Statement of Chairman Ben S. Bernanke
Chairman Board of Governors of the Federal Reserve System
Before the Committee on Banking, Housing, and Urban Affairs of the United States Senate
May 23, 2006
Chairman Shelby, Senator Sarbanes, and members of the Committee: I am pleased to be here to discuss financial literacy and financial education. My remarks will emphasize the importance of financial literacy, both as a source of better decisionmaking by consumers and as a means of improving the functioning of financial markets. I will also highlight various Federal Reserve System initiatives to promote financial education and address some of the opportunities and challenges that policymakers and financial educators face as they seek to improve financial literacy.
Technological advances have dramatically transformed the provision of financial services in our economy. Notably, increasingly sophisticated information technologies enable lenders to collect and process data necessary to evaluate and price risk much more efficiently than in the past. For example, the expanded use of credit-scoring models, by reducing the costs of making loans and by increasing the range of assets that can be securitized, has facilitated greater extension of credit to a larger group of borrowers. Indeed, we have seen an increasingly wide array of products being offered to consumers across a range of incomes, leading to what has been called the democratization of credit. Likewise, innovation has enhanced financial services, such as banking services, and increased the variety of financial products available to investors.
Even as the availability of credit has increased, so has the range of potential providers. In particular, in recent years, the number of nonbank entities providing credit products and other financial services has increased significantly. Data from a recent paper on alternative providers of financial services revealed that, between 1996 and 2001, the number of nonbank check-cashing establishments doubled in the United States. Payday lending outlets, a source of credit that was almost non-existent a decade ago, now number more than 10,0001. Data from the Federal Reserve Board’s 2004 Survey of Consumer Finances indicate that the share of households with a loan from a finance company increased from 13 percent of households in 1992 to 25 percent of households in 20042. While many of these providers cater to low- and moderate-income consumers, their customers include people with a wide range of incomes and financial experience3. Clearly, to choose wisely from the variety of products and providers available, consumers must have the financial knowledge to navigate today’s increasingly complex financial services marketplace. Consumers with the necessary skills to make informed financial decisions about purchasing a home, financing an education or their retirement, or starting a business will almost certainly be economically better off than those lacking those vital skills.
Informed financial decisionmaking is also vital for the healthy functioning of financial markets. Like any other businesses, financial service firms will provide better products at better prices when they are subject to market pressures imposed on them by informed consumers. Regulators have an important role in helping to ensure that financial service companies provide necessary information to their customers, but such information is of value only to the extent that it can be understood and applied by potential users of these services. Market competition among financial providers for the business of informed consumers is, in my judgment, the best mechanism for promoting the provision of better, lower-cost financial products.
Research on the Impact of Financial Education
Research suggests that financial education can help consumers make better choices. For example, for many decades, various nonprofit organizations have offered homebuying programs and credit counseling to improve consumers’ financial management skills and reduce the risk of default or delinquency. Research on the effectiveness of these programs has generally associated financial counseling with improvements in consumers’ credit management. For example, one study that analyzed nearly 40,000 affordable mortgage loans targeted to lower-income borrowers found that counseling before the purchase of a home reduced ninety-day delinquency rates by 19 percent on average4. This study also documented a 34 percent reduction in mortgage delinquency rates among borrowers who received individual counseling rather than classroom or telephone instruction.
In another study, researchers found that credit counseling had a positive effect on creditworthiness, especially for individuals with the lowest credit scores. They examined credit bureau data on 14,000 recipients of one-on-one credit counseling and found that, over a three-year period, these borrowers reported reduced debt levels and delinquency rates5. Another, preliminary study found that after receiving on-line instruction in credit management new or recently delinquent credit cardholders were more likely to pay on time and to have lower revolving balances6.
Other research has looked at the link between financial knowledge and broader financial management skills. For example, one study examined the relationship between financial knowledge and financial behavior such as cashflow management, savings, and investing. Overall, the study found a significant correlation between the level of financial knowledge and good financial management practices. Individuals who were familiar with financial concepts and products were found to be more likely to balance their checkbook every month, budget for savings, and hold investment accounts6. Similarly, another study on consumer creditworthiness and consumer literacy determined that financial knowledge is the single best predictor of behaviors, such as budgeting, saving, and shopping responsibly, that translated into positive outcomes on credit bureau reports. This study also found that the main sources of knowledge were bad experiences, school instruction, and other education 8.
The Federal Reserve System’s Commitment to Financial Literacy
The Federal Reserve System has long recognized the value of economic and financial education for producing better-informed citizens and consumers. Broadly, our financial education activities fall into five primary categories: (1) increasing access to information about financial products and services, (2) promoting awareness of the importance of financial literacy, (3) collaborating with educational and community organizations, (4) supporting research and identifying best practices, and (5) providing financial education for its own employees. I will briefly comment on each of these.
Increasing Access to Information about Financial Products and Services
One important means by which the Federal Reserve helps consumers make better informed financial decisions is through its consumer protection rule-writing. For example, in pursuit of the goals set by the Congress, our regulations require the disclosure of specific information on terms and fees associated with credit and deposit accounts. The Truth in Lending Act of 1968 (as implemented by Regulation Z) requires uniform methods for computing the cost of credit and for disclosing terms on a broad range of credit products--credit cards and other lines of credit, automobile loans, student loans, and home-purchase and other home-secured loans. In addition, the Truth in Savings Act, implemented by Regulation DD, requires uniform disclosure of certain cost information on deposit accounts, including the annual percentage yield. These disclosures provide consumers with the essential information they need to assess the costs and benefits of financial services offered by different providers. Standardization of disclosures allows for comparison among similar products and thus provides consumers with an important shopping tool.
One of the challenges of creating effective disclosures is presenting information so that it is as accessible and understandable as possible. To address this issue, we conduct focus groups and consumer testing to inform the rule-writing process. Because regulatory language can be quite technical, the Federal Reserve also publishes numerous brochures that explain the terminology and consumers’ rights in straightforward terms or provide useful information on particular areas of concern, such as predatory lending and identity theft. Focus groups convened over the years have found that the Federal Reserve’s consumer brochures were regarded as high-quality, unbiased publications. We have also found that counselors and educators often use our brochures when teaching about financial products and services.
Promoting Awareness of the Importance of Financial Education and Literacy
The Federal Reserve System has also worked to promote awareness of the importance of financial education and literacy. In May 2003, the Board and the twelve Reserve Banks participated in a national campaign to call attention to the value of personal financial education and the wide variety of financial literacy tools and resources available. This multi-media initiative, entitled "There’s a Lot to Learn about Money," included a public service announcement and a toll-free number for obtaining financial education resources. Consumers were also directed to our education website, www.federalreserveeducation.org, to obtain more-substantive information, ranging from materials about personal financial literacy to interactive tools for economic education. The website links to a wide variety of financial education resources at the national, regional, and local levels.
Collaborating with Educational and Community Organizations
A third piece of the Federal Reserve’s financial education effort is its collaboration with a wide range of educational and community organizations. Staff members from the Federal Reserve Board advise and assist national organizations such as the Jump$tart Coalition for Personal Financial Literacy, the Conference of Mayors’ DollarWi$e Campaign, Operation HOPE, the American Savings Education Council, and America Saves on the development of policies, programs, and partnerships.
The Federal Reserve Banks also join with regional organizations to address financial education needs. For example, the Federal Reserve Bank of Cleveland has worked with community financial educators to form regional networks that combine resources and share best practices. The Federal Reserve Bank of Chicago sponsors "MoneySmart Week," partnering with banks, businesses, government agencies, schools, community organizations, and libraries to host activities designed to help consumers learn how to manage money. The Federal Reserve Banks of San Francisco and Minneapolis have worked with leaders in the Native American community to develop financial education materials. As you are aware, the Federal Reserve Board also participates in the federal government’s Financial Literacy and Education Commission.
Collaboration with outside organizations also plays a central role in the Federal Reserve’s support for broader economic education. We believe that a better understanding of how the economy works promotes both better citizenship and greater personal economic success. As one means of supporting this objective, Reserve Bank staff members advise high-school teachers on ways to help students understand economics. Perhaps the best-known economic education initiative in the Federal Reserve System is the Fed Challenge. This academic competition offers high-school students the opportunity to learn more about how the Federal Reserve develops monetary policy and how those policies affect the economy. Federal Reserve Bank economists provide instruction guides for developing a Fed Challenge team. These teams compete at local, regional, and national levels. The competition hones students’ analytical and presentation skills, while expanding their knowledge of economic principles. I have personally judged the national finals of this competition on two occasions and can attest to the remarkable economic knowledge displayed by these students.
I have included an appendix to this testimony describing some of the significant System and Federal Reserve District programs and collaborative efforts in financial and economic education.
Promoting Research and Identifying Best Practices
The Federal Reserve also promotes, and engages in, research relevant to financial literacy. For example, understanding how families are doing financially helps financial educators decide how best to focus their efforts. The Federal Reserve Board conducts the triennial Survey of Consumer Finances to gain insight into U.S. families’ assets, borrowing, retirement saving, and use of financial institutions. Many researchers and practitioners use this unique data set in analyzing conditions and trends in consumer finances.
Given the significant commitment to financial education by government, private-sector, and nonprofit organizations, it is important to determine whether such programs actually improve consumer financial literacy and behavior. Toward this end, the Federal Reserve undertakes and promotes research that aims to increase our understanding of the financial education programs and delivery channels that work best. For example, the Board’s Division of Consumer and Community Affairs engages in research on learning preferences and consumer financial behavior. Currently, Federal Reserve researchers are collaborating with the Department of Defense to conduct a three-year longitudinal study of the effect of military-sponsored financial education on soldiers’ financial behaviors. Since 1999, the Federal Reserve System’s biennial Community Affairs Research conference has generated and highlighted new research on the efficacy of financial education. In fact, much of the research that I cited earlier has been presented at these conferences. The Federal Reserve Bank of Chicago maintains the Financial Education Research Center, which provides access to online resources for researchers, educators, and program developers.
Economists at the Federal Reserve Banks also assess the effects of financial education. The Federal Reserve Bank of Kansas City is currently evaluating the role that financial knowledge and education play in personal money management behavior. In addition, the Federal Reserve Bank of Boston plans a year-long evaluation of its credit repair education program, which is provided to taxpayers filing for the Earned Income Tax Credit at volunteer tax preparation sites where Reserve Bank staff offer their assistance. This study seeks a better understanding of the underlying determinants of credit problems and ways in which credit counseling can improve individuals’ credit scores.
Employee Financial Education
Besides these externally focused initiatives, the Federal Reserve seeks to improve the financial literacy of its own workforce. The Board offers a comprehensive financial education program to help employees plan their retirements and better use their benefits. We also offer regular seminars on topics ranging from budgeting and saving to buying a home or investing for children’s education. The Board maintains an internal website with links to information on quality-of-life matters, including managing finances. The website is organized by age groups and life events to help employees identify the information resources that are most relevant to their circumstances.
We view our employee education program as a win-win proposition. Research has determined that such programs benefit employers as well as employees. For example, one study found that workplace financial education programs contribute to improved worker performance, increased job satisfaction, and decreased absenteeism9. The Federal Reserve Bank of Kansas City is studying how financial education programs affect employers’ bottom lines.
Challenges and Opportunities
Financial education is a critical component of a robust and effective financial marketplace, but it is not a panacea. Clear disclosures, wise regulation, and vigorous enforcement are also essential to ensuring that financial service providers do not engage in unfair or deceptive practices. Even the most financially savvy consumer may fall victim to fraud or deception.
As policymakers and educators know, providing effective financial education presents many challenges. Efforts to increase financial literacy are resource- and time-intensive. Counseling programs require trained instructors and, to be most effective, must be available to consumers near the time at which they are making an important financial decision, such as whether to buy a home. Some school programs now include financial literacy courses or modules, but curricula must be regularly updated to remain relevant and teaching methods must be adapted to the backgrounds and interests of students. In some cases, financial education efforts are constrained by gaps in math and reading literacy, which impede comprehension of fundamental financial concepts.
Recent findings by the Jump$tart Coalition for Personal Financial Literacy illustrate the magnitude of the challenges still facing us, particularly in the case of young people. The Coalition has administered financial literacy tests to high-school students annually for the past nine years. Student performance on these tests has not improved during that time: The average score reported in the 2006 survey was 52.4 percent, up from the low of 50.2 percent in 2002 but below the 1998 score of 57.3 percent. The survey results also show a gap in financial literacy between minority and non-minority students: In the most recent survey, white students scored an average of 55 percent while African-Americans scored 44.7 percent and Hispanics scored 46.8 percent. Clearly, there is still much work to do to understand how to improve the financial literacy of young people. On the other hand, the Jump$tart survey does confirm the importance of financial literacy, in th at students who score higher on the test tend to make better financial decisions. For instance, students who reported having bounced a check averaged just 45.8 percent on the financial literacy test while students with checking accounts who had never bounced a check scored higher on average, at 53.4 percent.
Because financial literacy leads to better outcomes for individual consumers and for our economy generally, continued effort in this area is highly desirable. Fortunately, given the current level of interest in improving financial literacy and education both in the United States and internationally, opportunities abound for cooperation and collaboration among public, private, academic, and community institutions. Advances in technology also offer great promise for improving the quality and delivery of financial information and for sharing of research and best practices among financial education providers.
In closing, I want to reaffirm the Federal Reserve System’s commitment to increased financial literacy and improved financial education. We look forward to continuing our collaboration with the many partners who share these objectives.
Financial Education Programs and Initiatives
In Order of Federal Reserve Bank District
Federal Reserve System
There’s a Lot to Learn About Money is the Federal Reserve System’s financial education campaign. This web-based resource features the brochure and the public service announcement used in launching the campaign, as well as links to financial education resources available through the Federal Reserve Banks and through organizations within the Federal Reserve Districts.
American Savings Education Council is a national coalition of public- and private-sector institutions committed to making saving and retirement planning a priority for all Americans. ASEC is a program of the Employee Benefit Research Institute Education and Research Fund (EBRI-ERF). ASEC brings together public- and private-sector partners to share information on best practices and to collaborate on financial-security initiatives, including the federal government's Savings Matters campaign (now in its tenth year), the Choose to Save® public service campaign, and the U.S. Securities and Exchange Commission’s Facts on Saving and Investing campaign. The Federal Reserve Board is an ASEC mission partner, along with other government agencies, educational institutions, and nonprofit organizations committed to increasing awareness of the importance of saving and financial education.
The Federal Reserve is active in the America Saves initiative and serves on the National Savings Forum, its national advisory committee. The mission of this nationwide campaign--sponsored by nonprofit, corporate, and government groups--is to help individuals and families save and build wealth. The program is targeted at low- and moderate-income families, to raise their awareness and support their efforts to become more financially secure. Through local and regional campaigns, America Saves recruits "savers," who commit to the program and pledge to save. As a result of their commitment, savers receive information and education about strategies for fulfilling their financial goals, such as reducing debt, building an emergency fund, and saving for a home, education, or retirement. The Federal Reserve Bank of Cleveland played a significant leadership role in developing and launching Cleveland Saves, a pilot program for the national America Saves campaign. The program has also launched the targeted initiatives Black America Saves, Hispanic America Saves, and Military Saves.
Financial Literacy and Education Commission (FLEC), established by Congress in 2003 through the passage of the Financial Literacy and Education Improvement Act, was created to "improve the financial literacy and education of persons in the United States through development of a national strategy to promote financial literacy and education." The Federal Reserve, along with numerous other federal government agencies, is a member of this commission, which is supported by the Treasury Department’s Office of Financial Education.
U.S. Conference of Mayors’ National DOLLAR WI$E Campaign was developed to encourage the development of ongoing local strategies to educate citizens about financial issues. With improved basic money management and financial planning skills, citizens are in a better position to own homes, raise healthy families, educate their children, and invest in small businesses. The Federal Reserve Board serves as an advisor to the National DOLLAR WI$E Campaign. The Federal Reserve Banks of Cleveland, Chicago, and St. Louis provide supporting programs that have been described as best practices by the U.S. Conference of Mayors.
Operation HOPE is a nonprofit organization that provides lower-income and minority populations and communities with financial education and access to financial services. Its mission is to improve asset-building skills and accessibility of mainstream financial services for its constituencies. The organization, founded in 1992, is effective in creating public-private collaborations to fulfill its mission. Among its many national partners are the Federal Reserve Board, the FDIC, the Department of Commerce, H&R Block, E*Trade, Citigroup, and Bank of America. The Federal Reserve System has partnered with Operation HOPE in launching its youth financial education program Banking on Our Future in Washington, D.C.; Providence, Rhode Island; Atlanta, Georgia, and Los Angeles, California. A Federal Reserve Board staff member serves on Operation HOPE’s Mid-Atlantic advisory board.
The Jump$tart Coalition for Personal Financial Literacy, in its 10-year history, has brought visibility and--through its biennial survey of high school seniors--research-based data to the financial literacy movement. Jump$tart is a Washington, D.C.-based not-for-profit organization that seeks to improve the personal financial literacy of students in kinderga rten through college. The coalition has grown to include more than 170 national partners and 43 affiliated state coalitions. One of its premier services is the Jump$tart Personal Finance Clearinghouse (www.jumpstartclearinghouse.org), a web site that lists more than 580 financial literacy titles and provides information about speakers and training programs. The Federal Reserve is a partner and serves on the Jump$tart Coalition board of directors.
The Fed Challenge, in its twelfth year, is an academic competition in which five-member student teams play the role of monetary policy makers. In this role, each team makes a presentation in which it analyzes the current economic situation and advocates a monetary policy prescription. The team then engages in a question-and-answer session in which the judges probe to examine students’ understanding of the mechanics of monetary policy, macroeconomic concepts, and the workings of the Fed. The Fed Challenge has been a great success, as measured by participants’ grades on Advance Placement Exams, adoption of the program by other central banks (for example, the central banks of England, New Zealand, and South Korea); recommendations in the New York State Economics Syllabus, textbooks, and the National Academy Foundation’s Academy of Finance curriculum; and anecdotal evidence offered by teachers that the Fed Challenge profoundly affects participants’ career choices. The Fed Challenge is organized by the Federal Reserve Bank of New York, and many other Federal Reserve Banks participate.
FederalReserveEducation.org is the Federal Reserve System’s recently redesigned financial education web site, designed to increase the use of Federal Reserve educational materials and promote financial education in the classroom. The web site has material intended for the general public, as well as materials specifically geared toward teachers and high school and college students. It provides easy access to free educational materials, a resource search engine for teachers, and games for various ages and knowledge levels. FederalReserveEducation.org is maintained by the Federal Reserve Bank of Kansas City.
Federal Reserve Community Affairs Research Conferences are sponsored to invite and highlight research on a variety of issues that affect consumer financial service policies and practices. Since 1999, this biennial event has featured research that evaluates and explores the role of financial education in improving financial outcomes for consumers, particularly those with lower incomes.
Source: Federal Reserve