Financial Literacy Is Declining Among High School Seniors

Guest article, by Lewis Mandel

Each year America’s high schools graduate millions of young adults who are unprepared to make important financial decisions affecting their lives. Compounding matters, our society is becoming more financially complex, offering a variety of choices and options that can be confusing to the uninformed. 

By failing to provide our children with a sound understanding of personal finance, many of them can be expected to make financial missteps, misjudgments and errors as adults. Poor retirement planning, clumsy investing, debilitating debt and even bankruptcy are often the result.           

How prevalent is personal-financial illiteracy among America’s young people? The answer is startling. Last month, I announced the results of a survey that measured the personal finance knowledge of 723 12^th graders nationwide. The 30-question survey, sponsored by the Jump$tart Coalition for Personal Financial Literacy, tested students’ understanding of basic financial concepts, such as taxes, credit, investing and saving and retirement planning. 

On average, the students answered just 51.9 percent of the questions correctly—a failing grade based upon the typical grade scale used by schools. Even more alarming is the fact the students’ poor showing represented a five percent decline in the score achieved by high school students who competed a similar survey in 1997. 

A look at some of the student responses on the survey reveals just how unprepared teenagers are to make the financial decisions that await them after high school. For instance, only 23 percent correctly said stocks were most likely to offer the highest growth over 18 years of saving for a child's education. Instead, 73 percent said a savings bond or a savings account would offer the highest growth.

·        Only 21 percent knew they might have to pay income tax on savings account interest. Three years ago, 32 percent answered the question right.

·        Forty-six percent knew that retirement income paid by a company is called a pension, but 30 percent thought it was called Social Security. In the 1997 survey, about 64 percent answered the question right.

·        Just 32 percent knew that people turned down for credit based on a credit report can check their credit record for free, down from about 36 percent in the previous survey.

·        46 percent mistakenly said a bank certificate of deposit is not protected by the government and 21 percent thought U.S. savings and Treasury bonds are unprotected. 

The worsening scores, I believe, can partly be attributed to increased pressure placed on high schools to focus their efforts on courses that will help students pass basic exit exams, at the exclusion of more applied courses like personal finance. We certainly should have empathy for the challenges confronting our nation’s high school teachers and administrators, but we must also recognize the potentially disastrous effects of not properly preparing our teenagers for the financial realities of modern life. 

Since 1997, personal finance has been incorporated into the curriculum standards of only a handful of states, such as Idaho, Illinois and Pennsylvania. The low number is alarming, considering that more than 70 percent of today’s high school seniors will enter the full time labor force without obtaining a college degree, with the percentages even higher among minority students.  

Obviously, more needs to be done. State legislators and education leaders must recognize that high school is the appropriate time and place to provide young adults with meaningful instruction in personal finance. They must mandate the inclusion of highly interactive, creative and applied courses in personal finance within their high school curriculum standards. And organizations that already work with high school students, such as the Security Industry Association, Junior Achievement and Economics America, should be encouraged to develop courses that produce sound basic financial decision making that is relevant to young adults. 

Unfortunately, as the survey results shows, common parental methods used for instructing children in personal finance—such as allowances, discussing finances with children and letting teens handle and manage money—tend to be ineffective. Students who received a regular allowance, for example, scored worse than those who did not receive an allowance (48.9 percent compared to 51.9 percent). Also, students whose parents often discuss money matters in front of them scored no better (52.6 percent) statistically than did students whose parents sometimes (52.5 percent) or rarely (52.4 percent) discuss money matters in front of them. 

And students who own stocks in their own name are no more financially sophisticated than students who don’t own any stock (both scored 52.6 percent on the survey), while students who own a credit card scored worse in the survey (49.1 percent) than did teens who don’t use a credit card (53.3 percent). 

What can be done? The survey results did point out one area of student improvement, which gives us reason for hope and direction for the future. Those students who participated in the Stock Market Game, a highly interactive and fun instructional tool, scored better on the survey (55.1 percent) than did students who completed an entire course in money management (51.4 percent) or an entire course in economics while in high school. 

Based on that result, we can conclude that highly interactive, reality-based courses in money management--which provide intensive and applied instruction in personal finance--are more effective for developing financially savvy teens. These types of courses should become the standard for personal finance and money management instruction at the high school level.  

Knowledge of personal finance is not something students can develop by memorizing terms and phrase. It’s a skill that students learn when given the opportunity to apply concepts and practices as part of a thoughtfully designed high school curriculum. 

Until that happens, we can expect students to continually score poorly on tests of personal finance knowledge. Moreover, we can expect that, as adults, many will make poor financial decisions that can negatively, and sometimes permanently, affect their lives.           

Lewis Mandell is dean of the University at Buffalo School of Management.  He can be reached at lewm@buffalo.edu.  For more information about the survey, go to www.jumpstartcoalition.org.