Financial Education: Does It Work?
The best way to gauge the effectiveness of financial education programs is to study how they change the financial practices of participants. The best studies investigate causation, not correlation, using large randomly selected samples and rigorous statistical methods. Below is a summary of three recent research studies:
¨ Mandates Matter- Research by Carly Urban and Christiana Stoddard at Montana State University examined the causal effect of financial education graduation requirements on college borrowing behaviors. Their study found that students in states where financial education is required to graduate from high school make better financial aid decisions as college freshmen; e.g., applying for grants and selecting lower-cost federal loans.
¨ Payday Loan Avoidance- A study by Melody Harvey at the University of Wisconsin-Madison found that state financial education mandates were associated with a decreased likelihood of costly payday loan borrowing. Specifically, young adults who were required to take a personal finance course in order to graduate are 4% less likely to take out payday loans than peers who weren’t required to do so.
¨ Long-Term Impacts– Research by Jamie Wagner and William Walstad (University of Nebraska) found that financial education appears to have more positive and stronger effects on long-term behaviors (e.g., having an emergency fund, owning investments, and calculating retirement savings) for which the consequences are not fully realized until later in life. Conversely, people often learn about short-term behaviors (e.g., paying monthly bills and paying off credit cards) by experience because there is regular feedback and a greater opportunity to learn through “the school of hard knocks” (e.g., paying interest and fees on late credit card payments).