Opinion: Financial education in high school has little effect on retirement savings and long-term investing
In the first half of 2022, three states — Florida, Georgia, and Michigan — signed legislation requiring all high school students to take a stand-alone course on personal finance.
With increased interest in personal finance courses in every state, we’re diving into the research findings in this space, asking ourselves: What personal finance topics have a measurable and lasting impact on student behaviors?
Research consistently finds that requiring personal finance in high school improves how students view credit, which is typically included in high school personal finance courses. Specifically, courses often teach how to compare credit options, how credit card debt accumulates, how credit scores are determined, and what credit scores are used for.
In addition to improving credit management, requiring financial education is also changing how students view short-term debt. Personal finance courses often cover how to finance an unexpected expense, such as a needed car repair, medical emergency, or job loss.
The content also explains how to prepare for unforeseen needs using insurance, budgeting and liquid savings, as well as the cheapest way to finance a shock if the level of the financial shock exceeds the amount saved by the individual.
A discussion of the potential long-term consequences of different methods of borrowing (eg, credit card balances, payday loans, family networks) is often included. Evidence shows that requiring personal finance courses reduces reliance on expensive alternative financial serviceslike payday loans.
What about long-term debt? Public educational programs often include content on how to compare long-term debt obligations in terms of overall cost and repayment rate. Some use topics like auto loans or mortgages to teach this content, while others dive into financing post-secondary education.
Research on long-term debt shows that requiring financial education in high school displace student borrowers from higher-interest to lower-interest methods of financing: from credit card balances and private student loans to low-interest federal student loans. This too improve reimbursement rates for students who have attended public universities and students from low-income families.
However, this does not change the probability of taking out a mortgage: Financial education in high school does not change the probability that a person owns at 40 years old.
An important foundational lesson in personal finance courses is that establishing short-term liquid savings to prepare for emergencies is essential for smart personal finance. This is often tied to budgeting, so people are saving every month. Research shows that the requirement for financial education in high school increases subjective financial well-beingdefined as the ability to track day-to-day and month-to-month finances while being on track to meet future financial goals by age 40.
Long-term saving and investing are also important topics to teach students, and indeed many states require content that emphasizes saving for retirement.
Although the value of saving early to take advantage of compound interest is frequently discussed, it does not appear that the financial education required in high school has substantial effects on retirement savings at 40 years old. Furthermore, financial education in high school may not modify the probability of having a retirement savings account (through an employer, alone or through the account of a spouse or partner). It also does not change the likelihood of having a taxable investment account.
Although more research is needed, it appears that the financial education required in high school is more likely to affect behaviors directly relevant to young adults on the verge of financial independence: credit, debt, budgeting, and life saving. ’emergency.
Little research evidence indicates an effect on long-term saving and investing based on high school courses. Yet other topics covered in personal finance courses have yet to be explored, such as filing taxes, buying cryptocurrency, insurance, taking out low-cost mortgages, and seeking financial advice.
Carly Urban is a professor of economics at Montana State University and a research fellow at the Institute for Labor Economics (IZA). Melody Harvey is an assistant professor of consumer science at the University of Wisconsin-Madison.
This column was published with the authorization of the Pension Research Council and Wharton School of the University of Pennsylvania.