Money Science examines the latest personal finance research.
Plenty of evidence supports the idea that Americans could use more financial education in their lives. High student loan debt. Low savings rates. A stream of personal finance books.
Many states are considering requiring schools to teach personal finance classes. But does more personal finance education actually make people better at personal finance? One recent study estimates the impact of personal finance education on repayment rates for federal student loans.
The study, by Daniel Mangrum, a Ph.D. candidate in the department of economics at Vanderbilt University, finds students from states with personal finance education mandates were more likely to start paying down their student loan balances within a year. Students subject to personal finance class mandates had up to 2.5% higher one-year repayment rates, the study found. The effect was stronger for first-generation and low-income students, who had 5% higher repayment rates after being exposed to personal finance classes.
One reason for the improvement may be because many personal finance classes require students to apply for federal student aid, Mangrum said. As a result, students who take these classes may be better at navigating the complex federal loan system and at managing their resulting debt.
"Right when these students are taking these classes, they're also applying to college and the classes are helping them understand how to go about applying for federal aid," Mangrum said.
How the study was done
A lack of quality borrower-level data makes it difficult to conduct credible research on student loans, Mangrum said. To get around this, Mangrum used data from the College Scorecard, a federal website that grades universities on student loan repayments. For each incoming class at a university, Mangrum tracked how many students came from states that require personal finance classes and calculated how variations in the makeup of the student body affected repayment rates.
According to Next Gen Personal Finance, a nonprofit advocating for personal finance education, 24 states mandate some form of personal finance education, ranging from dedicated personal finance classes lasting up to a year to embedded lessons in existing classes like economics.
Should every state require personal finance classes?
It might not be the most cost-effective way to improve student loan repayment, Mangrum said. The results of his study — at most a 5% improvement for repayment rate for certain students — are modest. At the average public university, they represent only about 30 more students reducing their balance in a year. And personal finance classes can be expensive to implement, Mangrum said.
"Whenever you adjust state standards you're crowding out other potential curriculum," Mangrum said.
It may be more cost-effective and far-reaching to simplify the federal loan system, he concluded.
How parents can help
Parents should push their children to fill out the Free Application for Federal Student Aid (FAFSA), which provides access to to many forms of financial help paying for college. The Department of Education provides a guide for parents who are filling out the FAFSA form.
Those with federal loans may want to look into income-based repayment plans. Depending on the students' profession, they may qualify for loan forgiveness. Loans can also be discharged if the student becomes disabled.
Before taking on any debt, it's a good idea to get a picture of your finances. You can use our free budget spreadsheet to prioritize your debt payments.
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Image: Phillip Blackowl