Staff Reports
Financial Education and the Debt Behavior of the Young
September  Number 634
Revised  February 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 we have little understanding of the relationship between financial education and their subsequent debt behavior. In this paper, we study the effects of exposure to financial training on debt outcomes in early adulthood. Identification comes from variation in financial literacy, economics, and mathematics graduation requirements mandated over the 1990s and 2000s by state-level high school curricula. The FRBNY Consumer Credit Panel provides debt outcomes based on quarterly Equifax credit reports from 1999 to 2012. Our analysis, based on a flexible event study approach, reveals significant effects of quantitative training on debt-related outcomes of youth. On the extensive margin, financial literacy education has a modest impact on the propensity of youth having a credit report. On the intensive margin, we find that math and financial literacy education exposure reduces the incidence of adverse outcomes – such as accounts in collections and delinquent accounts – and reduces both the likelihood of youth carrying debt and their average debt balances. During a difficult era for young first time homebuyers, both math and financial literacy education exposure delay entry into homeownership. The net effect of both math and financial literacy education is an increase in the youths’ average creditworthiness, as measured by the Equifax risk score. On the other hand, economic education leads to significant increases in debt market participation and debt balances – in particular, debt used to support consumption. It increases the likelihood of adverse credit outcomes, leading to a decline in youths’ average risk scores. The effects of these financial education policies accumulate over the course of early adulthood. Our results suggest that financial education programs, increasingly promoted by policy-makers, are likely to have significant impacts on the financial decision-making of youth, but their impacts may depend heavily on the content of the programs.

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