel, we make sure they understand the basics.  Yet, individuals will borrow thousands of dollars in student loans without knowing financial basics.

Teaching personal finance is not about describing financial products, it is about teaching the principles of financial decision making so that people understood how financial instruments work.

Dr. Lusardi went on to say to those opposed to requiring personal finance courses that the main thing students should learn is skepticism about the financial industry and its products.

The lack of financial literacy just like the lack of a driver’s license is more than a personal problem.  It is dangerous for the country.  She says the Great Recession was driven by mortgages and loan terms consumers didn’t understand.  That statement may have been a stretch since many borrowers knew they didn’t have to make a down payment, or prove that they had an income stream to repay the loan.  All that they had to do was sign on the dotted line.

The federal government then allowed these non-bank lenders to bundle the loans and sell them to investors as high-grade investments.

The question is asked will young people saddled with student loans be less likely to buy cars and homes?  The answer is yes.  We already see it.  People are living at home, and not getting married because they don’t have a living wage job.  University administrators have sold them a bill of goods, convinced young folks to take classes that will not provide a good job.  More financial education in my opinion is a must.

Making the counterpoint is Professor Lauren Willis of Loyola Law School.  She says there is scant evidence that personal finance courses lead to better financial decisions.  Where will people get this information if not through classes?  Will it come from their parents?  If schools did not provide three meals a day many of their students would go hungry.

Professor Willis says making personal finance courses a college requirement sends a message that financial success is largely the result of personal decisions.  Here comes the old liberal point of “it’s not your fault.”  Government policies have a greater effect than personal financial health.  I would agree, especially given the effects of the great recession – where good policies and habits that worked for years were abandoned.

Individuals lost their homes and savings because of poor policies adopted by Washington politicians.

Ms. Willis also says that the vast majority of student loan defaults are concentrated among young people who attended primarily for-profit schools.

She then says the finance industry profits when people make poor financial choices.  Like paying late fees, investing in high-fee mutual funds and insurance products.  I agree, but who will teach the pitfalls?

Then the real liberal appears with instead of requiring college courses about managing money, society should subsidize prenatal and early childhood care.

Please don’t change the subject – both areas are important.  If a person in college doesn’t have the financial basics, it may be too late.  This subject should be taught at least in high school.  It’s like reading, without it a young person is truly lost.