Why Indiana's Mandatory K-12 Personal Finance Education is not the Silver Bullet in Improving Financial Literacy

After the Great Recession, Indiana sought to prevent future catastrophes by mandating financial literacy instruction in schools. Is this a reasonable approach, and what policies can the state look at to ensure more Hoosiers have the information they need to make sound financial decisions?

A generation or two ago, many working families had fewer financial decisions to navigate. They received health insurance and pensions through their employers, and banks offered a more limited range of mortgage products. Within the changing world of both work and finance, more and more options have been placed in the hands of consumers who frequently struggled to assess them. When the mortgage crisis hit, household financial decision-making received a new level of scrutiny, and surveys uncovered that not only were many adults in the U.S. ill-equipped to make basic financial decisions, but they also believed they were more capable than their performance on test questions suggested. While personal finance education had been promoted for many years prior to the crisis, it received a boost through new federal programs and states requirements to add personal finance classes or content to the mandatory K-12 curriculum. The logic is certainly compelling: if well-educated about financial decision-making, individuals will be better equipped to navigate a world that increasingly places important financial decisions about things like insurance, borrowing, saving, and investing in the household’s hands. The key question is, does it work?  

Indiana decided to give it a shot. Beginning with the 2009 school year, Indiana lawmakers required that all students receive personal financial responsibility instruction through Indiana Code 20-30-5-19. The State Board of Education approved guidelines for teaching all students in grades six through 12 at Indiana’s state-accredited schools. Defining financial literacy as “the ability to use knowledge and skills to manage one’s financial resources effectively for a lifetime of financial security,” the Department of Education adopted six standards for financial literacy with benchmarks at 8th and 12th grade:

·         Demonstrate management of individual and family finances by applying reliable information and systematic decision making.

·         Analyze how education, income, career, and life choices relate to achieving financial goals.

·         Manage money effectively by developing financial goals and budgets.

·         Manage credit and debt to remain both creditworthy and financially secure.

·         Analyze the features of insurance, its role in balancing risk and benefits in financial planning.

·         Analyze saving and investing to build long-term financial security and wealth.

However, the state did not put in place any systematic teacher training, end-of-course assessments, or other mechanisms to support the implementation of the new requirements. Nor did it engage in any study of the effects of the new standards on decision-making down the road. Unfortunately, Indiana is not unique in requiring personal finance instruction without fully supporting its implementation or measuring its results.

It is perhaps unsurprising, then, that K-12 personal finance education mandates have not been the silver bullet policymakers hoped. This 2014 Harvard Business School study concluded that overall, the mandates did not have the desired effect on savings or asset development, although other research focused on states with supported mandates has found positive effects. For example, researchers compared three states with more intensive mandates and/or implementation supports (e.g. exit tests, teacher training, model curriculum, tools to conduct simulations) to other states without mandates and found increased average credit scores and lower delinquency rates. At a minimum, then, we can say that a K-12 mandate alone is likely to be insufficient to change financial behaviors but supported mandates may.

At the same time, even reviews of fully-implemented personal finance curricula offer mixed results. The Council for Economic Education suggests that students who receive instruction in personal finance from a well-trained teacher are more likely to save, budget, and invest.  However, a recent meta-analysis of studies on financial education and financial behaviors found that while students may show short-term increases in knowledge, the effects of general financial literacy classes diminish over time and may not change behaviors all that much. Research also suggests that this is particularly true for low-income samples.

So what can we make of all this? Some speculate that providing standalone personal finance education to older students without first infusing it into elementary school curriculum and providing regular opportunities to practice new skills is a misstep that needs correcting. Others suggest that stepping back to a slightly more nuanced version of the past with “defaults, ‘nudges,’ and ‘choice architecture’ such as opt-out retirement savings plans and ‘plain vanilla’ financial products” would be both less costly and more effective than K-12 financial education. These policy options sometimes meet with resistance, particularly where individuals’ needs and preferences differ. For example, how much money to set aside for retirement depends a great deal on factors like projected retirement age and desired income. To help resolve this, advocates of this option propose “smart agents” or recommender systems that tailor advice based on individuals’ personal characteristics - such as desired age of retirement.

There is also some evidence from that “just-in-time” financial education tied to a specific behavior or decision may be helpful. In other words, part of the reason financial education in the K-12 space may lack robust results is due to difficulty retrieving and applying knowledge from earlier education to a personal decision several years later. Therefore, education that occurs in the moment of a major decision or at a time of life transition may be helpful. Studies have shown some success, for example, coaching college students as they sign up for college loans or home-buyers faced with mortgage decisions.  

Finally, given that many Hoosiers do not make enough money to cover the basic costs of living, it is perhaps unsurprising that that they miss payments, have low credit scores, and have not accrued assets – and possible that this would be true whether they received financial education or not. Sufficient income is an important precursor to any expectation of improved financial decision-making. In short, a combination of steady, sufficient income, evidence-based K-12 personal finance education, “just-in-time” financial coaching, and smart policy nudges may all be needed to better equip individuals to navigate the complex new world of personal finance.