Federal Reserve: Financial Education in Schools Lowers Bankruptcy and Reduces Debt

Amid today’s skyrocketing debt crisis, the vast personal financial impact of assuming excessive debt has become very widely known. Student debt loads remain a significant and serious problem. High loan delinquency rates are troubling, while industry experts have long contended that the reported numbers are understated. In addition, college graduates have been facing high and rising costs and the job market outlooks remains weak. To make matters even worse, those carrying debt often do not understand the terms of their loan agreements or how to manage and pay off their debt in an effective manner, sparking greater personal financial problems for debtors and their families.

Notwithstanding the many economic, social, and personal financial issues that stem from debt, new research illustrates that financial education in schools can help address these problems and minimize the negative effects of carrying excessive debt. Federal Reserve Bank authors of “Financial Education and the Debt Behavior of the Young” researched the effects of broad expansion of personal finance courses in high schools throughout the United States. While only one state (Illinois) required a financial literacy course and only ten states included basic economics in the high school curriculum in 1999, in the ten years that followed, the majority of states instituted mandatory courses in financial education. To assess the results of this financial education, the authors followed the students that had to take these compulsory courses and compared their later activities with debt using the New York Federal Reserve’s Consumer Credit Panel.

The results were impressive. First, greater levels of financial education were found to decrease rates of bankruptcy among former students. Second, higher levels of financial literacy translated into faster loan repayment times. Moreover, among additional findings detailed in the report, those who took courses in financial education delayed the purchase of their first home to a material degree, as they were more cautious with incurring debt to do so.

The findings of the research could not have come at a better time, as local, state and national governments in both developed and developing countries are considering how to best implement financial education initiatives to enable individuals and families to become more empowered with respect to debt and their other personal financial affairs. The full research report can be found here.