Numerous complaints of so-called predatory lending have
been reported in recent years. According to these reports, certain lenders
exploit unsophisticated borrowers by inducing them to agree to disadvantageous
loan contracts. A disadvantageous contract, in this context, means a
loan that is overpriced or overly restrictive after adjusting for risk,
in the sense that the borrower could easily do better by shopping around
a little or, in extreme cases, by simply doing nothing. The extreme
cases include loans seemingly rigged to yield default and foreclosure,
so borrowers lose their homes or home equity to the lenders.
By its nature, predatory lending is difficult to track and measure,
but growing anecdotal and circumstantial evidence has convinced many
observers that it is a serious problem. In 2000, a national task force
organized by the U.S. Department of Housing and Urban Development and
the U.S. Department of the Treasury collected information about predatory
lending from around the country. The task force reported that "there
is a growing body of anecdotal evidence that an unscrupulous subset
of ... actors ... engage in abusive lending practices."1
Some policymakers have recently modified consumer regulations and laws
in an attempt to curb predatory lending, providing further evidence
that the problem is perceived as a serious one.
However, regulations and laws intended to curb predatory lending may
have undesired consequences. They may impede the operation of legitimate
credit markets, making it difficult for financially vulnerable individuals
to access credit. Partly for that reason, policymakers are exploring
other approaches to reduce predatory lending. Increasing the financial
knowledge of borrowers is one appealing approach. If successful, it
could make borrowers less susceptible to predatory loan offers and improve
the operations of legitimate credit markets. With these hopes in mind,
Federal Reserve System governors, the secretary of the Treasury, leading
members of Congress and others have endorsed financial literacy training
as a promising antidote to predatory lending.
It seems logical that delivering appropriate financial training to vulnerable
borrowers will help them ward off predatory lenders. But is there evidence
that this approach actually works? Unfortunately, direct evidence on
training aimed at preventing predatory lending is hard to find, due
in part to the difficulties involved in monitoring predatory lending.
So, this article focuses on a more limited question: Does financial
literacy training, of any kind, bring about positive behavioral change?
Several recent studies examine the effectiveness of certain forms of
financial literacy training, and a review of these studies supports
cautious optimism about the ability of well-designed educational programs
to bring about responsible financial decision making. This optimism,
in turn, supports further exploration of financial literacy training
as a tool for reducing abusive lending practices.
Reviewing the evidence
For decades, financial literacy training has been offered in many different
forms and settings to many different audiences. Efforts to measure the
effectiveness of this training are typically organized around its subject
matter and audience. Accordingly, this review of the research on financial
literacy training is organized into three commonly studied categories:
General financial literacy offered to high school students;
Training related to retirement and savings planning, offered by
employers to employees; and
Home buying and homeownership training, offered to mortgage applicants
or to homeowners who are having difficulties making
High school financial literacy training
Basic financial literacy education has been available for decades in
many high schools, but only recently has its effectiveness been studied.
The recent studies are far from comprehensive, but they suggest both
short-term and long-term effects.
Evidence of short-term effects comes from studies of students exposed
to the High School Financial Planning Program® (HSFPP)
curriculum between September 1997 and January 1998. For the studies,
which were conducted by researchers from the University of Minnesota
and the University of Wisconsin, over 4,000 students from 188 high schools
across the United States returned surveys after completing the HSFPP
curriculum. More than 400 of those students completed a follow-up survey
three months later, and their teachers were also surveyed.
The studies have some limitations, since their results are based entirely
on the students' and teachers' subjective assessments, and no control
group was used to benchmark the results. Notwithstanding these limitations,
the authors concluded that "teaching personal finance in high schools
can positively impact the financial knowledge, behavior, and self-efficacy
levels of teens."2
Immediately after completing the HSFPP curriculum, almost half of the
students in the study reported increases in their financial knowledge.
Of special note, "the area where the most students increased in
knowledge was in understanding the cost of credit,"3
which could help reduce their subsequent susceptibility to predatory
lenders. In addition, about a third of the students reported changes
in behavior, especially in tracking expenses and setting and achieving
money-management goals. Teachers generally agreed with their students'
self-assessments, indicating a "marked change in knowledge and
behavior in students after participating," with "the most
changes in the areas of consumer credit, car insurance, time value of
money, and tracking expenses."4
And of the subset of students who completed follow-up surveys three
months after their training, nearly 40 percent had started saving money,
and 31 percent reported that opening a savings account was the most
important financial planning activity they engaged in after completing
In many areas, at least half of the surveyed students did not report
gains in their financial knowledge or changes in their behavior. Although
this may seem discouraging, the authors indicate that it is partly due
to the fact that many students had already adopted responsible financial
behaviors before their training. In other words, the gains reported
for this curriculum in large part reflect a "leveling up"
of the knowledge and behavior of individuals who were not already financially
savvy. This theme runs through many of the studies summarized here.
Reports that the benefits of financial literacy training persist months
later are encouraging. But the benefits need to persist for years or
even decades to be effective against predatory lending. At least one
study suggests that they do. The study, conducted by researchers B.
Douglas Bernheim, Daniel M. Garrett and Dean M. Maki, takes advantage
of the fact that, historically, some states have at times mandated financial
literacy education in high schools.
The study is based on financial and demographic data collected in 1995
from a national sample of 2,000 individuals between the ages of 30 and
49. Allowing for other factors that affect financial behavior, it found
that adults who attended high school when their states mandated financial
literacy training generally save more and accumulate more wealth than
other adults. Their net worth is higher—by an amount equivalent
to one year's earnings—than the net worth of adults who attended
high school when their states did not mandate financial literacy training.
In other words, exposure to state-mandated financial literacy education
appears to be associated with more frugal adult financial behavior,
even 30 years later.
As with the short-term benefits of high school financial literacy training,
the long-term benefits may result from leveling up the knowledge of
some individuals. When the researchers measured the effects of mandated
training, they made a distinction between "individuals whose parents
did and did not save more than average."5
They found that the long-term benefits of financial literacy training
are concentrated among individuals who reported that their parents'
savings rates were at or below the average. The researchers concluded
that "the consistency of this pattern ... provides considerable
support to the view that financial education at school is a close substitute
for financial education at home."6
In other words, high school financial literacy training appears to be
especially effective for individuals who did not learn the basic habits
of household saving from their parents.
Ninth District Financial Literacy Standards
According to a recent study funded by the National Endowment
for Financial Education, fewer than half of all states cover
personal financial management in their required coursework
for grades kindergarten through 12 (K-12). Only three of those
states—Florida, Illinois and Rhode Island—require high school
students to complete a personal finance course in order to
None of the six states in the Ninth District has such a requirement
in place, but all six include economics and, to some degree,
personal finance in their academic content standards. Content
standards are defined expectations of what students need to
know in particular subject areas, and many school districts
use them as the basis for their K-12 curricula.
In addition to including economics and personal finance in
their current content standards, several Ninth District states
have recently considered legislation related to financial
literacy education. Summaries of the relevant content standards
and legislative actions appear below.
Michigan: Economics content standards from the Michigan
Department of Education (MDE) emphasize an understanding of
individual and household choices, business choices, economic
systems, trade and the government's role in the free-market
economy. (For more information, visit www.michigan.gov/mde.)
Legislation: A 2001 amendment to the state's revised
school code requires the MDE to develop or adopt model financial
education programs for grades K-12.
Minnesota: Economics and business content standards
from the Minnesota Department of Children, Families and Learning
introduce the concepts of resource management, decision making
and informed consumerism in middle school. In grades 9-12,
the emphasis is on personal and family resource management,
financial analysis and economic systems.
Legislation: Several financial education bills were
defeated in the Minnesota legislature in 1999 and 2001, including
one requiring personal and family financial management and
investment education for all high school students.
Montana: The Montana Office of Public Instruction's
content standards for social studies emphasize the basic economic
principles of production, distribution, exchange and consumption.
By high school graduation, students are expected to understand
financial institutions and the common products they offer.
Separate standards for career and vocational/technical education
emphasize basic monetary skills and financial management.
(For more information, visit www.opi.state.mt.us.)
Legislation: Senate Joint Resolution No. 2, passed
in 1999, urged the Montana Board of Public Education to integrate
economic principles and retirement planning into the K-12
curriculum in order to improve retirement planning and saving.
North Dakota: The North Dakota Department of Public
Instruction's social studies content standards emphasize supply
and demand, economic systems and resource management. Specific
knowledge in support of these standards includes an understanding
of budgets, checking, savings, credit, interest and financial
institutions. (For more information, visit www.dpi.state.nd.us.)
South Dakota: Under the South Dakota Department of
Education and Cultural Affairs' content standards, economics
is one of four core areas of social studies education. Basic
economic concepts are introduced in the early grades. In later
grades, lessons in economic systems and practices are conveyed
through a variety of history courses. Separate content standards
for consumer and family resources emphasize resource management,
personal and family financial planning, consumer awareness
and insurance decisions. (For more information, visit http://doe.sd.gov.)
Wisconsin: The Wisconsin Department of Public Instruction's
core academic standards for economics include concepts of
production, distribution, exchange and consumption, with some
emphasis on consumer rights and decision making. Separate
content standards for business education emphasize savings,
checking, credit and investments. (For more information, visit
Legislation: Wisconsin Senate Joint Resolution 31,
dated April 11, 2001, urges the educational community to explore
ways of teaching personal finance to junior and high school
students. A 2002 report from the Governor's Task Force on
Financial Education recommends a financial education requirement
for all students.
Legislative information was obtained from the Jump$tart
Coalition for Personal Financial Literacy at www.jumpstart.org.
Workplace financial literacy training
Many firms offer employees financial literacy materials or training,
usually with a focus on retirement savings plans. Surveys conducted
in the 1990s found that roughly three-fourths of companies provided
some financial education in the workplace, in the form of summary
plan descriptions, newsletters, one-on-one counseling or participatory
workshops. The vast majority of workplace financial training covered
topics such as asset allocation and retirement income.7
These surveys also indicate that a key reason why employers provide
financial literacy training is to boost their employees' savings plan
participation and contribution rates. This may be partly due to the
fact that, under many retirement savings plans, contribution limits
for highly compensated managers and executives are eased if other
employees' participation and contribution rates increase.
Well-designed programs of workplace financial training seem to change
behavior, especially among employees who are not highly compensated.
A number of studies of workplace savings plans generally agree on
the following points:
Providing generic information, especially in written form, is
the least effective method of delivering training and sometimes
appears to have little or no effect.
The more specific the information is to the firm's plan or the
individuals' situations, and the more frequently and personally
it is offered, the more effective it is.
Well-tailored information, especially if it is offered frequently
or in person, can raise overall employee retirement plan participation
and contribution rates at least as effectively as generous employer-matching
With the exception of employer matching and financial education,
retirement plan provisions have relatively isolated and limited
effects on employee behavior.
The effects of workplace financial training are concentrated among
nonhighly compensated employees and appear to be reduced or nonexistent
for highly compensated employees.
These studies provide consistent evidence that financial literacy training
in the workplace can induce more prudent retirement savings behavior,
at least among employees whose participation and contribution rates
are initially low. However, many of the studies have significant gaps,
such as failing to provide information about employees' savings behavior
outside the workplace—leaving open the possibility that increased
participation merely reflects a shift of existing savings into employers'
plans. A few studies attempt to fill these knowledge gaps, and they
bolster the view that the positive effects of workplace financial training
are real and extend to the employee's household generally. For example,
a study that measured all forms of savings found that the median total
savings rate for employees—including savings outside the workplace—is
about 20 percent higher when the employees can obtain financial training
at work.9 The study also
found that spouses of these employees tend to participate at higher
rates in their own employers' plans.10
The screening problem
Screening, or the bias that can be introduced through a
study's selection process, makes it difficult to determine
whether the effectiveness of some homeownership education
and counseling (HEC) training is due to the training itself
or the traits of the HEC participants. Researchers continue
to devise statistical procedures to adjust for screening effects
and correct other study flaws, but it is still difficult to
define and measure the success of HEC programs. (This difficulty
need not imply that HEC programs are without merit, for the
screening function itself may be valuable. See the McCarthy
and Quercia study referenced in the main article below for
comments on how the screening provided by HEC programs has
helped facilitate increased lending to low-income communities.)
Screening effects are also a problem in some studies that
focus only on recipients of high school or workplace training.
However, in these cases, the gap is covered by other studies
that focus on whole populations for whom training was available,
without differentiating between the individuals who chose
to pursue the training and those who did not. Some of these
studies also provide evidence that even the availability of
training was not correlated with any preexisting interest
in or tendency toward financial prudence. (For example, see
the Bernheim, Garrett and Maki study of high school training
and the Bernheim and Garrett or Bayer, Bernheim and Scholz
studies of workplace training discussed in the main article.)
According to Roberto G. Quercia of the University of North Carolina
and Susan M. Wachter of the University of Pennsylvania, homeownership
education and counseling (HEC) programs, which provide information about
the financial aspects of buying and keeping a home and are usually directed
at low-income individuals, "evolved from the implementation of
the 1968 Housing and Urban Development Act."11
The Act authorized "public and private organizations to provide
counseling to mortgagors" affected by certain federal programs.12
Subsequent federal legislation, including the Fair
Credit Reporting Act of 1970, provided additional impetus by setting
standards for granting credit and encouraging consumer education. By
1993, more than 1,000 organizations were receiving homeownership education
funding from foundations, federal housing authorities and states.
Federal funding of HEC helped stimulate studies of its effectiveness,
beginning with a flurry in the 1970s that has since tapered off. Recent
reviews of these studies conclude that almost all are flawed and that,
as a result, "it is astounding to consider what little empirical
evidence there is to determine how well HEC works."13
Several factors make it difficult to accurately assess whether HEC leads
to positive behavior changes by enhancing home buyers' knowledge. In
the first place, it is even difficult to define an appropriate measure
of success. One indication might be increased home buying rates for
low-income clients. But increased home buying alone can be a misleading
indicator. If buyers are not prepared for the ongoing financial burdens
of homeownership, increased home buying could result in increased mortgage
delinquencies and defaults a few years later. So a complete measure
needs to consider both home buying rates and subsequent delinquency
and default rates, with success indicated by some combination of more
home buying and fewer defaults per buyer.14
Many studies consider only one of these two factors.
Even if an appropriate measure of success could be established, studies
of HEC's effectiveness often cannot adequately control for certain factors
outside the training that affect the results. For example, completion
of HEC is often required to obtain some kinds of private or public low-income
mortgage financing. Low-income would-be borrowers who are organized
and disciplined enough to complete the required HEC training differ,
at least by those traits, from low-income buyers who avoid or fail to
complete the training. Even if they learn nothing at all in their classes,
HEC graduates will tend to be more successful, on average, than low-income
would-be borrowers who do not complete the program. So when HEC graduates
disproportionately succeed as homeowners, it is difficult to know whether
their success is due to the training they received or merely to HEC's
ability to "screen in" individuals who are already well suited
Although assessing the overall educational success of HEC programs is
difficult, a recent study of HEC delivery methods reinforces the common-sense
view that outcomes improve when financial literacy training is delivered
face to face. The study, conducted by Abdighani Hirad and Peter M. Zorn
of Freddie Mac, tracked delinquency rates on 40,000 mortgages originated
under a program for risky borrowers that requires participants to complete
HEC. It found that borrowers who received classroom instruction or one-on-one
counseling had significantly lower delinquency rates than borrowers
who received training via telephone counseling or self-study.16
Because classroom and one-on-one instruction may require more commitment
from borrowers than the alternatives do, the researchers cannot say
for sure whether the lower delinquency rates result from better education
or simple screening effects. In addition, lower delinquency rates are
only a partial measure of home buying success, since they do not indicate
the number of people who were turned down in their attempts to purchase
homes. Nonetheless, the study is generally consistent with other results
supporting the idea that face-to-face training is associated with desirable
Evidence mixed but supportive
A review of the research on the effectiveness of financial literacy
training shows that training offered by high schools and workplaces
is associated with improved financial knowledge and behavior. These
associations are especially strong for low-income or less-educated recipients,
supporting the idea that financial literacy training has the potential
to curb predatory lending.
However, the efficacy of HEC is less clear, due to the difficulties
discussed above. Many predatory lending practices involve mortgages,
and the lack of solid evidence about the success of HEC casts some doubt
on the idea that financial literacy training can be an antidote to those
So, although little is yet known about financial literacy training specifically
targeted against predatory lending, the existing evidence on other forms
of financial literacy training is partly encouraging and partly discouraging.
However, the special factors that raise doubts about the effectiveness
of HEC, like screening effects, might be overcome by developing delivery
channels that reach across the population of individuals at risk for
predatory lending. For this reason, and because of the favorable evidence
on other forms of financial literacy training, the overall body of evidence
seems generally supportive of the idea that well-designed, appropriately
delivered financial literacy training should be considered as a tool
to prevent predatory lending.
Curbing Predatory Home Mortgage Lending, U.S. Department of Housing
and Urban Development-U.S. Department of the Treasury (2000), p. 13.
2 Catherine A. Huddleston-Casas,
Sharon M. Danes and Laurie Boyce, "Impact Evaluation of a Financial
Literacy Program: Evidence for Needed Educational Policy Changes,"
Consumer Interests Annual, vol. 45 (1999), p. 113.
3 Sharon M. Danes, Catherine Huddleston-Casas
and Laurie Boyce, "Financial Planning Curriculum for Teens: Impact
Evaluation," Financial Counseling and Planning, vol. 10,
no. 1 (1999), p. 32.
5 B. Douglas Bernheim,
Daniel M. Garrett and Dean M. Maki, "Education and Saving: The
Long-Term Effects of High School Financial Curriculum Mandates,"
Journal of Public Economics, vol. 80 (June 2001), p. 460.
7 Patrick J. Bayer, B.
Douglas Bernheim and John Karl Scholz, "The Effects of Financial
Education in the Workplace: Evidence from a Survey of Employers,"
Working Paper 5655 of Working Paper Series, National Bureau of
Economic Research Inc., July 1996. Similar findings appear in B. Douglas
Bernheim, "Financial Illiteracy, Education and Retirement Saving,"
Living With Defined Contribution Pensions (University of Pennsylvania
Press, 1998), p. 62.
8 In employer-matching
programs, employers supplement their employees' contributions to a retirement
savings plan, up to a specified limit. For example, an employer might
contribute an extra 50 cents for each dollar contributed by an employee,
up to a fixed percentage of the employee's salary.
9 B. Douglas Bernheim
and Daniel M. Garrett, "The Effects of Financial Education in the
Workplace: Evidence from a Survey of Households" (August 2001),
10 Ibid., p. 18.
11Roberto G. Quercia
and Susan M. Wachter, "Homeownership Counseling Performance: How
Can It Be Measured?" Housing Policy Debate, vol. 7, issue
1 (Fannie Mae Foundation, 1996), p. 178.
13 George W. McCarthy
and Roberto G. Quercia, "Bridging the Gap Between Supply and Demand:
The Evolution of the Homeownership, Education and Counseling Industry,"
Report 00-01 (The Research Institute for Housing America, May 2000),
14 Quercia and Wachter,
15 Researchers continue
to devise statistical procedures to adjust for screening effects and
correct other study flaws, but it is still difficult to define and measure
the success of HEC programs. (This difficulty need not imply that HEC
programs are without merit, for the screening function itself may be
valuable. See the McCarthy and Quercia study referenced above for comments
on how the screening provided by HEC programs has helped facilitate
increased lending to low-income communities.) Screening effects are
also a problem in some studies that focus only on recipients of high
school or workplace training. However, in these cases, the gap is covered
by other studies that focus on whole populations for whom training was
available, without differentiating between the individuals who chose
to pursue the training and those who did not. Some of these studies
also provide evidence that even the availability of training was not
correlated with any pre-existing interest in or tendency toward financial
prudence. For example, see the Bernheim, Garrett and Maki study of high
school training and the Bernheim and Garrett or Bayer, Bernheim and
Scholz studies of workplace training discussed above.
16 Abdighani Hirad and Peter M.
Zorn, "A Little Knowledge Is a Good Thing: Empirical Evidence of
the Effectiveness of Pre-Purchase Homeownership Counseling,"
Low-Income Homeownership Working Paper Series (Joint Center for
Housing Studies of Harvard University, August 2001), p. 14.