By Assemblyman Ted W. Lieu and John Hope Bryant
Every year we graduate millions of high school students who are financially illiterate. Nationwide financial literacy tests administered during the past decade by Jump$tart, a coalition of financial education organizations, show that the average score for a high school senior continues to hover in the low to mid-50 percent range — a score that equates to an F-minus.
These graduates enter the workforce or go to college lacking basic financial survival skills. They do not know how to balance a checkbook, let alone understand the difference between a stock, a bond or a certificate of deposit. They will later become part of the mass of 25- to 34-year-olds who have an average credit-card debt of $4,088, with 1 in 10 owing more than $7,000, and will spend nearly a quarter of their income just on debt payments.
With the dizzying proliferation of credit and debit cards, non-traditional loans, instant credit and Internet-based financial transactions, more people make financial choices independently and at a much younger age. Most of our schools, however, have not adjusted to this new financial order. Schools teach our children about pi and the Pythagorean theorem, but not about credit scores and annual percentage rates. In today’s world, knowing that a FICO score of 500 is awful and how to avoid it is an everyday necessity.
If children leave school without understanding basic financial concepts, it may be too late. Although some financial institutions and non-profits provide financial literacy education, there are precious few programs aimed at teaching financial education to adults. Financially illiterate teenagers often become financially illiterate adults. They make unwise financial decisions and become financial victims.
Bankruptcy on rise
The consequences of an increasingly financially illiterate nation are dramatic. In 2005, more than 2.1 million Americans filed for bankruptcy, the largest number in our recorded history. Part of this increase was probably due to the federal Bankruptcy Reform Act, but part of it was certainly due to poor and uninformed financial decisions. In 2006, our nationwide savings rate dipped to negative 1 percent, the lowest since the Great Depression. That means Americans are spending all of their disposable income and then increasing their borrowing to finance additional purchases.
The structure of our financial system — which places a premium on freedom of choice — compounds the problem of financial illiteracy. The touchstone of our banking and finance laws has always been based on disclosure. We allow financial institutions to sell all types of financial products as long as they disclose the terms. Because each consumer is unique, maximizing financial options makes sense. A system based on disclosure, however, utterly fails if the consumer does not comprehend what is being disclosed.
Another blow to poor
Financial illiteracy also has a disproportionate effect on minorities and the poor. Minorities score lower than white students on the Jump$tart financial literacy tests, and students from families earning between $40,000 and $80,000 score lower than those from families earning more than $80,000.
We fight epic battles over whether to raise the minimum wage, but fail to teach the poor the financial knowledge to help lift them out of poverty. We fail to educate lower-income working families about the Earned Income Tax Credit, a federal program that can give up to $4,536 dollars back to them in tax refunds. In California for instance, more than $1 billion in federal EITC money was left unclaimed last year by the working poor.
It is time to acknowledge the serious problem of financial illiteracy. We must incorporate a financial literacy curriculum in all our schools. We must increase the number of financial education programs for adults and seniors. We must have an aggressive education campaign about the EITC. Through a sustained collaboration between government, non-profits and industry, we can give people the financial tools to navigate our complex financial world today. Let’s stop churning out generation after generation of financial victims, where more people file for bankruptcy than graduate from college.
ASSEMBLYMAN TED W. LIEU is a Democrat from and chair of the Assembly Banking and Finance Committee. JOHN HOPE BRYANT is chair and CEO of Operation Hope, a nationwide non-profit dedicated to financial literacy education and the eradication of poverty. They wrote this article for the Mercury News