As personal bankruptcy filings continue to climb, the link between financial literacy and the record numbers of filings is becoming more apparent. The Jump$tart Coalition,¹ a Washington-based non-profit organization seeking to improve the financial literacy of young adults, learned from its 1997 national survey that most students are leaving high school without the financial management skills they need. An analysis of the results indicates a strong negative relationship between the students' scores and the personal bankruptcy rates in their states.

In Jump$tart's 1997 nationwide benchmark survey of America's young adults, it was found that students are leaving schools without the ability to make critical financial decisions affecting their lives. Many are unable to balance a checkbook, and most simply have no insight into the basic survival principles involved with spending, saving and investing. The survey examined four categories: income, money management, saving and investing, and spending and credit. The survey also polled students on where they learned about personal finance, and only 10 percent said responded that they learn these skills in school. The majority, 60 percent, said they learned from their parents, which may either be a positive or negative factor, depending on the example their parents are setting. In light of the skyrocketing personal bankruptcy rate, parents are not providing a good example in many cases.

Survey Analysis

Speaking before a subcommittee of the House Judiciary Committee evaluating bankruptcy reform legislation, Lewis Mandell, Ph.D., an economist who is dean of the School of Management at the University at Buffalo and a Jump$tart board member, presented new data from the survey he conducted for the Jump$tart Coalition. The survey tested 1,532 high school seniors from across the United States on their knowledge of personal finance basics, such as taxes, retirement, insurance, credit use, inflation and budgeting. The students correctly answered only 57.3 percent of the 31 multiple choice questions designed by educators. Only 10.2 percent of the students scored a "C" or better on the exam. Of particular note is that the study also showed that states with high numbers of adults declaring personal bankruptcy had high numbers of 12th graders who are illiterate when it comes to personal finance.

Another relevant finding is that experience in managing one's own finances does little, if anything, to improve financial literacy. For instance, students who use credit cards do not know anything more about them in terms of fee penalties, for example, than students who do not use them. When questioned about finance charges on credit card bills, 61.2 percent of the students answered the question correctly that paying only the minimum amount each month will result in the greatest dollar amount in finance charges per year. However, 69.6 percent of students who had no credit card answered correctly. Experience proved to be an inadequate teacher in this case, Mandell said.

Link to Personal Bankruptcy Filings

A new analysis of the results, contained in the recently published book Our Vulnerable Youth, found that the mean score on the survey was 55.6 percent in states where the rate of personal bankruptcy filings was very high (above one and a half percent of households). Conversely, in states where the bankruptcy rate was very low (below one half of one percent of households), mean survey scores were 70.3 percent. This relationship was supported through more detailed analysis, according to Mandell, even after controlling other factors likely to influence financial literacy scores, such as sex, race, region, income and education.

"While direct causation cannot be shown, because high school seniors seldom declare bankruptcy, the results are very meaningful," Mandell said. "They show that financial literacy—while by no means the sole cause—appears to be an important factor affecting the number of bankruptcy filings. If a state has a high rate of personal bankruptcy, it probably does little to insure that its citizens are well-educated in personal finance."

Mandell's testimony came on March 12 during the second of two days of House hearings on three bills to reform the U.S. Bankruptcy Code. While stopping short of taking a position on any of the bills, Mandell said the Jump$tart survey's findings—and the role of youth education—should be factored into the broad debate on the country's bankruptcy situation. In 1997, consumer bankruptcy filings totaled 1,350,118—up 20 percent from total non-business filings of 1,125,006 in calendar year 1996, according to the Administrative Office of the U.S. Courts. In addition, a survey of 1996 filers by Visa U.S.A. Inc. found that 8.7 percent were aged 18-25.

Educating Young Adults

The response to Dr. Mandell's testimony was positive and hopefully influential in the addition of §117 to H.R. 3150, the Bankruptcy Reform Act of 1998, which passed the House Judiciary Committee. This section of the proposed bill states: "It is the sense of Congress that states should develop curricula relating to the subject of personal finance, designed for use in elementary and secondary schools." The new data presented by Mandell underscores the dire need for improvements in personal finance curricula for the country's 50 million students in grades K-12. Unless this country takes action on the education front, the bankruptcy cycle is destined to continue. Many of this country's young people will end up in bankruptcy court if they are not taught personal finance basics before they become self-supporting adults.

Further information about the Jump$tart Coalition and its efforts can be found on its web site at http://www.jumpstartcoalition.org. When visiting the site, check out the section called "education materials." This is a database of personal finance curriculum that has been evaluated by Jump$tart's Education Committee and contains high-quality, low-cost materials that educators and parents can order. In addition, there is an order form to obtain Dr. Lew Mandell's book, Our Vulnerable Youth. For additional information or assistance, call Jump$tart at (202) 466-8604.

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Footnotes

¹ Jump$tart Coalition, which has more than 70 members including federal agencies, universities, non-profit associations and sponsors of education programs, has set a goal for the year 2007: Every student will have the skills to be financially competent upon graduation from high school. The ABI is one of the partners in the Jump$tart Coalition. Return to article

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Journal Date:  Thursday, October 1, 1998 © American Bankruptcy Institute. All rights reserved. ABI is a (501)(c)(3) non-profit business (52-1295453)