Jarrett Mendoza
Chief Reporter (2023–2024)
Financial literacy education in the United States has become a polarizing issue. Who should educate kids on how they should manage their money? Is this a decision that should be left to parents, or should the school system be responsible for teaching children about an important personal issue? The raw data indicates that minority families are disproportionately affected by the lack of financial education across the United States.¹ The states that have made financial education mandatory in schools have begun to bridge the gap that minority students fall into.² This article walks through the extent of the financial literacy crisis in the United States, the disproportionate effects of such, and the tangible benefits of states that approach financial literacy education differently.
What is Financial Literacy?
The definition of financial literacy can vary depending on who you ask. Put broadly, financial literacy is understanding what to do with your money to secure an ideal financial position.³ The term often includes skills like creating a budget, planning for retirement, managing debt, and tracking personal spending.⁴ While some people likely grew up learning about these things in school or from their parents, the numbers show that a vast number of Americans didn’t have access to the same teachings.⁵
The numbers used to judge whether a population is financially literate are another point of debate. The Financial Industry Regulatory Authority (FINRA) is an oversight organization that periodically surveys people across the country to test their financial literacy.⁶ Some scholars put heavy emphasis on FINRA’s National Financial Capability Study, while other scholars look toward other factors like student debt, retirement accounts, and defaults on mortgages.⁷
The Current Financial Literacy Crisis in Texas
In FINRA’s most recent National Financial Capability Study in 2018, Texas’ performance ranked 43rd among the 50 states.⁸ This statistic indicates that Texas is substantially behind the curve when it comes to understanding finances. However, the other tangible factors, mentioned above, paint a startling story for many Texans. The average household in Texas owes $5,308 in credit card debt, which ranks 50th out of all 50 states.⁹ Also, Texas’ students have racked up over $127 billion dollars in student debt, only beaten by California’ students.¹⁰ This is an average of $33,400 for every Texas student.¹¹
Student and credit card debt are some of the factors that lead to households living paycheck-to-paycheck. According to FINRA, 52% of Texans are living paycheck-to-paycheck, with 61% having no form of savings.¹² When households have no form of savings, unexpected financial obligations, like medical bills, can be crippling. Of the 20 most populous counties in the United States, Dallas County and Tarrant Country rank first and second in concentration of medical debt, respectively.¹³
The Disproportionate Effects on Minority Communities
The eye-opening statistics above become worse when considering the effect on minority households. According to the National Center for Education Statistics (NCES), Hispanic and Black students borrow $6,000 more on average for education than their White counterparts.¹⁴ Additionally, according to The Federal Reserve, Black borrowers have over 30% more debt than their White counterparts.¹⁵ Inequities like this create what experts call the racial debt gap.¹⁶
The racial debt gap is the factually backed proposition that debt falls disproportionately on students of color and their families with long-term implications. The racial debt gap was widened among middle-class households in the aftermath of the 2007 Great Recession.¹⁷ Many traditional economic scholars blame the widening gap on the ineffectiveness of parental guidance due to the lack of formal financial education.¹⁸
States Trending in the Right Direction
Some states are looking to bridge the racial debt gap by implementing mandatory financial education in their high school curriculum.¹⁹ As of September of 2023, there are 23 states that have passed legislation requiring a stand-alone personal finance class before graduating high school.²⁰ All of these states seem to be trending in the right direction when examining the financial outcomes of their citizens. For instance, students who are required to take a stand-alone personal finance class in high school, like the classes in the 23 states, are significantly less likely to borrow from dangerous lenders like payday loans.²¹
There are a portion of states, however, that require no form of financial literacy education whatsoever. There are, as of September 2023, six states, including Washington D.C., that have no form of financial education required in their schools.²² As expected, these states are trending in the wrong direction when evaluating the financial outcomes of their citizens. For example, in Washington D.C., where there is no mandatory financial literacy education, the citizens live with the highest rate of current outstanding college debt.²³
Options for Financial Literacy in Texas
As of the date of publication of this article, Texas does not require a stand-alone personal finance course to graduate.²⁴ Instead, Texas requires financial literacy education be integrated within another course.²⁵ In many cases, this looks like a few weeks studying the topic during a home-economics course. The effectiveness of this practice is widely skepticized. The data shows that a stand-alone personal finance course is more effective in increasing the financial outcomes of a state’s citizens.²⁶ Texas is seemingly behind the curve when recognizing this trend.
The facts remain clear, Texas is in a dire position when it comes to financial literacy. Texas has some of the worst debt, budgeting, and retirement savings statistics in the entire country.²⁷ States that implemented a mandatory stand-alone personal finance course have more positive financial statistics. Additionally, 23 states have already recognized the growing need for this type of education.²⁸ It is time for Texas to take a step in the right direction by securing the financial future of its students by adopting a required personal finance course in all high schools.
Sources:
[1] Report on the Economic Well-Being of U.S. Households in 2017, May 2018, Board of Governors of the Federal Reserve System, page 1. (The latest Survey of Household Economics and Decisionmaking interviewed a sample of over 12,000 individuals—roughly twice the number in prior years—with an online survey in November and December 2017).
[2] Kaiser, T. & Menkhoff, L. (2017). Does Financial Education Impact Financial Literacy and Financial Behavior, and If So, When? (World Bank Grp., Working Paper No. 8161, 2017).
[3] Jason Fernando, Financial Literacy: What It Is, and Why it is So Important, Investopedia (March 30, 2023), https://www.investopedia.com/terms/f/financial-literacy.asp.
[4] Id.
[5] NFEC, Financial Literacy Subject Survey, (Oct. 21, 2017), https://www.financialeducatorscouncil.org/Financial-literacy-subject-survey/
[6] Liz Manning, Financial Industry Regulatory Authority (FINRA) Definition, Investopedia (August 4, 2023), https://www.investopedia.com/terms/f/finra.asp.
[7] Fernando, supra note 3.
[8] Emma Marshall, Pia Orrrenius, and Michael Weiss, Turbulent Economy Tests Texans Who Lack Financial Knowledge, Federal Reserve Bank of Dallas, Southwest Economy, First Quarter 2022 (citing Financial Industry Regulatory Authority, 2018 National Financial Capability Study), https://www.dallasfed.org/researdch/swe/2022/swe2201/swe2201c
[9] Alex Miller, The Best U.S. Cities for Boosting Your Credit Score [2022 Data Study], Upgraded Points (Sept. 20, 2023, 8:30 AM), https://upgradedpoints.com/finance/best-cities-to-boost-credit-score/.
[10] Samantha Ketterer, Biden Administration Restarts Federal Student Loan Interest, The Houston Chronicle (Sept. 1, 2023, 5:32 p.m.), https://www.houstonchronicle.com/news/houston-texas/education/article/biden-administration-restarts-federal-student-18342622.php
[11] Id.
[12] News Release, Financial Industry Regulatory Authority, Financial Capability Survey Shows Texans Near Bottom in Nation to Comparison Shop for Credit Cards (Dec. 8, 2010).
[13] Noam Levey, Few places have more medical debt than Dallas-Fort Worth, but hospitals there are thriving, The Texas Tribune (Sept. 30, 2023, 1:00 PM), https://www.texastribune.org/2022/09/30/dallas-fort-worth-medical-debt/.
[14] U.S. Dep’t of Educ., National Center for Educational Statistics, Percentage of undergraduate degree/certificate completers who ever received federal loans and parent PLUS loans and average cumulative loan amount, by degree level, selected student characteristics, and institution control: 2017-18, Tbl 331.95 (2022).
[15] The Federal Reserve, Survey of Consumer Finances (1989-2019).
[16] Marisa Wright, How Student Loan Forgiveness Can Help Close the Racial Wealth Gap and Advance Economic Justice, Legal Defense Fund (Apr. 17, 2023), https://www.naacpldf.org/student-loans-racial-wealth-gap/#:~:text=America's%20racial%20wealth%20gap%20means,color%20in%20the%20United%20States.
[17] Rakesh Kocchar, Anthony Cilluffo, How wealth inequality has changed in the U.S. since the Great Recession, by race, ethnicity, and income, Pew Research Center (Nov. 1, 2017), https://www.pewresearch.org/short-reads/2017/11/01/how-wealth-inequality-has-changed-in-the-u-s-since-the-great-recession-by-race-ethnicity-and-income/#:~:text=The%20Great%20Recession%20of%202007,further%20in%20its%20immediate%20aftermath.
[18] Id.
[19] Christiana Stoddard, Carly Urban, The Effects of K-12 Financial Education Mandates on Student Postsecondary Education Outcome, Global Financial Literacy Excellence Center, (2018) https://gflec.org/wp-content/uploads/2018/03/Stoddard-Urban-CB-2018-UPDATED.pdf.
[20] Next Gen Personal Finance, How many states require students to take a personal finance course before graduating from high school? (Feb. 12, 2020), https://www.ngpf.org/blog/advocacy/how-many-states-require-students-to-take-a-personal-finance-course-before-graduating-from-high-school-is-it-6-or-is-it-21/
[21] Kaiser, T., Lusardi, A., Menkhoff, L., and Urban, C. Financial Education Matters: Testing the Effectiveness of Financial Education Across 76 Randomized Experiments, FINRA Foundation (2022), https://www.finrafoundation.org/sites/finrafoundation/files/Financial-Education-Matters-Testing-Effectiveness-Financial-Education_0.pdf.
[22] Next Gen Personal Finance, supra note 20.
[23] Chamber of Commerce, States with the Most Student Loan Debt (2023) (July 6, 2023), https://www.chamberofcommerce.org/student-loan-debt#:~:text=Since%202020%2C%20the%20nationwide%20amount,loan%20debt%20in%20the%20nation.
[24] Next Gen Personal Finance, supra note 20.
[25] Id.
[26] Kaiser, T. & Menkhoff, L, supra note 2, at 3.
[27] News Release, Financial Industry Regulatory Authority, supra note 12.
[28] Next Gen Personal Finance, supra note 20.
