Maybe Financial Literacy Is NOT the Answer to Student Overborrowing, Part 2

Spring boarding from a piece in the Pacific Standard, we’re spending some time this week looking at a school of thought that is contrary to that of the mainstream: debt and loan counseling may not prevent student overborrowing. According to the essay, if counseling is delivered at the point of sale, for instance, the potential for conflicts of interest is huge. Where does education end and marketing begin? With no credentialing or oversight requirements in the financial literacy world, itâ��s up to the consumerâ��the one in need of enlightenment, rememberâ��to determine whether a lesson objectively and thoroughly covers the most important bases. Take, for example, Ally Financial, a company that offers car loans and other products. It has put together an entire online education site called…

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Spring boarding from a piece in the Pacific Standard, we’re spending some time this week looking at a school of thought that is contrary to that of the mainstream: debt and loan counseling may not prevent student overborrowing.

According to the essay, if counseling is delivered at the point of sale, for instance, the potential for conflicts of interest is huge. Where does education end and marketing begin? With no credentialing or oversight requirements in the financial literacy world, it’s up to the consumer—the one in need of enlightenment, remember—to determine whether a lesson objectively and thoroughly covers the most important bases. Take, for example, Ally Financial, a company that offers car loans and other products. It has put together an entire online education site called Ally Wallet Wise. But the site makes no mention of subprime auto loans, does not say how to determine whether you are being offered one, and doesn’t help users find out what an optimal interest rate might be.

In addition, the very notion that there is some moment that’s “just in time” for many financial decisions may be a mirage. Consider retirement savings for a moment. In our current, do-it-yourself model of financial planning, built on instruments like the 401(k), consumers must begin saving early in life to maximize the money they will have on hand at the end of their careers. But that often doesn’t happen. People stay in school until their late 20s, or, faced with competing demands on their funds, come to believe they can’t afford to put money away for some ill-defined future need. They make bad decisions for what seem like good reasons. If a counselor comes along at some point in this process, it’s likely not going to be “just in time,” but either too early to make an impression—or too late to make a significant difference.

Finally, it’s worth noting that standards of good advice have a way of shifting over time in a way that, say, basic facts of history or math do not. It used to be that people saving for retirement were told to set aside 10 percent of their salary. Now, many experts suggest that figure should be more like 15 or 20 percent.

A FEW MONTHS AGO, a website called Low Pay Is Not OK brought a burst of national attention to a financial literacy initiative created by Visa and McDonald’s, designed to teach low-wage McDonald’s employees “practical money skills for life.” The online program included a suggested monthly budget for a typical employee that left room for $800 of “spending money” after expenses. The budget assumed that this employee would take a second job to bring in extra money, while not spending a penny on child care or heat, and spending a laughable $20 a month on health insurance. The intended moral of the budgeting exercise: “You can have almost anything you want, as long as you plan ahead and save for it.”

The sheer cluelessness of this exercise caused uproar on the Internet, and no wonder. The United States is an increasingly class-stratified country, where the engines of mobility appear to have stalled. Minimum wage jobs lead to other minimum wage jobs. Salaries are stagnant. College tuition has soared at rates well beyond that of inflation, forcing students to turn to loans to get by, which in turn leaves them servicing massive amounts of debt in their 20s, a time when financial literacy classes—citing the power of compound interest—say they should save. The leading cause of bankruptcy is not overspending, nor lack of adequate financial planning, but the financial free fall caused by a health crisis.

Personal shortcomings and mistakes in managing money can indeed worsen the financial situation for many of us, but even these may be more a function of stress and scarcity than ignorance. Recent research by the behavioral economists Sendhil Mullainathan and Eldar Shafir has shown that perfectly intelligent people become much less so when they are experiencing a shortage of money, time, or attention. They develop a kind of tunnel vision that erodes the long-term thinking essential to financial planning. (Indian sugarcane farmers, for instance, perform worse on cognitive tests before a harvest, when they are cash poor, than they do after they’ve sold a crop.)

Trying to take some of these realities into account, a small group of educators is fundamentally rethinking the concept of financial literacy. Chris Arthur is an eighth grade teacher and a Ph.D. candidate in education at York University in Toronto. When he taught the subject in the past, he exposed his students to the Great Piggy Bank Adventure, a traditional financial literacy game produced by T. Rowe Price and Disney, and introduced them to the business concepts promoted by Junior Achievement, the children’s entrepreneurship organization. But last year he also made them play an online game called Spent, which is not a financial literacy product at all.

Spent was designed a few years ago for the North Carolina charity Urban Ministries of Durham. The concept is simple. The gamer assumes the role of a low-wage worker—like, say, someone at McDonald’s—attempting to get by until the end of the month. Players are faced with a relentless series of decisions and tradeoffs, and almost anything—a gift for a child’s birthday, a plea from a family member to help pay for needed medication—can send them into a financial downward spiral.

Needless to say, it’s just about impossible to achieve anything resembling financial success in the game of Spent. And that’s the point. “It challenges the dominant framing of financial insecurity as wholly a problem of ignorance and irresponsible consumer behavior,” Arthur told me.

Spent, like the controversy that ended up swirling around McDonald’s suggested employee budget, points to an oft-buried truth. The financial literacy movement presumes that with a modicum of education, we can all be equal in the financial and economic marketplace. But that’s a false promise. Financial literacy is, first of all, no substitute for financial regulation. It’s also an ultimately ineffective personal solution to a systemic political and economic problem. And even McDonald’s knows it. As I was reporting this piece, the Low Pay is Not OK website released a recording of a McDonald’s employee calling the firm’s help line for financial advice, saying she could not make ends meet on her salary. The counselor she spoke with suggested she locate a local food pantry and apply for food stamps and Medicaid.

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Maybe Financial Literacy Is NOT the Answer to Student Overborrowing, Part 2

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