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Shahar Ziv Headshot

Swimming In The Real-World Financial Pool

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Summer always brings a certain excitement as a new crop of freshly minted college graduates descends upon Manhattan and other cities, ready to take on the world. But while these young adults come armed with diplomas, a new wardrobe, and endless ambition, most lack a solid grasp of what it means to be financially literate. Today's graduates are diving into the real-world financial pool without even the basic strokes of personal finance. As the recent financial crisis has illuminated, not only is the water quite deep, but there are also plenty of sharks and, unfortunately, not as many lifeguards as we would have hoped.

A fundamental shift in risk, most notably in the transition from guaranteed pensions to individual retirement accounts such as 401(k)s, means that the economy that today's graduates enter is structurally different from the one of previous generations. Simultaneously, most Americans, young and old, display a strikingly low level of financial literacy. A 2010 Financial Literacy Survey of adults, conducted on behalf of the National Foundation for Credit Counseling, Inc., revealed that 34 percent of U.S. adults (over 76 million people) gave themselves a grade of C, D, or F on their knowledge of personal finance. On questions dealing with compound interest, inflation, and risk diversification, studies by Professors Annamaria Lusardi and Olivia Mitchell show significantly low rates of understanding among the general population and specifically among certain demographics including women, African Americans, and Hispanics.

The lack of financial sophistication in the United States has severe consequences. Academic research has found that individuals who are not financially literate are less likely to plan for and accumulate retirement wealth, participate in the stock market, and refinance mortgages during periods of falling rates. Furthermore, individuals who are not financially literate are more likely to take on high-cost debt (e.g., mortgages) and select mutual funds with higher fees. As Lusardi notes, "Financial literacy impacts financial decision-making. Failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior can all be linked to ignorance of basic financial concepts."

The outlook for college students is similarly scary. Today's educational experience increasingly places a heavy burden of debt on students. Two-thirds of those who received a bachelor's degree in 2008 graduated with debt, compared to less than one-half in 1993. Poor decisions made with respect to credit cards while in college serve to amplify students' already significant debt levels. A 2009 study by Sallie Mae, the financial services company specializing in education, found that the average undergraduate carries over $3,000 in credit card debt and "more than three-quarters [of students] incurred finance charges by carrying a monthly balance". Given the increased debt burden, it may not be surprising that a 2011 Scottrade survey found that 55 percent of "Gen Y'ers" have not started saving for retirement; however, this statistic should be disturbing given the shift in retirement risk and the importance financial experts place on saving early to take advantage of the time value of money.

What many students don't realize is that the financial mistakes they make in college and soon after, such as not paying their bills on time, can have significant consequences, including negative effects on their employment prospects. Credit checks are still used by many employers as an input to the hiring process despite a lack of evidence linking poor credit with a propensity to perform poorly in the workplace (several states have actually passed laws limiting the use of credit checks in employment evaluations). As Robert Manning, the author of Credit Card Nation, sums up, "While freshman and their parents are likely thinking more about tests and academics during orientation, the fact is that after graduation a student's credit rating is arguably far more important to his or her future than grade point averages."

College is about getting an education, but this doesn't just mean academics. Just as schools work diligently to help students transition from high school to college life, they should consider how to help facilitate the transition from college to the working world. It behooves schools to look beyond math, science, and history to ensure that students leave with basic, yet essential personal finance skills. Some schools have incorporated a for-credit personal financial management course into their curriculum; Mary Morrison's class at Stanford is perpetually over-subscribed, proof that there is salient demand on campus. Other institutions, like Smith College and its Women & Financial Independence Center, have created permanent programs and integrated financial education into student life with resounding success.

Unfortunately, these schools are more the exception rather than the norm.

Earlier this year, I worked with the Harvard University Employees Credit Union to launch a program providing undergraduates with practical life skills surrounding personal money management. Eighty-five Harvard undergraduates voluntarily gave up a week of their winter vacation to return to campus early for the four-day seminar. Incorporating findings from academic research and feedback from other workshops we conducted, the course focused on moving beyond a pure lecture-based format to incorporate guest speakers, collaborative cases, and peer instruction to engage students and enhance the learning experience. While four days won't turn a college student into Warren Buffet, the goal was to educate students on foundational elements -- consumer credit, budgeting, taxes, insurance, and investing -- as well as help them build a toolkit for practical-decision making in the future.

Feedback from students was overwhelmingly positive with over 90 percent saying they would be extremely likely to recommend the program to a friend. As one student remarked, it was "an essential program. Nobody talks about this crucial information, which is absolutely shocking if students hope to be responsible adults by graduation." Another said it was "one of the most helpful parts of my college experience." The Harvard program also highlights the substantial collaboration opportunities and resources available to a university, both within its own system and through its local community. More schools should take advantage of these opportunities and prepare their students to navigate the financial waters that await them.