This article was supervised by MinnPost journalist Sharon Schmickle, produced in partnership with students at the University of Minnesota School of Journalism and Mass Communication, and is one in a series of occasional articles funded by a grant from the Northwest Area Foundation.
When Angelia Mayberry fell $100 short on her car payment, she turned to four local banks for loans. All four turned down the Minneapolis resident.
At Payday America, though, Mayberry found a lender more than happy to grant a short-term cash advance.
“It does help me out a lot,” the 46-year-old Mayberry said.
Mayberry also hoped to build her credit rating as she repaid the loan plus “a little bit of interest,” she said.
A little bit of interest? All too often, Minnesota borrowers, who increasingly turn to short-term lenders, do not realize that they are loading up on interest charges that could pile up debt to ruin – not improve — their credit scores. The Payday America office Mayberry frequents has advertised a package of charges that can add up to an annualized interest rate of 737 percent for a short-term, $100 loan.
The allure of quick cash can seduce borrowers into overlooking such high rates, especially borrowers with little financial knowledge or little interest in the details of credit – a fact consumers like Mayberry will admit themselves.
“I’m a poor person and very bad with money,” Mayberry said.
Too many Minnesotans are “bad with money,” say advocates of a new, coordinated effort to boost financial literacy across the state. They seek to lay the groundwork for sound financial decisions, making Minnesotans better aware of the benefits of financial planning, saving, budgeting and avoiding lenders who force them to throw good money after bad.
“The most important thing is to create a culture where financial literacy will be sustained over time,” said Minnesota Commerce Commissioner Mike Rothman, whose department initiated a Financial Literacy Roundtable in 2011, drawing on state departments, local governments, business leaders, nonprofits and others. They created a 12-step action plan focusing on education and outreach for Minnesotans from grade school children to senior citizens.
Now Minnesota schools are joining the movement along with a host of organizations from big banks to community action groups.
This ambitious movement is breaking new ground even while questions remain about the effectiveness of financial literacy education. Serious problems associated with poor financial choices have spurred public and private groups to try anyway.
‘Making sure kids know about money’
What’s the best mortgage option for a family of four making $48,000 a year?
Students at Hopkins High School use a mortgage calculator to find the answer in a typical assignment in David Braaten’s personal finance class.
Last fall, the Hopkins school district initiated a new graduation requirement for its students, adding two classes in personal finance to the courses needed to earn a diploma. Braaten, a business teacher who was involved in the program’s conception, believes Hopkins is among the first school districts in the state to take such an action.
“Personal finance is of utmost importance as something we want all students to understand before they graduate,” Braaten said. “Given where we are with the state of the economy, can we really look forward without making sure kids know about money?”
The courses cover a variety of topics, including budgeting, credit and banking.
Junior Jimmy Copouls took the course last fall, and said his experience would make him hesitant to take out a payday loan. “I know they’re risky,” he said, “and if I ever have a mad dash for some quick cash I would rather be in a little debt and take my losses than keep building my debt to a point where I can’t pay it back.”
New statewide school requirements
Looking to schools statewide, the Minnesota Department of Education released a revised version of its social studies requirements in 2012, creating a new category of personal finance standards for economics courses.
“We worked to create social studies standards that include a strong emphasis on financial literacy and personal finance,” said Beth Aune, the department’s director of academic standards. “There’s been more and more momentum for financial literacy education coming from multiple sectors — government and private.”
Rather than create new classes in personal finance as Hopkins has done, schools have the option to work the subject into existing economics courses. Different grade levels must meet different benchmarks, ranging from basic differentiation between “wants and needs” in grades K-3 to creating personalized budgets in grade six to showing understanding of topics like investment and credit in high school.
For Braaten, it isn’t enough to add personal finance to already crowded economics curricula.
“It should be a designated, well-planned, required course,” he said. “Students need to be immersed in it.”
But Aune said that adding too many new requirements limits schools’ flexibility.
“If you did make schools require a course, you tie their hands more,” Aune said. “Right now they have the option of doing it that way, like Hopkins is, but they have the choice to do it other ways too, so it gives them more flexibility.”
Nationally only 13 states required a course on personal finance to be offered in high school in 2011, and 22 states required a high school course in economics, according to a Council for Economic Education survey.
Student-run credit union
Como Park Senior High School has taken a hands-on approach: opening a credit union branch that serves students and school staff. The school bills the Cougar Credit Union as the first of its kind in the Twin Cities.
Students not only get valuable practice in saving and managing money; they also help run the school-based branch of St. Paul Federal Credit Union. Student representatives sit with teachers on an advisory oversight board, and also work as credit union interns.
Junior Timothy Smith worked at the branch, helping students open accounts, taking deposits and answering financial questions.
“The most that I learned was being able to understand how a financial institution runs; how it’s good to save money and have some for the future, and how money affects peoples’ lives,” Smith said.
MinnPost photo by Amelia Kaderabek
Building financial habits early is key for high-school aged kids, said Trevor Malone, a coordinator for the Como High program and also a student in business management at Century College.
“Right now, learn how to save. If you don’t start saving now, you don’t build those habits. It’s a lot more valuable to understand how money works,” Malone said.
Government and grassroots
Outside of the classroom, the financial literacy movement has gained ground at state government offices over the past two years.
In connection with the Commerce Department’s Financial Literacy Roundtable, 60 stakeholders convened in April 2011 to create an action plan for the state. A related work group brought together the heads of 10 state agencies to promote financial literacy.
“It’s making sure that people who are unbanked have the opportunity and access to learn about financial capability,” said Rothman, the commissioner. “It’s a challenge.”
The Commerce Department has also sponsored multiple town hall meetings to discuss the pitfalls of predatory lending. And Gov. Mark Dayton declared April to be Financial Literacy Month in Minnesota, dedicating 30 days to promoting economic education in the state.
It has been a slow-moving effort – mostly discussions, proposals and declarations so far.
“It’s growing,” said Braaten at Hopkins High, “but not very fast.”
Nonprofits have been key players in the movement. Junior Achievement, for example, has connected schools with businesses to teach students about money management.
“We bring business professionals into the school space to mentor students,” said LaChelle Williams, vice president of education and programs for Junior Achievement of the Upper Midwest.
In Junior Achievement’s statewide programs, elementary school students focus on general concepts like wants versus needs, while older students delve into specific issues like debt cycles and predatory loans.
One popular program is “Finance Park Virtual,” an online game where students create their own avatars and make budgeting decisions based on a randomly assigned career and monthly income. Players compete for high scores, earning points by correctly calculating percentages, correctly filling out budgets and making decisions that stay within those budgets.
Big companies are players too.
In September, insurance giant Allianz Life announced a $600,000 grant to Junior Achievement and BestPrep, another promoter of financial literacy, to fund educational programs for three years.
“The grant ties closely to what we value as a company,” said Laura Juergens, Allianz senior community relations specialist. “Allianz wants to improve the community and help people make educated financial decisions.”
A company known for its retirement plans needs a financially literate public in order to find clients, said Sara Thurin Rollin, Allianz’s public relations director.
“We are definitely investing in the future,” Thurin Rollin said. “We hope that if we can teach students how to make smart financial decisions early, they’ll be much more likely to be ready to be our customers down the road.”
Wells Fargo has deployed the same logic, providing hundreds of volunteers for Junior Achievement’s financial education classrooms in Minnesota as well as in community groups. Wells Fargo also has assisted with bilingual financial literacy sessions sponsored by the Mexican Consulate, and it offers its financial education program, “Hands on Banking,” in Spanish as well as in English, said spokeswoman Peggy Gunn.
Is educating effective?
Clearly, there is a need for improved financial literacy, judging from the plight of Mayberry and thousands of other Minnesotans who pay exorbitant interest on payday loans, lose homes to foreclosure and load up credit card debt.
But does education truly help them? Does teaching a 17-year-old about personal finance really impact decisions about payday loans and subprime mortgages that he or she likely won’t encounter until years later?
Not always, said Rick Nelson, who teaches finance at the University of Minnesota’s Carlson School of Management. Several studies have shown that “people exposed to financial literacy programs and training don’t act very different and don’t retain most of the information,” he said.
Researchers at the Chicago Federal Reserve Bank reviewed studies done through 2010. The link between education, literacy, and outcomes is poorly established, they reported.
“We find ample evidence that many consumers lack basic financial literacy,” they said.
“In some cases, financial education improves financial literacy and behavior, and it is most effective for those who have the least financial knowledge, income, and savings,” they said. “However, it is not clear that effective programs improve behavior through increased literacy, whether programs are cost-effective, or which types of programs are most effective. Answering these questions requires a great deal more research.”
Nelson at the Carlson School said, “I don’t know why these efforts are not very effective.” One possible explanation is that “financial literacy that people need is different at different points” in their lives.
Indeed, Nicholas Jaeger of the Minneapolis Urban League said the effectiveness depends on a person’s life stage. “The best time to educate people is during life-changing events,” he said. “Birth of a child, a wedding, graduation from high school — that’s typically when they’re ready to embrace new ideas and accept new challenges.”
Another key, Nelson said, is the financial habits young consumers learn at home.
“People’s financial habits are developed by their families,” he said. “It’s useful to teach that at a school level, but it’s hard if those habits aren’t reinforced by families.”
Meanwhile, advocates for financial literacy education insist that the need is too urgent to wait years or decades for more research.
“High school is a great time to start teaching these things,” said Braaten at Hopkins High. “At that age kids are starting to work and make money. It suddenly goes from abstract knowledge to more real-world stuff. One year from now, kids may not remember specific limits are in place for car insurance. But they’ll know how to ask the right questions.”
Sorting good guys from bad
But education alone may not be enough, said Myron Orfield, director of the Institute on Metropolitan Opportunity. The University of Minnesota law professor also advocates tougher restrictions on lenders that he says take advantage of low-income and minority groups who have little access to credit.
“It’s good to have a knowledge about what is an abusive loan,” Orfield said. “That may help some people.”
But it also is important to make sure that lenders abide by laws intended to protect consumers, he said.
Predatory lenders use the Internet aggressively to pitch easy money, often in defiance of state laws. And some agencies offering credit counseling actually are targeting debt-ridden consumers for further loan scams.
Ken Scott, the public relations representative with the Association of Independent Consumer Credit Counseling Agencies, said AICCA counsels around 2 million people every year and works to set the industry standard for consumer protection.
“There are good guys and bad guys in every industry,” and consumers need to do their homework, Scott said.