Montana State University

MSU professor’s study finds financial education programs improve credit outcomes for young adults

March 2, 2015 -- MSU News Service

A recent study by Montana State University assistant professor Carly Urban and others examined the effectiveness of state mandates on financial education for high school students and found notable improvements in credit outcomes for young adults who were exposed to rigorous financial education programs. MSU photo by Kelly Gorham.

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A recent study by a Montana State University faculty member and others examined the effectiveness of state mandates on financial education for high school students and found notable improvements in credit outcomes for young adults who were exposed to rigorous financial education programs.

Carly Urban, assistant professor in MSU’s Department of Agricultural Economics and Economics, and researchers from the Federal Reserve Board and the Center for Financial Security at the University of Wisconsin-Madison prepared the study.

The study notes that if a rigorous financial education program is carefully implemented, it can improve the credit scores and lower the probability of credit delinquency for young adults.

“Young adults face many difficult financial decisions, and to date, no other study has found that financial education in high school can mitigate these challenges,” Urban said. “This study highlights that if implemented rigorously, financial education mandates can serve as a policy lever to improve the financial well-being of young adults.”

The study selected three states that mandated financial education in high schools after the year 2000 (Georgia, Idaho and Texas) and compared the change in credit outcomes for young adults in those states with young adults in adjacent control states where no state-mandated financial education was implemented. In order to determine the true effect of state-mandated personal finance education on subsequent credit outcomes, the researchers used the Federal Reserve Bank of New York/Equifax Consumer Credit Panel data, which allowed them to observe an individual’s credit behavior. The researchers analyzed the credit behavior of young adults starting at age 18 until they reached the age of 22.

The study found that three years after implementing a financial education mandate, all three states examined saw significantly increased credit scores, and young adults in all three states had lower delinquency rates on credit accounts:

  • Credit scores improved by 11 points in Georgia, 16 points in Idaho and 32 points in Texas.
  • These gains translate into a two percent, three percent and five percent increase in credit scores in Georgia, Idaho and Texas, respectively.
  • Three years after the states implemented their financial education mandate, 90-day delinquency rates on credit accounts decreased in all three states.
  • Texas had the largest decrease in delinquency rate—a six percentage point drop, which translates to a relative decrease in delinquency rate of 33 percent.

According to the study, it takes time for state financial education mandates to have an effect. While very few positive effects were measured one year after implementation, by the second year after implementation, there were consistently positive results for the students. The authors contend that this lag could be due to both students and teachers adjusting to changes in the course curriculum.

The study was funded by the FINRA Investor Education Foundation, which supports innovative research and educational projects that give underserved Americans the knowledge, skills and tools necessary for financial success throughout life. For details about grant programs and other FINRA Foundation initiatives, visit www.finrafoundation.org.

Contact: Carly Urban, (406) 994-2005 or carly.urban@montana.edu