The Private Sector: The ABCs of financial literacy and No Child Left Behind
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I recently asked a group of young people how they expected to make money as adults. Most "planned" to get rich by landing a job on Wall Street, scoring a basketball contract, or becoming a rock star.
The answers were disheartening, but not surprising. The truth is that too many Americans -- young people especiallys -- are financially illiterate.
Consider that only 51 percent know that the purpose of diversifying a portfolio is to reduce risk. This isn't an esoteric concept -- it's what mutual funds are based on.
Or look at the National Council on Economic Education's economics and personal finance quiz. On average, adults answer only 70 percent of the questions correctly. A student, on average, receives a failing 53 percent.
The consequences of this lack of knowledge are significant.
By his or her senior year, the typical college student has racked up $3,000 in credit-card debt. One in 10 owes more than $7,000. For many students, the interest owed on their credit cards exceeds the principal of their college loans. And 18- to 25-year-olds are filing for personal bankruptcy in record numbers -- 200,000 did so last year.
Moreover, financial illiteracy is one of the main reasons why the United States has such a low savings rate. Personal savings as a share of disposable income hovers just above zero, at 0.4 percent. Just 42 percent of adults have calculated how much money they will need for retirement.
Unless public schools do more to increase financial literacy, the personal-savings rate will probably stay in near-zero territory because young people aren't learning budgeting skills at home. Only 26 percent of 13- to 21-year-olds were, or are, being taught to manage money by their parents.
That's why it makes little sense to leave financial literacy on the backburner of the debate over reauthorization of the No Child Left Behind act.
The public recognizes that students need a basic education in economics and personal finance to manage their money effectively once they graduate -- a full 97 percent of adults believe that economics should be taught in high schools.
No Child Left Behind, however, does not recognize this reality. The 2001 federal law requires the nation's public schools to test students only in math, reading and writing.
Schools are then held responsible for their students' performance on these standardized tests, and must provide extra help -- such as tutoring -- to low-scoring pupils. If their scores don't improve by a certain amount, these students can to transfer to private charter schools, and the state must pay their tuition fees. Schools whose students consistently fail to meet test-performance benchmarks may even be shut down.
The accountability that No Child Left Behind has introduced is arguably welcome. But it has had a significant impact on what public schools teach.
Mostly, they teach what's on the tests. Indeed, only 17 states require an economics class before graduation, and just seven states require a personal finance class.
The actual legislation reauthorizing No Child Left Behind may not be the best vehicle for making financial literacy a mandatory part of every schoolchild's curriculum. But at the very least, lawmakers must ensure that the Department of Education is following through on its promise to encourage schools to incorporate financial literacy in their math and reading curriculum.
For instance, under No Child Left Behind, local school districts are allowed to use federal "innovative assistance programs" funds to support activities that promote personal financial education.
Also, thanks to No Child Left Behind, the National Council on Economic Education received a five-year grant in 2005 to boost its efforts to promote economic and financial literacy among students across the country.
These sections of the original legislation shouldn't just be reauthorized; they should be expanded.
Albert Einstein famously called the concept of compound interest a miracle. Thousands of students would undoubtedly agree with him if they knew how much it could make their money grow.
But too few students, especially low-income ones, do. Public schools should introduce this lucrative concept to them. They also could create partnerships with banks so that students can actually invest their money and watch it grow.
This will give them a compelling reason to save. And it will help them become financially responsible adults.
First Published January 1, 2008 12:00 am