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Financial Education Should Be Part Of The Recovery From The Covid-19 Recession. This Is Why.

The US Department of the Treasury recently issued the new National Strategy for Financial literacy. This is much needed, in particular in a time of crisis and a good part of the report is devoted to how to help people in these difficult times and the critical role of financial education.

Since the start of the crisis, one thing has been notably absent: the voices of those who say financial education is futile and a waste of time.  The long lines at food banks stand as a painful reminder of how little financial resilience many American families had and how daunting it is to manage our finances during a pandemic. It is during a storm that sailing lessons show their worth, and it is becoming painfully obvious that knowing a thing or two about financial literacy is essential—not simply to navigate our finances but to survive in a storm.

Still, images and stories of people struggling amid the turbulence of COVID-19 are no formal test of the importance of financial education. So, together with a team of co-authors, I set out to determine whether financial education is effective.  The answer is important, not only because time and money are invested to provide financial education, but also because it is urgent that we figure out how to help families manage financial aspects of COVID-19, as argued in the National Strategy as well.

As we set out to review existing research, we discovered that the number of academic papers on financial literacy and financial education had exploded. It would have been tough to summarize them in a narrative, as we commonly do in the field of economics. Instead, we turned to a meta-analysis, a technique often used in medical or psychology studies that aggregates all the studies to determine whether there is a common finding. We were trying to answer a simple question: Does financial education work?

Not all financial education programs are the same, so we decided to focus on the most rigorous ones. We used Randomized Control Trials, or RCTs, because they are the gold standard of impact evaluation. These studies looked at behaviors that ranged from preparing for retirement to saving, borrowing, budgeting and planning, using insurance, and dealing with remittances. Prior to this, the most cited meta-analysis on financial education involved 13 studies only. It was good to see that the field has become rigorous and now embraces evaluation techniques used in the sciences.

Three findings stand out in our analyses. First, there is clear-cut evidence that financial education affects both financial knowledge and financial behavior. The estimates of the effects of financial education are three to five times as large as the estimates provided in previous work, including previous meta-analyses. Perhaps this is not surprising. We have learned over time about how to design more effective financial education programs.

Our second finding is that the impact of financial education is big enough to matter. And we estimate the impact of financial education to be similar to the effects found in other fields, such as the influence of education on math and reading. It is the same level of influence that results from interventions designed to stop and prevent smoking, to improve heath or to spark energy conservation.

Our third finding has to do with the endurance of financial education. We found no strong evidence that the effects of financial education decay over time. This does not provides much support in favor of “just in time education,” if there is such a thing. Our findings are available as a National Bureau of Economic Research’s working paper.

Coming back to our original question: Does financial education work? Our answer is a resounding “yes.” Not only does it work, but it is obvious even when looking at evidence from many education interventions that vastly differ in quality and time of instruction.

Hard data, evidence and numbers are fascinating. But they are even more persuasive when applied to real lives. In the personal finance course I have been teaching at the George Washington University School of Business since 2013, I have seen close up how financial education changes young people’s lives. It makes them think hard about the way they use credit cards, contribute to employer-matched savings plans when they begin their careers, and manage student loans.

Interestingly, recent U.S. school-based financial education graduation requirements are shown to be more impactful for first-generation college students and students from lower-income families. That said, the same policy is no more or less beneficial for minorities than whites. More efforts are needed to design financial education programs that can improve, for example, the lives of Black Americans.

 Building financial resilience in the recovery needs to be part of the strategy going forward. Yes, it is time we push for financial education in schools, at work and in other places where people go to learn. In fact, we have no time to spare. Improving financial literacy must be part of the toolkit we use to move forward and be better prepared for the future, for shocks big and small, and to enhance economic opportunities for all.

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