Preventing another national financial crisis may be as simple as teaching good financial behavior in high school. The office of Financial Education was established in 2010 as a result of the Dodd-Frank Act. The office serves to teach individuals to make smart personal finance choices in hopes of avoiding another national economic meltdown. While mandating students enroll in personal finance courses to learn to better manage their money seems like a viable solution, a new working paper, High School and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses by Shawn Cole, Anna Paulson, and Gauri Kartini Shastry, published by Harvard Business School suggests math classes, not personal finance classes, may work best for teaching students good financial behavior in high school.
The paper suggests schools will have more success teaching good financial behavior in high school by simply increasing their offering of math classes instead of financial education classes. The paper also reports that overall mathematical competency is a more accurate indicator of future economic success than financial literacy.
In their research, Cole, Paulson, and Shastry analyzed three datasets: the 2000 U.S. census, the Federal Reserve Bank of New York Consumer Credit Panel (FRBNY CCP), and the Survey of Income and Program Participation (SIPP). They compared the financial histories of students who had graduated before the mandatory classes were offered against students in the same state who had graduated after the mandatory classes were offered. Using this method, they found that mandatory personal finance classes had “no effect on investment income, the value of financial assets owned, or home equity.” In other words, high school personal finance courses do nothing to safeguard against bankruptcy, foreclosure, and unmanageable credit ratings.
Meanwhile, the data showed that one additional high school math class reduced the probability of the students experiencing foreclosure by 0.3 percentage points (base of 9%), reduced the probability of bankruptcy over a 22 year period by 0.4 percentage points (base of 20%), and reduced the fraction of quarters the students were delinquent on their credit card bills over a 10 year period by 0.2 percentage points (base of 12%).
Historically, those in support of mandated personal finance courses point towards evidence showing an association between financial literacy and sound financial decisions. Yet it is almost impossible to attribute financial literacy to general wealth and security, as there are so many other aspects of the problem to consider. Financially-illiterate households tend to have less education, be poorer, and work for different employers than wealthier households, making it difficult to tease apart any of these factors as a definitive case of cause-and-effect.
CONTINUE READING Can Good Financial Behavior Be Taught In High School? or Read the Working Paper High School and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses