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Riskology

Could your education make you a risky borrower?

About the author

Ari has written about financial products and investing for The Wall Street Journal, Forbes, and Pensions & Investments. Find him on Twitter.  

(Harley Schwadron)

(Harley Schwadron)

When it comes to economics, a little knowledge may truly be a dangerous thing.

A recent Federal Reserve Bank of New York staff report suggests that high school students exposed to economics education develop worse credit habits than those taught in math and financial literacy.

That might sound odd, since economics is steeped in lessons of costs and benefits, supply and demand, and inflation and interest rates — not to mention historical lessons. But it’s possible that such lessons in markets and macro just aren’t relevant to scores of teens who just need to learn about budgeting, debt and saving before they hit adulthood.

In “Financial Education and the Debt Behavior of the Young,” the working paper’s authors — looking to test whether mathematics, financial literacy or economics education in US secondary schools affected a student’s approach to taking on debt in early adulthood — found that economics education was, effectively, bad for your credit health. (See the end of this story for how the study was conducted.)

Meanwhile, more mathematics education had no bearing on whether a student would take on debt and, actually, people with more exposure to math had “improved credit scores, a lower likelihood of delinquencies, and a lower likelihood of debt use.”  Mandatory financial literacy, which is not standardised across states, but generally focuses on core curricula of decision-making, career planning, personal budgeting, borrowing and investing, had a positive effect on students’ credit later on, including the likelihood of “higher credit scores, fewer delinquencies, and lower debt, particularly debt that is used to support consumption, such as credit card and auto debt.”

So, what about economics courses? These courses teach about the world around us; how and why markets behave like they do; why things costs what they do; and how markets and people behave in times of abundance or scarcity. They teach about luxury goods and commodities. Surely, these are real-life lessons to take home? Well, students with mandatory high-school instruction in economics had more delinquent accounts, more accounts in collections and lower risk scores.

So what gives?

The authors surmise that “exposure to basic economic concepts may make students more comfortable with debt and increase their participation in the credit markets.” Essentially, taking on debt seems like less of a big deal once you know how it works.

Unlike theoretical concepts in mathematics or the more personal lessons of responsible debt use common in financial literacy course, economics courses — macro and micro — are focused more on nation-states and product markets than your back pocket.

 The study’s findings — both positive and negative — were magnified for older participants. The beneficial impact of more math education increased with age. Financial literacy showed similar results, with one exception, that older subjects were more likely to declare bankruptcy (seen in this study as a positive use of the clean-slate approach to dealing with debt.)

On the other hand, those with economics backgrounds ended up having lower risk scores and greater delinquent accounts. Why does all of this matter?

Immediately following the dot-com crash and the financial crisis, policy-makers and market observers were searching for answers to head off the next crisis. But the implementation of secondary education courses on financial literacy and economics, without outcomes testing, could (and perhaps has) lead us to the conclusion that we’re teaching people just enough to be dangerous.

Of course, views on the study’s conclusions will be influenced by your own perception of debt and borrowing. Some see debt as simply a lifestyle-enabler in early adulthood (buying a car or house); others may view it as a necessity (student loans). Additionally, the study did not isolate demographics (income or family financial situation) or tendencies among a demographic group for certain types of education or spending dynamics. The study also did not break down the content in each course or how they were taught to attempt to isolate particular weaknesses. 

But the results still provide a valuable reality check.

Following the 2008-2009 financial crisis, the US created the Consumer Financial Protection Bureau to lead a national effort on financial awareness and sponsor financial research, adding to efforts already put forth by the US Treasury, Federal Reserve Banks, the Securities and Exchange Commission, industry lobbying groups, private institutions and not-for-profits which have financial literacy and education as their sole focus.

While no one would ever expect standardisation of early financial literacy education, research like this FRBNY study may show that economics education could produce better outcomes when layered in with financial literacy rather than seen as a proxy for it.

How the study was conducted: The researchers looked at increases in state-level mandates for more advanced mathematics courses, economics education and financial literacy across US states that made changes to curriculum between 1999 and 2012. They looked at credit profiles and risk scores in those states for 22- to 28-year-olds before and after curriculum changes. They also tested for “false positives” by time-shifting the data: what if the new courses started five years earlier? 

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