Over $17 trillion in household debt, increasing auto loan delinquencies, and declining financial literacy – our nation faces an alarming debt crisis. According to the Federal Reserve Bank of New York, the total household debt in the United States rose by $16 billion to reach an alarming $17.06 trillion in the second quarter of 20231.
The freedom associated with wealth or lack of debt is seemingly out of reach for many. As a nation of consumers, utilizing available credit and other resources to obtain goods or services is a staple. Young adults between the ages of 18 to 25 have increasing levels of debt which often leads to a decreased level of financial stability2. Auto delinquency and debt ratios have substantially increased for Millennial and Gen Z groups3. The question remains as to why finance is not a bigger part of traditional education segments?4 The priorities placed on fiscal responsibility and debt should be of national importance to all.
The objective of this piece is to spotlight the urgent need for enhanced financial literacy education in schools and homes. The goal is to equip younger generations with money management skills and reverse escalating debt delinquency trends.
The Financial Literacy Deficit Driving Record Debt Delinquency
The demand to finance homes, education, vehicles, and other perceived earmarks of modern day success through credit or increasing debt drives a major sector of the US economy. There are very few mainstream societal functions, private or public, that do not connect to the financial services sector. Yet, this important element remains marginalized within the education cycle: financial literacy.
Loan defaults have rapidly increased with small banks5. Credit Unions as a group are reporting increased delinquency and loan balances6. A 2023 TIAA Institute report solidifies the connection between financial literacy and debt. Those who are financially literate are usually more financial stable7.
The Fair and Accurate Credit Transactions Act called for increased financial literacy. The Department of Treasury produced a 2006 guide on the subject with limited emphasis on school curriculum8. Subsequent updates express the importance of financial literacy but lack tangible action9. In recent years, many states have tried to pass or otherwise instituted various mandates on financial education, but they are not uniform. Of the bills that have been implemented, often they may only require a single course on the subject or lack sustained engagement10. The National Financial Educators Council blames a general failure of the education system in the lack of ability
to design the required skillsets students need to participate in society today11. We have yet to see a compressive standard to sufficiently satisfy the need.
The Proof is in the Data: Financial Ignorance Leads to Avoidable Debt Distress
As a country, by the close of 2022, the US managed to achieve the largest quarterly increase in debt in the last two decades. Younger borrowers are missing more credit card and auto loan payments following a trend of more loan debt than ever before12. Auto delinquencies exceeding 90 days past due for those between 18 and 39 years of age yielded an excess of $19 Billion. The total outstanding debt held by people under the age of 30 has increased more than any other age group since 202013. An S&P Global report in June 2023 acknowledged that households are clearly struggling with inflation given the 60 day past due segment of delinquency now exceeds the Great Recession levels from 200814.
Auto loan amounts have increased each quarter since Q2, 2020. Prior to that, they increased more so than ever before in the last 20 years15. Younger consumers were the drivers of largest auto loan originations during the pandemic. Robert Kiyosaki explained, “We were not taught financial literacy in school. It takes a lot of work and time to change your thinking and to become financially literate”16.
In the not so distant past, a 60 month auto loan term would have been the maximum in most circumstances. Now, we see those terms extending to 72 or even 84 months17. This means both longer periods of indebtedness at the consumer level and even larger losses in the event of a default at the bank-finance company level.
Nearly half of Gen Z and Millennials perceive their parents to have poor spending habits, yet only 37% say they were actually taught about personal finance by their parents. This illustrates the cycle of financial illiteracy spanning generations18. Incidentally, Alan Greenspan asserted, “The number one problem in today’s generation and economy is the lack of financial literacy”19.
Broader impacts such as reduced disposable income, economic productivity, impulse spending, and dependence on family and alike can be avoided. This requires proper financial literacy training starting at a young age. The end goal is to ensure sustainability while reducing a variety of societal impacts.
- Reduced disposable income: As more income goes towards debt payments, less remains for savings, discretionary spending, or investing which drives economic growth.
- Lower economic productivity: People with poor financial skills are less likely to capitalize on economic opportunities, limiting innovative entrepreneurship and alike.
- Increased impulse spending: Lack of financial literacy fosters poor spending habits and higher consumption driven by emotion over logic. This may include higher interest rates due to ignorance.
- Greater dependence on family: Younger generations with insufficient financial skills turn more to parents or family for financial support.
- Widening income inequality: The financially illiterate are more vulnerable to predatory lending or accruing high-cost debt. This may influence foreclosures, bankruptcies and even becoming a victim of fraud. These situations can propel individuals into a perpetual cycle of debt.
- Delayed financial independence: Inadequate financial literacy results in delayed milestones such as buying a car, homeownership, and retirement planning.
Implementing Comprehensive Financial Literacy Education
While some schools are shifting their curriculums to support financial education concepts, it is not a consistent movement yet20. We also cannot expect schools to solve the entire problem alone nor should parents expect such public service to raise their young. This requires collaboration. The National Bureau of Economic Research performed a middle-school curriculum simulation study illustrating the successes of students educated in financial literacy in contrast to those who had no training in it. The results overwhelmingly support the education21.
Education departments at the federal and state levels generally acknowledge the need for financial literacy. However, it is still not a nationwide staple of core course work. Those who want to make a difference should contact their education policy makers and demand change.
All schools need to teach financial literacy consistently and throughout the education lifecycle. Lobby your representatives to demand policy changes. Family units need to take the time to explain finances, discuss outcomes and budgets22. Parental engagement is a must. This will afford children practical experience to apply what they are learning in school.
Vince Shorb of the National Financial Educators Council said, “Teachers are the single most important influence on student success. The qualifications of financial educators have direct impact both on short-term student outcomes and on their long-term financial well-being”23. Educators must be properly trained to deliver financial knowledge that empowers students with financial literacy as well as financial competency24. There is a very strong success rate when financial education is delivered throughout partnerships, including both at home and at school, allowing future generations to succeed financially25.
Sample curriculum could include integrating hands-on application in budgeting simulations as part of lessons or utilizing technology, such as mobile apps to engage students. Most banks and finance companies offer some sort of educational programs at no charge. These services range from traditional online trainings to simulators and range to nearly every aspect of money management principals.
The parents that engage in the interactive process with their children are to be shining examples to others. Schools that have prioritized financial literacy should be sharing their successes and collaborating with other schools to promote growth.
The Financial Policy Council (FPC) has been at the forefront of raising awareness around the alarming decline in financial literacy and providing solutions to reverse this crisis. The FPC’s national coalition of member entrepreneurs, blogs, seminars, and policy recommendations have brought this issue to the attention of education leaders and lawmakers alike. Association with groups such as the FPC is yet another way to help bring about change. The FPC exists to assert needed change and to bring attention to subjects that threaten the values that our Founding Fathers established. This commitment involves being a leader in the presentation of solutions on topics like financial literacy as well as a change driver in the policy framework of the nation. We all must demonstrate support and bring about innovative ideas to effectuate change. Subscribe to FPC updates, engage in discussions via FPC social media platforms and attend upcoming events to be part of the movement.
Esteemed FPC member Scott Donnell published a very insightful blog on “How to Prepare Your Kids for Wealth”. Mr. Donnell’s writings have valuable insight that families and individuals alike can benefit from on this topic. The points mentioned are a prime example of just how important this distinction is for the sustained welfare of this country.
The FPC also drives innovations in FinTech that can augment classroom learnings, such as mobile apps that make budgeting relatable through customized insights and alerts. Adoption of these supplemental tools by students and families will climb as financial literacy becomes a greater priority. The FPC continuously explores ways to leverage technology to democratize access to the essential knowledge that unlocks economic mobility and responsible money management.
There are plenty of ways for companies and individuals alike to bring about change and generate (or protect) revenue while they are at it. Suffice to say, nearly every
organization has a need to reduce losses and avail the services of loss mitigation providers. The same exists at the education level where drivers of change can present unique approaches that present a solution to the messages presented herein.
Without proper financial literacy, younger generations will face severely reduced economic mobility and independence. Lacking money management skills sinks their ability to build assets, invest in the future, accrue wealth, and take advantage of economic opportunities through entrepreneurship. The financially illiterate are unlikely to escape cycles of poverty or low-income and often remain dependent on family support. This undermines the very promise of the American Dream for millions.
Implementing national financial literacy education standards, teacher training programs, and parental engagement starting early on could help reverse these alarming trends. With the proper policy and curriculum changes, we can equip students and graduates with the financial acumen to make informed choices, avoid predatory lending, increase their purchasing power, and stimulate economic productivity.
Financial literacy fosters freedom and flexibility no matter one’s circumstances. This issue demands urgent action before economic mobility worsens and inequality becomes more entrenched due to ignorance of basic financial concepts so fundamental to participating in the modern economy.
Parents and concerned community members need to advocate for financial literacy to be included in core curricula standards nationwide and requiring the associated teacher training. Parental involvement is an essential part of the equation if the status quo is to be disrupted.
While there may not be a pandemic coupled with supply chain shortages each decade, growing inflation and other fiscally ignorant consumer practices may become the norm. A return to focusing on the family unit, properly equipping children to be responsible members of society and similar practices are some methods to help correct this trend. Effective saving strategies, well rounded financial education and responsible borrowing coupled with the conservative use of credit are mission critical to a successful future. As the national debt continues to rise, so does our consumer debt.
Implementing the proposed solutions of integrating financial literacy into core K-12 standards and requiring rigorous teacher training programs would open up significant opportunities for investors in the EdTech and FinTech spheres. As school districts are mandated to provide quality financial education, public and private spending on instructional resources, software, and tools will rise. Companies focused on creating engaging, interactive financial literacy programs and simulations stand to benefit greatly from this increased demand. Likewise, scaling teacher training initiatives will lead to new partnerships with education technology firms equipped to design personalized professional development platforms. The FPC actively works to identify promising startups pioneering next-generation financial learning solutions for students and teachers that investors should keep on their radar.
The need to capture the development of sound public policy on this subject has a wide reaching net. Engagement with organizations and drivers of change at all levels is essential to change. Economic uncertainties, failed policies, and broken political promises all lead to financial difficulties at the top, bottom, and everywhere in between. Do we just sit back and do nothing when these circumstances arise? Should we just complain about it or we can take an active stance in affecting change? Establishing sound partnerships can help advance the opportunity at hand. Every member of society has a stake in shaping the future of our nation.
The FPC is a leading non-profit organization Think Tank. Among several priorities, the FPC is dedicated to financial literacy, wealth creation and being a change driver. Voice your support for material changes to core education curriculum and share this information with others, to encourage the same from them. Calling attention to these topics, offering viable solutions and promoting change are essential in the preservation of this great country. The FPC will remain instrumental in crafting standards and policies that realize the full promise of educational literacy in a prudent, inclusive manner. Get involved in the fight for better financial literacy! Here are specific ways you can help drive the urgent change needed:
- Contact your state and federal representatives to demand that relevant financial literacy material is included in core K-12 curriculum standards nationwide. Share this blog and emphasize the importance of equipping our youth.
- Advocate for mandating rigorous teacher training programs nationwide to properly equip educators with the knowledge of how to teach personal finance concepts.
- Speak to your school principal, school board and PTA about integrating more interactive financial skills learning like budget simulations into lesson plans. Advocacy at the local level is a must.
- Commit to teaching your own children financial basics like budgeting, saving, and responsible borrowing from an early age at home. This is an investment that will pay dividends.
The future prosperity of our nation depends on tackling this crisis head-on. With your help pressuring policymakers, vocalizing the need for education reform, and arming our next generation with financial acumen, we can reverse current trends and set students up for economic success.
Please sign up now and join the discussion https://financialpolicycouncil.org/blog/
#FinancialLiteracy, #DebtCrisis, #FinancialEducation, #MoneyManagement, #FinancialSkills
- Federal Reserve Bank of New York, Center for Microeconomic Data (2023). https://www.newyorkfed.org/microeconomics/hhdc.html
- Sydney Han. To what extent do grade levels and the requirement of an economics course in high school impact the financial literacy levels of students in the United States? Journal of Student Research (Houston, Tex.), 11(3), (2022). https://doi.org/10.47611/jsr.v11i3.1671
- Federal Reserve Bank of New York, Analysis Based on New York Fed Consumer Credit Panel/Equifax Data Quarterly Report on Household Debt and Credit 2022, Q4 (2023). https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2022Q4
- M. Salas‐Velasco, D. Moreno‐Herrero & J. Sánchez‐Campillo. Teaching financial education in schools and students’ financial literacy: A cross‐country analysis with PISA data. International Journal of Finance and Economics, 26(3), 4077–4103, (2021). https://doi.org/10.1002/ijfe.2005
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- P. Yakoboski, A. Lusardi, A. Hasler, TIAA Institute-GFLEC Personal Finance Index. Financial well-being and literacy in a high-inflation environment, (2023). https://gflec.org/wp-content/uploads/2023/04/2023-P-Fin-Index-report-TIAA-Inst-and-GFLEC-Apr-2023.pdf
- Taking ownership of the future: the national strategy for financial literacy. Financial Literacy and Education Commission, (2006) https://eric.ed.gov/?id=ED496720
- Taking ownership of the future: the national strategy for financial literacy. Financial Literacy and Education Commission, (2020) https://home.treasury.gov/system/files/136/US-National-Strategy-Financial-Literacy-2020.pdf
- Emma Donahue. Not all Mandates are Created Equal: a 2022 Legislative Recap. National Endowment for Financial Education, (2022). https://www.nefe.org/news/2022/08/not-all-mandates-are-created-equal.aspx
- National Financial Educators Counil, (n.d.). https://www.financialeducatorscouncil.org/why-isnt-personal-finance-taught-in-school/
- Andrew Haughwout, Donghoon Lee, Daniel Mangrum, Joelle Scally, and Wilbert van der Klaauw, “Younger Borrowers Are Struggling with Credit Card and Auto Loan Payments,” Federal Reserve Bank of New York Liberty Street Economics, February 16, 2023, https://libertystreeteconomics.newyorkfed.org/2023/02/younger-borrowers-are-struggling-with-credit-card-and-auto-loan-payments/
- Federal Reserve Bank of New York, Analysis Based on New York Fed Consumer Credit Panel/Equifax Data Quarterly Report on Household Debt and Credit 2022:Q4, Released February 2023.
- Federal Reserve Bank of New York, Analysis Based on New York Fed Consumer Credit Panel/Equifax Data Quarterly Report on Household Debt and Credit 2022:Q4, Released February 2023.
- R. Manju & Dr. Gabriel Simon Thatti. Financial Literacy and Participation in Capital Market Operations – A Study Among Teachers. EPRA International Journal of Economic and Business Review, Vol – 4, Issue- 10, (2016). https://eprajournals.com/IJES/article/8553/abstract
- Experian. Should You Get an 84-Month Auto Loan? (2023). https://www.experian.com/blogs/ask-experian/should-you-get-84-month-auto-loan/
- Experian. Most Gen Zers and millennials still rely on parents for financial support and feel ashamed asking for help, (2023). https://www.experianplc.com/media/latest-news/2023/most-gen-zers-and-millennials-still-rely-on-parents-for-financial-support-and-feel-ashamed-asking-for-help/
- Vanessa Lau. Focus, HKEX Foundation. Exchanges have a role to play in driving financial literacy that addresses local needs, (2021). https://focus.world-exchanges.org/articles/hongkong-financial-literacy
- Sydney Han. To what extent do grade levels and the requirement of an economics course in high school impact the financial literacy levels of students in the United States? Journal of Student Research (Houston, Tex.), 11(3), (2023). https://doi.org/10.47611/jsr.v11i3.1671
- Bruce Carlin, David Robinson. NBER Working Paper Series: What does Financial Literacy Training Teach Us? National Bureau of Economic Research, (2010). http://www.nber.org/papers/w16271.pdf
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- M., Salas‐Velasco, D. Moreno‐Herrero, & J. Sánchez‐Campillo. Teaching financial education in schools and students’ financial literacy: A cross‐country analysis with PISA data. International Journal of Finance and Economics, 26(3), 4077–4103, (2021). https://doi.org/10.1002/ijfe.2005
- K. E. Merry, F. Webster, & S. Kucharczyk. Investing in Students With Extensive Support Needs: Steps to Integrate Personal Financial Literacy in Inclusive Settings for Educators, Students, and Families. Inclusive Practices, 1(4), 156–170, (2022). https://doi.org/10.1177/27324745221128931