Impact of Financial Education Mandates on Younger Consumers’ Use of Alternative Financial Services

Abstract

Over one-quarter of American adults used credit-based alternative financial services (AFS) in the past five years, which carry a typical APR of 300 percent. Young adults are especially more likely to use AFS yet are also more likely to be exposed to personal finance education in schools. In this study, I use data from pooled 2012 and 2015 waves of National Financial Capability Study to examine whether state-mandated financial education impacts young adults’ use of AFS. I find that financial education mandates significantly reduced the likelihood and frequency of payday borrowing in particular. Additionally, I show that exposure to required personal finance courses could affect payday borrowing through increased financial literacy and improved financial planning practices. These findings suggest that policymakers and other stakeholders need to understand the full benefits of financial education when making cost-benefit analysis comparisons as to whether or not to implement.

Keywords: public policy, financial education, alternative financial services, fringe banking, young adults, National Financial Capability Study

JEL Classification: A2, D1, G23, J1