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

34 Pages Posted: 19 Oct 2017 Last revised: 26 May 2018

Melody Harvey

Pardee RAND Graduate School

Date Written: October 16, 2017

Abstract

Financial literacy in the United States remains very low: two-thirds of Americans are unable to correctly answer more than three out of five questions regarding interest rates, inflation, risk diversification, mortgages, and bond pricing. Adequate financial knowledge is critical because consumers are increasingly being asked to take responsibility for their own financial health. One policy response has been to mandate financial education in schools; however, it remains unclear if financial education actually improves financial capability. In this study, I use data from the National Financial Capability Study (2012) to examine whether financial education impacts the use of alternative financial services (AFS). By estimating probability and count data models with state fixed effects to examine AFS use among younger adults who were mandated to take financial education in high school relative to those who were not, I find that financial education mandates significantly reduced the likelihood and frequency of payday borrowing. Furthermore, financial education mandates significantly reduced the probabilities of using AFS among underrepresented minorities. These findings suggest that evaluations on financial education policy should also focus on financial behaviors that younger consumers are significantly more likely to engage in, such as high-cost borrowing. Failure to do so may underestimate the benefits of school-based financial education.

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

JEL Classification: A2, D1, G23, J1

Suggested Citation

Harvey, Melody, Impact of Financial Education Mandates on Younger Consumers’ Use of Alternative Financial Services (October 16, 2017). Available at SSRN: https://ssrn.com/abstract=3054379 or http://dx.doi.org/10.2139/ssrn.3054379

Melody Harvey (Contact Author)

Pardee RAND Graduate School ( email )

1776 Main Street
Santa Monica, CA 90401
United States

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