A Financially Illiterate Generation

How much financial education did you receive when you were growing up? If you're like me or many of my 20-something-year-old peers, it was a course on balancing a checkbook. It lasted just a few weeks, and it was in the fifth or sixth grade. From that point on, there was no required course dealing with how to manage money. You'd think that, given a school's duty to educate its students, more emphasis would be placed on this critical aspect of life. Yet financial education is continually neglected throughout high school. So it's no wonder that students are racking up monstrous debts once they hit college. Credit card companies are preying -- or, rather, are able to prey --on a financially illiterate group.

According to UCMS, there are just a hair under 10 million students enrolled at four-year colleges. On average, each of these students possesses 2.8 credit cards. That's 28 million credit cards floating around college campuses, with only a fraction of their owners having any semblance of financial literacy. So it's no surprise that debt continues to mount, to the detriment of these students' futures.

Why do college students have so many credit cards?

To begin to understand the problem of financial illiteracy in this country, we must understand why we're getting to this point. Thankfully for this article, but unfortunately for its author, I was representative of the student credit card problem. So let me relate my experiences to you, to help better understand why this is becoming a problem.

Upon entering college, I was nearly broke. I had a crappy part-time job that paid me a hair over minimum wage, and even that is more than most college freshman have. I lasted through the first semester on my paltry wages, but once the second semester started up, I found myself more broke than ever.

Without money, I couldn't do the things my friends were doing. I couldn't go out to eat, I couldn't chip in for beer, I couldn't go buy new gadgets and clothes. For a post-adolescent in a relatively new environment, that can be a death sentence. I had to figure out a way to make enough money to be able to keep up with my friends. Figuring out how they had so much money to blow never really crossed my mind.

Walking to and from class, I would pass a number of booths offering free t-shirts. All you had to do was fill out an application for a credit card. In addition, I received no fewer than five credit card solicitations in the mail every week. It was such an easy proposition. Get a credit card, buy what you want, and pay it back when you have the money. Of course, the last part of that statement is where it gets pretty fuzzy.

Most college students simply do not understand that they haven't the means to pay back these credit card debts. What they miss is one key line, one key element, that could be taught to them and reinforced at any point during their education:

If I don't have the money to pay for this now, how am I going to have money for it in the future?

In high school, we were required to take four years of Phys Ed. For 40 minutes a day, every day, for all four years of high school, we were forced to change clothes and participate in physical activity. The reasoning must be that it will keep us healthy, now and in the future. Yet, high schools cannot find room in their schedules for a program that will help keep us financially healthy through our later years.

High school financial blunders

The Jump$tart Coalition, an organization dedicated to increasing the financial literacy of our nation's high school graduates, conducted a survey of this year's high school seniors. In multiple choice test format, they asked 31 questions of these students in order to gauge their level of financial competence. The average score was under 50 percent. This is no good for a group of kids who are headed off to an environment where, as we saw from my example, obtaining a credit card requires nearly no effort.

For some of these questions, the high percentage of wrong answers is troubling. For instance, one of the questions asks, "Under which of the following circumstances would it be financially beneficial to you to borrow money to buy something now and repay it with future income?" The majority of students picked the correct response, but a third picked an abhorrent response: "When the interest on your loan is greater than the interest you get on your savings." This, of course, is fundamentally backwards.

If the interest on the loan is greater than the interest on your savings account, you'll be losing even more money by taking a loan in that situation. If the interest on your loan is seven percent, and the interest on your saving is four percent, your debt is growing faster than your savings. Even if that statement was read wrong, and students thought it was the savings interest growing faster than the loan, the answer is still problematic. Interest rates can plummet. When I opened my ING Direct account, my interest rate was up near five percent. It's now at three percent. If I had taken out a loan at four percent interest, my lowered interest rate would mean that I'm losing money, where I was once coming out ahead.

Students also showed a lack of knowledge of the ability to check their credit history, the nature of sales tax, income tax, and interest rates on savings accounts. These are all factors that play heavily into one's ability to stay afloat financially. Particularly troubling is a lack of comprehension of compound interest, a concept that, if understood correctly, can create a near fortune out of relatively small contributions--over time, of course.

About half of high school seniors noted that they received some sort of financial education through the school. This ranged from a small, segmented lesson like a stock market game, to a full-year class on economics. So what about the other half?

College students aren't much better

While college students on average scored better than their high school counterparts on this very same survey, their results are troubling in ways, too. Right off the bat, with the first question on the survey, college students display a fundamental lack of understanding of inflation. It asks which group would have the greatest problems in periods of high inflation: Older, working couples saving for retirement; Older people living on fixed retirement income; Young couples with no children who both work; or Young working couples with children. The correct answer, older people living on fixed retirement income, was chosen by just 5.7 percent of respondents. High school kids, incidentally, mostly got this one right.

On the loan question, college students fared a bit better than high school students, but still nearly 20 percent of respondents thought that having a loan interest higher than savings interest would be more beneficial for them when taking out a loan. They also showed a lack of understanding regarding how interest earned on savings plays into income tax.

Even for the questions where the vast majority got the answer correct, there is still a concerning number of respondents who answered incorrectly. These 31 questions comprise a base of knowledge that every single college graduate, about to enter the workforce, should understand. You're required to take a number of core classes during your college tenure, but few if any colleges require a financial literacy test, so that students can graduate with a level of competency with their finances.

Spending more than we make

With so many Americans spending more than they earn, we face a dilemma. It means that not only are we not saving enough, but that we're overextending ourselves with credit. This goes back to the line I emphasized above. If we can't pay for something now, what makes us think that we can afford it in the future? Chances are that when you put something on credit because you don't have the money in the bank, you won't have the money in the bank to pay it off a few months from now. And even if you do have the principal amount, there are those nasty finance charges that can eat away at you.

Before April of 2005, there was only one month since the last 40s that showed a negative savings rate. Now we're running a streak. This does not bode well for the country's immediate future. It is said that our economy depends on the availability of credit lines for both consumers and businesses. If consumers are consistently taking out loans that they cannot repay, whether that be a home loan, car loan, or through a credit card, banks will be more reluctant to extend credit.

With our nation's high schoolers scoring worse on financial literacy tests than they did just a few years ago, this problem could get worse.

Solving the problem through education

As has been suggested throughout this article, education is the greatest combatant of this financial ignorance we're seeing in our nation's high school students. This includes not only state-sponsored school programs, but right at home, where finances can be talked about in a more intimate setting between parents and children.

Unfortunately, neither is happening on a large scale. According to a Capital One survey in 2007, over a third of parents haven't talked to their kids about back-to-school finances. Only half of parents have given their children the all-important talk of the difference between needs and wants, which seems quite an important talk.

Financial education can and should start at home. These can be simple lessons, involving the child's allowance. Parents can set up programs whereby children will earn an incentive for saving, to simulate the interest gained through saving and investing. And since this involves real money, the child can learn the lessons intimately, and actually see the rewards for saving.

Schools have a duty to impart financial knowledge on their students, too. A short course in balancing a checkbook and a few weeks playing the stock market game simply isn't enough. Instituting a required class on financial literacy, in multiple grade levels, can help kids grasp basic concepts that they're apparently missing, according to the Jump $tart surveys.

Responsibility

The recurring theme throughout this article is responsibility. Financial responsibility on the part of students, as well as taking responsibility for furthering their understanding of how money works. Educational responsibility on the part of schools and parents, to ensure that our children, our nation's future, don't go off to college, on their own, without a clue as to how to budget or manage a credit card.

A high school teacher of mine had a saying: Elementary school prepares you for middle school, middle school prepares you for high school, high school prepares you for college, and college prepares you for nothing. That was certainly true for past generations -- only five percent of adults learned anything about money management from grammar or high school. That doesn't mean we have to continue along this path, though.

This seems to be getting a bit better. According to Jump $tart, nearly half of high school students surveyed have taken an entire course in money management or personal finance. That's a start. Ideally, that number will approach 100 percent in the not so distant future.

Remember, money management is not an option in life, as it is as a classroom course. So why don't we teach this skill where we have assembled masses of our country's future? Seems to me we have something vital to add to the curriculum.