What Your Students Don't Know about Personal Finance...CAN Hurt Them

In the current environment of national educational reform, the emphasis on "reading, writing and arithmetic" leaves one very important area for literacy out: how to handle money. The recent financial crisis made it very clear that the cost of financial illiteracy is high. Credit card debt, fallout from home foreclosures, and student debt levels continue to mount. These personal financial issues affect more than just the person—they affect the bottom line for businesses, the economic stability of the nation, and the future of a whole generation.

On August 12, 2013, the Florida Council on Economic Education (FCEE), in partnership with the Federal Reserve Bank of Atlanta, the University of South Florida, the Florida Bankers Association, and Bay Cities Bank, convened the Florida Financial Literacy Summit in Tampa on the campus of the University of South Florida. The summit's inspiration was the passage of Florida Senate Bill 1076, which now requires that personal finance standards be taught to all students in Florida in their required senior year economics course. Currently, three states in the Sixth Federal Reserve District—Tennessee, Georgia, and Louisiana—require students to take a personal finance course, and all three require testing. Nationally, only 14 states require a course, and only five require testing.

Students so often ask "Why do we need to know this stuff?" Keynote speakers and panelists—including a bankruptcy judge, a school superintendent, a credit counselor and may others at the Tampa summit—offered plenty of reasons, giving powerful testimony from their own experiences of the terrible consequences resulting from a lack of financial knowledge.

Below, you will find some food for thought gleaned from the conference that can help you answer that question for your students. This information can also provide talking points for a discussion with students about their financial futures.

Credit reports
Why do credit reports even matter to young people? They probably haven't even established a credit history yet, but they will be starting one before they know it. Broc Rosser, Florida regional representative for CredAbility, a nonprofit credit counseling service, pointed out that teens will be judged on their credit just as they begin to establish themselves after high school. Whenever they rent an apartment or purchase a cell phone, for example, their credit scores are checked. Those scores will determine if and how much these teens will pay for utility deposits and the interest rate they will receive for a car loan or a student loan.

Students may have trouble connecting the fact that the interest rate they pay will translate into how much their monthly payment will be. For a good activity on interest rates in the context of purchasing a car, the St. Louis Fed has a curriculum called Cars, Cards, and Currency that has a lesson that walks them through the process. The lesson and the entire five-unit curriculum (which also teaches about credit and debit cards) are also available in an online course format. The St. Louis Fed has also just debuted a new online course on the basics of interest rates. The course is called "Paying and Receiving Interest." The St. Louis Fed also has a mobile app that shows students how interest rates affect the cost of things that they buy.

Rosser pointed out another very important reason students need to learn to manage their money: nearly 50 percent of employers now use credit reports as part of the screening process for job applicants. He told the audience, "If you have bad credit, it's going to severely impact your ability to get a job. It doesn't just stop there. This impacts your entire career."

Dan Doyle, senior vice president of Bealls Corporation, also explained how bad credit affects people's ability to get a job. As he explained the thinking, "If they can't run their own finances, why should they trust them to run ours?" Students need to be taught that early financial mistakes can have a lasting and costly impact.

Paying for college
Billie Jo Hamilton, who directs the University of South Florida's financial aid services, talked about students' growing reliance on loans as a way to pay for college. She also said that some students come to college with no plan at all for how they are going to pay for it. Nationally, students are graduating from college with an average debt burden of more than $26,000. The total outstanding federal student loan debt now stands at $1 trillion, outpacing credit cards as the largest source of consumer debt. Hamilton had some advice for families hoping to lessen the financial burden, especially if they must take out loans. Since two-thirds of the cost of college is not tuition but living expenses, it is especially important to finish college on time. Taking a full load of classes and not dropping courses is a strategy to "finish in four" and lessen the financial burden. And having a basic financial knowledge of what interest rates are and how much college really costs is important. Individual colleges, numerous websites and the Consumer Financial Protection Bureau have cost calculators that can help students and their parents understand college financing and compare the costs of different colleges.

In an easy-money world, bankruptcy seems like an easy solution to the out-of-control debt that leaves many consumers unable to pay their bills. In Florida alone, more than 78,000 cases have been filed so far this year. But as Caryl Delano, a bankruptcy judge in Ft. Meyers, said, bankruptcy is a costly solution that, despite popular belief, does not discharge all debt. It can also affect a filer's future employability in the workforce. Although a bankruptcy judgment may discharge unsecured debt, it does not let a filer out of income tax debt, alimony and child support payments, and, most important for students to know, federal student loan obligations. In most of the cases the judge has seen in her courtroom, overextended credit leaves families unable to cope when just one thing out of the ordinary happens, such as a job loss or medical crisis. This can happen even to families whose members have a good education and good jobs.

Failing to plan for the future, especially for unexpected financial circumstances, can have catastrophic results. The dangers of living paycheck to paycheck are illustrated well in a video chat with a group of university students in the Federal Reserve Bank of Atlanta's Katrina's Classroom curriculum, which is being updated this year to include voiceover PowerPoint lessons, test-your-knowledge quizzes, and SMART lessons. More information on bankruptcy for students is available in the Kansas City Fed's reader's theater script "Professor Finance and Fed Boy Meet the Catastrophe Clan." The character Barb Bankruptcy learns how new laws make declaring bankruptcy more difficult. She also learns that the consequences of discharging debt through the courts include higher interest rates, difficulty in renting a place to live, higher insurance premiums, and possibly even the denial of employment. The lesson accompanying the script teaches students the costs and benefits of credit, credit terms, and the "three Cs of credit." It also teaches them about the 2009 CARD Act as they role play the story of two superheroes who save consumers from a shady credit and loan operation.

Credit cards and payday loans
Florida State Senator John Legg, a former history educator who cofounded Pasco County's first and largest charter school, chairs the Florida Senate's K–20 Education Policy Committee. The senator warned that students today do not understand the fine print that comes with many credit card agreements. For example, there is something called universal default, which is a common practice among credit card issuers. Under universal default, consumers who make a late payment to just one creditor—such as a landlord, utility, or cell phone—can see their rates raised by their other creditors, even if they were never late in paying those other creditors. Although the 2009 credit card reform law (the CARD Act) has ended universal default for existing credit card balances, card companies are still allowed to use universal default on future credit card balances if they give at least 45 days' notice of the change. Even with the law's changes to credit card statements that try to educate borrowers to the realities of the cost of making only a minimum payment each month (the "Shumer box"), students are still largely unaware of the consequences. For instance, they may not understand that paying only the minimum of $500 each month on $25,000 in credit card bills at a 19.99 percent interest rate will take them 89 years to pay off. When the balance is finally cleared, the interest paid on that balance will be more than $120,000. Change the interest rate to 24.99 percent and, because the interest charged each month exceeds the minimum payment amount, they will never be able to pay off the balance. There are various online credit card calculators that do a good job of showing the dangers of piling up too much credit card debt from a payment perspective, not to mention the fact that a high debt-to-income ratio can impact a person's ability to borrow in the future or even to get a job.

Consumers whose lack of money skills has cut off their ability to borrow through traditional means such as bank loans and credit cards sometimes resort to nontraditional lenders, such as payday loan organizations. Rosser from CredAbility has found that most clients who had payday loans thought the interest rate was between 12 percent and 15 percent when in reality they usually had an interest rate exceeding 500 percent.

The St. Louis Fed's It's Your Paycheck curriculum, which is also available as an online course, teaches students about the dangers of payday loans while showing them how to calculate interest rates. The nine-lesson curriculum also features lessons on budgeting, saving, and credit. The St. Louis Fed also has Personal Finance 101, an online activity that features an online chat that teaches students more about why payday loans are an expensive and risky option. In the chat, Jasmine counsels her friend Alexis, who has gotten in over her head with payday lenders because of a car repair and now realizes that she has made a costly financial mistake.

Saving for retirement
Teens live in the world of the here and now, so retirement seems like something only their parents need to worry about. Companies frequently can't get their young employees to understand the benefits of employer-match savings programs. "They simply don't understand the tax benefits of it and they don't understand the employer match piece of it," said Beall's Doyle. He explained that his company instituted lunch-and-learn sessions to educate employees on the benefits on "what is essentially free money being given to them through the employer match." Even more troubling is the fact that over 20 percent of Americans are borrowing from their 401k funds, using them as an emergency fund rather than an investment for the future. CredAbility's Rosser pointed out that a study found that by 2050, less than one-third of all workers will have anything invested in a 401k.

The St. Louis Fed's No Frills Money Skills video series delves into the topic, using a catchy game show format to teach about the types and benefits of various savings plans. An online assessment accompanies the video. Another benefit of saving touted at the conference is this: studies show that a child who has a savings account is seven times more likely to go to college than a nonsaver.

The importance of teaching them young
It is critical that young people understand that the financial decisions they make today can have a lasting effect on their futures. According to a Harris Poll conducted for the American Institute of Certified Public Accountants, although 87 percent of parents talk to their children about the importance of good eating habits and getting good grades, one in three parents never or rarely talk to their kids about money. This means that teachers have a very important role to play. The Federal Reserve has a number of financial literacy resources to help teach these valuable lessons, so that students are better prepared to make wise financial decisions and avoid the pitfalls of financial illiteracy that often bring lasting consequences.


By Lesley Mace, economic and financial education specialist with the Jacksonville Branch of the Federal Reserve Bank of Atlanta

September 30, 2013