What Young People Don't Know About Money Could Hurt Them in This Economic Crash. How Schools Can Help
About 1 in 5 of the nation's 15-year-olds don't have basic financial skills at a time when 33 million Americans are out of work and the economy is expected to suffer continuing shockwaves from the coronavirus for months or years.
The Program for International Student Assessment 2018 financial literacy test, released today, gauged the money smarts of more than 110,000 teenagers in 20 countries and education systems, including the United States. It found U.S. students scored 506 on average on the 1,000-point test, statistically average with other countries in Organization for Economic Cooperation and Development, which runs the PISA. U.S. students performed no better or worse than they did in 2015 or 2012, when the test was first given.
Racial gaps continued: Hispanic and white students performed on average at level three of five. At that level, students can interpret a range of financial documents and solve routine financial problems in context, such as budgeting and calculating percentages. Black students performed on average at level two, where students are expected to understand basic budgets and financial documents. Asian-American students on average performed at level four, where students can interpret and evaluate a range of commonly and infrequently used financial documents, and explain the long-term consequences of financial decisions, such as taking out a loan over a longer period of time.
About 12 percent of U.S. students demonstrated the highest-level understanding of money skills, and 16 percent lacked even basic financial understanding—both on par with the average OECD achievement, but that gap in understanding could make a big difference for students coming of age amid the current recession.
"One thing we all see in this current crisis is that yeah, it's important that we know how to solve a quadratic equation, but it may be even more important to solve very practical problems like balancing your budget and doing an online transaction and young people are confronting those kinds of problems," said Andreas Schleicher, the director for education and skills for the OECD.
"The post-COVID context makes you much more responsible for your own decisions," he said. "You are confronted with the more complex world, you are isolated from people ... and that landscape is difficult to manage. And that's the immediate context in which people are in this moment. Then if you think downstream three or four years, the constraints that people are going to face in an economic financial crisis are going to be much, much more severe. So I think this is not a problem that people talk to 15-year-olds about, but I do think preparing them for a more uncertain time is more important than ever."
The results come on the heels of a separate annual study out last month from the TIAA Institute and Global Financial Literacy Excellence Center (GFLEC) at George Washington University, which found that U.S. adults generally also fare poorly in money matters: They could correctly answer only about half of personal finance questions, and struggled particularly with questions of risk, insurance, and investments, where adults on average answered fewer than half of questions correctly.
A separate PISA study out earlier this year also suggests that U.S. students may be less equipped to weather the massive disruptions to the current and future job market, as their career aspirations tend to be out of sync with both actual labor needs and with their own plans for education and training.
Peril and Promise for Poor or Low-Performing Students
Students in schools where 75 percent or more of their peers lived in poverty scored more than 100 points lower on the 1,000-point test than students in schools where less than a quarter of students were low income. With one year of schooling equal to 30 to 40 scale points, that's a gap of some three years between low- and high-poverty students.
But even students in the highest poverty schools were likely to understand the value of budgeting and recognize everyday financial documents like bills or invoices. And 7 percent of students in the highest-poverty schools performed at the highest level in personal finance, said Peggy Carr, associate commissioner for the National Center for Education Statistics, which administers PISA in the United States.
Moreover, the lowest-performing 10 percent of students was the only percentile group to significantly improve in 2018. The portion of U.S. students who performed at level one, below basic financial literacy, fell from 7 percent to 3.9 percent since 2015, and the share of students performing at level two fell steadily from 26.2 percent in 2012 to 22 percent in 2018.
"So there are challenges, but our assumptions that students can't gain these skills are unfounded," Carr said. "They can and they do, as we can see for those students who are going against the grain."
To put students on surer financial footing, both Carr and Schleicher argued schools should take a more active role in laying out financial literacy, not just underlying reading and math skills.
But only 38 percent of U.S. students said they had taken a class on personal finance at school, and 46 percent reported learning about money as part of another school class. By contrast, in Estonia—which led financial literacy achievement on the PISA with Finland and Canada—53 percent of students said they learned personal finance in a class, and 40 percent took a class dedicated to the subject at school.
"Overwhelmingly students learned about money matters at home," Carr said.
Before the pandemic, more states had begun to require students to take personal finance and economic courses to graduate, raising the total from 17 at the time of the PISA to 21 at the start of 2020, but those graduation requirements have been waived for seniors this year in an effort to help the Class of 2020 complete their diplomas after school closures.