Robert Segal

Gov. Charlie Baker signed into law in January new legislation that requires state education officials to establish financial literacy standards for students in kindergarten through grade 12. The goal is to train students in decision-making skills that will help them become financially self-supporting adults. Topics will include understanding loans, renting or buying a home, saving for college and investing for retirement.

The law culminates a 14-year effort to improve Massachusetts students’ financial skills. State legislators have introduced more than 20 bills since 2005 attempting to mandate the inclusion of financial literacy instruction in the curriculum in schools. The new law requires the state Department of Elementary and Secondary Education to establish financial literacy standards before the start of the 2019-2020 school year.

“Financial advisers, banks and financial institutions have said that when they interact with young customers that they’re seeing a lot of young people are not fully grasping everything from what credit cards are, compound interests, and just general costs once they’re out of high school and college,” Acton state Sen. Jamie Eldridge, an original sponsor of the bill, said in a statement.

State Historically Failed Students

For a number of years, Massachusetts had received a failing grade on its efforts to produce financially literate high school graduates, according to studies conducted by Champlain College’s Center for Financial Literacy. The Center for Financial Literacy issues a national report card that assigns grades to each state based on the effectiveness of personal finance education. Massachusetts was among 10 states to receive an “F” grade in the 2017 report, indicating that the “state has virtually no requirements for personal finance education in high school.”

John Pelletier, director of the Center for Financial Literacy, noted that while high schools have improved incrementally, only five states have received an “A.” He said studies continue to show that financial literacy is linked to positive outcomes like wealth accumulation, retirement planning, and avoiding high-cost alternative financial behavior like payday lending and paying interest on credit card balances. Conversely, he said, financial illiteracy was partly to blame for the Great Recession and to minimize the impact of any future recession or financial crisis, Americans must be educated in personal finance.

The center asserts that high schoolers are the prime candidates for the following reasons:

• The number of financial decisions an individual must make continues to increase, and the complexity of financial products continues to grow.
• Many students do not understand that one of the most important financial decisions they will make in their lives is choosing whether they should go to college after high school.
• Most college students borrow to finance their education, yet they often do so without fully understanding how much debt is appropriate for their education.
• Children are not learning about personal finance at home. A 2017 T. Rowe Price Survey noted that 69 percent of parents are reluctant to discuss financial matters with their children.
• Employee pension plans are disappearing and being replaced by defined contribution retirement programs, which impose greater responsibilities on young adults to save and invest.

It seems most Americans would agree with the study’s conclusions. The National Foundation for Credit Counseling’s 2017 Consumer Financial Literacy Survey reported that 42 percent of adults gave themselves grades C, D or F with regard to their personal finance knowledge; 27 percent have not saved anything for retirement; 32 percent have no savings; 60 percent do not have a budget; and 22 percent do not pay their bills on time.

Financial Literacy Improves Credit Behavior

While some research on the effectiveness of financial education found mixed evidence that it improves financial wellbeing, a 2015 report published by the FINRA Investor Education Foundation revealed that vast improvement in credit behavior resulted from state-mandated personal finance education.

The study evaluated the effect on credit scores and delinquencies over a three-year period in the states of Georgia, Idaho and Texas. Individuals in school during the third year following the inception of the program showed greater benefits from personal finance instruction, with credit scores increasing by 10.89 points in Georgia, 16.19 points in Idaho and 31.71 points in Texas. Ninety-day-plus delinquencies dropped nearly 2 percent in all three states by the third year. FINRA found that if a rigorous financial education program is carefully implemented, it can improve the credit scores and lower the probability of delinquency for young adults.

A number of depository institutions already provide financial literacy training, using programs such as the FDIC’s Money Smart or the U.S. Treasury Department’s MyMoney.gov. In fact, the Massachusetts

State Treasurer’s Office has made financial literacy a cornerstone of the administration, in partnership with groups including local banking institutions. These initiatives are helping consumers better understand important financial topics while offering the resources that are needed to effectively manage personal finances.

Financial institutions not yet participating may wish to explore partnering with various state agencies and/or nonprofit organizations in to order to support their customer base and ensure the long-term viability of their communities.

Robert B. Segal is president of Bedford-based investment advisors Atlantic Capital Strategies Inc. He can be reached at bob@atlanticcapitalstrategies.com.