04/16/2015 12:19 pm ET Updated Dec 06, 2017

Proof That State-Mandated Financial Education Programs Work

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There has been a long dispute over whether or not state-mandated financial education programs in high schools actually help improve financial literacy and overall financial health in adulthood. However, new research has emerged that provides consistent evidence that these programs are effective.

According to a report by the Consumer Financial Protection Bureau (CFPB), financial education is defined as, "A process of lifelong knowledge and skills development required to achieve financial literacy, mitigate financial risks, protect assets and ensure ongoing effective management of one's savings, credit, debt, housing, and other resources to maximize financial well-being of individuals and society." Recently, two new studies were released which prove that proactive financial education is key to a more financially literate America.

FINRA Investor Education Foundation Funded Study

A FINRA Investor Education Foundation funded study, State Financial Education Mandates: It's All in the Implementation, conducted by Dr. Carly Urban of Montana State University and researchers from the Federal Reserve Board and the Center for Financial Security (CFS) at the University of Wisconsin-Madison, looked at three states: Georgia, Idaho, and Texas. These states previously had not mandated financial education in high school, but changed financial education mandates after the year 2000. CFS affiliates analyzed the credit scores of young adults starting at age 18 until they reached the age of 22 using the Equifax Risk Score that ranges from 280-850. The findings from those state mandates prove that carefully implementing a rigorous financial education program in high school can improve credit scores and lower the probability of delinquency for young adults.

Results of the Study:

Credit Scores - The report found that two years after implementing financial education mandates, young adults in all three states significantly increased their credit scores. For students who remained in school for a third year following the inception of the program, their credit scores increased even more:

  • Georgia saw an average increase of 10.89 points
  • Idaho saw an average increase of 16.19 points
  • Texas saw an average increase of 31.71 points

Seeing these increases in credit scores due to financial education mandates is very encouraging since young adults with little financial education are prone to engaging in expensive and risky credit behaviors, such as paying interest on credit cards, accruing late fees, and using payday loans. Maintaining low credit scores is extremely costly as low-credit consumers receive much higher interest rates, lower credit lines, and may even be required to provide deposits for certain items such as on a secured card or in order to open a new utility account.

Your payment history has the heaviest influence on your overall credit score in any scoring model, making up 35 percent of your total score. Late payments are typically reported in one of the following categories: 30-days late, 60-days late, 90-days late, 120-days late, 150-days late, or charge off, which means the account was written off due to severe delinquency in payment. A single late payment will drop your credit score, but making a late payment of 90-days or more, for example, will plummet your credit score.

Delinquency Probability - The report found, beginning two years after the implementation of the mandate, that the financial education mandates significantly reduced the likelihood that a student would be late by 90 days or more with their payments to credit accounts. For students who remained in school for a third year following the inception of the program, their probability of delinquency dropped dramatically as they entered into adulthood (18-22 years of age):

  • Georgia saw an average reduction of 9.9 percent in 90+ day delinquencies
  • Idaho saw an average reduction of 15.6 percent in 90+ day delinquencies
  • Texas saw an average reduction of 8.4 percent in 90+ day delinquencies

Three main distinctions were presented as to why their efforts may have provided a positive outcome compared to past findings:

  • Previous research assumed all state mandates are implemented the same way.
  • Implementation of mandates varies from state to state, and could take as long as five years to be effective.
  • States often change multiple curricular requirements simultaneously, making it hard to determine the single impact of personal finance mandates.

EverFi Study

EverFi conducted a survey on the financial capabilities of teens. They assessed more than 94,000 students who completed pre-course and post-course surveys of the EverFi high school financial education course.

Results of the Survey:

  • Before completing the course, only 25 percent of high school students felt prepared to check and understand their credit score.
  • After course completion, 62 percent of students felt prepared to check and monitor their credit scores.

Financial education implementation within high schools has a greater effect on the future financial well-being of young adults. More specifically, focusing on credit and debt topics -- such as credit scores, credit reports, and the pros and cons of using credit will help students without an established credit history begin to build their credit and proactively think about how credit impacts their future.

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