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Outside the Box: Financial education in high school has little effect on retirement savings and investing in the long run

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In the first half of 2022, three states — Florida, Georgia and Michigan — signed legislation requiring all high school students to complete a standalone course in personal finance.

With heightened interest in personal finance coursework across states, we dive into the research findings in this space, asking: Which personal finance topics have a measurable and lasting impact on student behaviors?

Research consistently finds that requiring personal finance in high schools improves how students perceive credit, which is commonly included in high school personal finance classes. Specifically, courses often teach how to compare credit options, how credit card debt accrues, how credit scores are determined, and what credit scores are used for.

This seems to pay off, since research finds that requiring financial education in high school increases credit scores, particularly through reducing the likelihood of falling behind on accounts.

In addition to improving credit management, requiring financial education also shifts how students see short-run debt. Personal finance courses frequently cover how to finance an unexpected expense, such as a necessary car repair, a health emergency or a job loss.

The content also explains how to prepare for unanticipated needs using insurance, budgeting and liquid savings, as well as the lowest-cost way to finance a shock if the level of the financial shock exceeds how much the individual has saved.

A discussion of potential long-run consequences of different borrowing methods (for example, credit card balances, payday loans, family networks) is often included. The evidence shows that requiring personal finance coursework reduces reliance on high-cost alternative financial services, such as payday lending.

What about long-term debt? State educational programs often include content on how to compare long-term debt obligations in terms of overall cost and repayment rates. Some use topics like auto loans or mortgages to teach this content, while others dive into financing post-secondary education.

Research on long-run debt shows that requiring financial education in high school shifts student loan borrowers from higher interest financing methods to lower interest methods: from credit card balances and private student loans to low interest federal student loans. It also improves repayment rates for students who attended public universities and students from low-income families.

However, it does not change the likelihood of taking on a mortgage: High school financial education does not change the likelihood that someone is a homeowner by age 40.

One important foundational lesson in personal finance coursework is that establishing short-run liquid savings to prepare for emergencies is essential for smart personal finance. This is often tied to budgeting, so that people save each month. Research shows that requiring financial education in high school increases subjective financial well-being, defined as the ability to keep up with day-to-day and month-to-month finances, while also being on track with future financial goals by age 40.

Long-run saving and investing are also important topics to teach students about, and many states indeed require content that emphasizes saving for retirement.

While the value of saving early to take advantage of compound interest is frequently discussed, it does not appear that required financial education in high school has substantive effects on retirement savings by age 40. Moreover, high school financial education may not change the likelihood of having a retirement savings account (via an employer, on one’s own or via a spouse’s or partner’s account). It also does not change the likelihood of having a taxable investment account.

While more research is needed, it appears that required financial education in high school is most likely to affect behaviors that are directly relevant for young adults about to gain their financial independence: credit, debt, budgeting and emergency savings.

Little research evidence points to an effect on long-run saving and investing based on high school coursework. Yet other topics covered in personal finance classes have not yet been researched, such as filing taxes, buying crypto currency, insuring, taking out low-cost mortgages and seeking out 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 permission from the Pension Research Council and Wharton School of the University of Pennsylvania.

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