Financial Literacy Doesn’t Work

Colleges often propose a series of “financial literacy” courses to help students manage their debt, pay bills on time, and generally be fiscally solvent adults, despite facing huge payments on college loans.

The University of South Carolina, for example, to address the average South Carolina borrower’s $21,157 of education debt, offers “counseling… a financial literacy program and altering the school’s University 101 course to include a section on financial management.”

We’re not going to do much to help you fix your debt, kids, but maybe you can take another class to figure out how not to starve. Awesome.

There’s another problem, however: financial literacy courses just don’t make people financially responsible . According to an article by Jason Zweig in the Wall Street Journal:

Year after year, surveys find that Americans are as financially and economically illiterate as ever.

Even more worrisome are the studies that purport to prove that financial-literacy [fin-lit] education works. The typical such study, according to an authoritative review, includes no experimental control group and relies on people’s reports of their intentions – not an independent measure of their actions – to measure whether the classes work.

If someone taking a fin-lit course says, “Now that I’ve taken the class, I’m going to start paying my bills on time,” researchers report that the program was a success – even if the person goes on to be as bad a deadbeat as ever. In other studies, people are asked whether they think they know more at the end of the class than they did before it started; if they say yes, the class is declared to be effective.

It gets worse:

There is even some evidence that fin-lit classes can make people worse off. One study found that soldiers who had studied fin lit ended up significantly less likely to have systematic control over their household budgets. Another showed that people who had taken a fin-lit class in high school later reported that they were less thrifty, less likely to pay their credit-card bills in full and more likely to bounce a check.

That sounds counterintuitive; but it shouldn’t be that surprising. If I know nothing at all about finance I might think that if I have $150 in my wallet and I don’t get paid until next Friday, between now and next Friday I must make sure to spend less than $150. If I know a little something about money, however, I might have obtained a credit card and understand that I also have a line of credit through my bank. Now look at all that stuff I can buy; let’s go out to dinner!

Similarly, if I’m a financial amateur and have, say, $15,000 in savings and I’m considering going to college I might conclude that I have to make sure to spend less than $15,000 doing so. But “financial literacy” will make me aware of a whole bunch of fun new debt options.

So who really benefits from financial literacy?

Taking the long view it seems that it’s not consumers who get much at all from such courses (except possibly more debt). As Zweig wonders, “Is fin lit an educational enterprise, or a marketing gimmick?” It seems to be banks and financial firms that benefit most from these efforts to improve “literacy”; it’s just another way for them to capture more clients.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer