Staff Reports
Financial Education and the Debt Behavior of the Young
September  Number 634
Revised  July 2014
JEL classification: A20, D12, D14

Authors: Meta Brown, Wilbert van der Klaauw, Jaya Wen, and Basit Zafar

Young Americans are heavily reliant on debt and have clear financial literacy shortcomings, yet evidence on the relationship between financial education and youths’ subsequent debt behavior remains limited and mixed. In this paper, we study the effects of exposure to financial training on debt outcomes in early adulthood among a 2 percent sample of all Americans aged nineteen to twenty-nine. Variation in exposure to financial training comes from statewide changes, mandated over the 1990s and 2000s, in high school graduation requirements relating to financial literacy, economics, and mathematics. The FRBNY Consumer Credit Panel provides debt outcomes based on quarterly Equifax credit reports from 1999 to 2013. Our analysis, based on a flexible event study approach, reveals significant effects of quantitative training on debt-related outcomes of youth. We find that exposure to math and financial literacy education decreases the incidence of adverse outcomes—such as bankruptcies—and reduces the likelihood of youth carrying debt. These effects fade out with age. However, economic education leads to an increase in debt market participation, with the effects accumulating over the course of early adulthood. It increases debt balances in later youth, increasing the likelihood of adverse outcomes (such as collections and delinquencies), and leads to a decline in youths’ average risk scores. We find that, during a difficult era for young first-time homebuyers, exposure to all three types of financial education delays entry into homeownership. Our results suggest that financial education programs, increasingly promoted by policymakers, do have significant impacts on the financial decision making of youth, but their impacts may depend on the content of the programs.

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