How the DMV Could Drive Home Financial Education

Page 2 of 2

March 10, 2013

The situation is actually getting worse. The number of states that require students to take tests on financial life skills dropped from nine in 2009 to just five in 2011.

At the federal level, attempts at teaching the basics of finance are scattershot at best. As of last summer, the U.S. Government had 16 overlapping programs that teach this stuff, according to the Government Accountability Office. That number doesn't include the Consumer Financial Protection Bureau, which assumed primary responsibility for coordinating such programs when its 10-member Office of Financial Education opened last summer.

Do all these programs succeed in helping consumers make better financial decisions? For the most part, the GAO said it couldn't tell.

This is particularly troubling because we know the difference that effective financial education can make in young peoples' lives. Teens and young adults who grow up in states that require financial education courses are significantly more likely to put money into savings and pay their credit card balances in full every month, and less likely to max out their credit cards, make late credit card payments or become compulsive shoppers, according to a study by Dr. Michael Gutter of the University of Florida.

Classes and testing on financial basics help people thrive all the way into their golden years, according to research by Annamaria Lusardi, a professor of financial literacy at Dartmouth. Answering just one additional question correctly on a financial literacy test boosts the chances that a person will plan responsibly for retirement by up to 10 percent.

What's important is to help young people see that financial basics are both easy to learn and vital to their long-term well-being. Tying that education to something many teens care about deeply -- like getting a car -- is one path to accomplish that.

"It is a low-cost, low-barrier option for getting a student interested, and they have an incentive to do so," Nan J. Morrison, CEO of the Council for Economic Education, says about the proposal.

When we commit to including financial literacy questions on state drivers' tests, we need not start from scratch. The council has 60 years of experience developing curricula and training teachers on how to make financial life skills fun and accessible. Other organizations including the Georgia Consortium for Personal Financial Literacy do similar work for people of all ages.

Since the questions will appear on driver's tests, they should be car-related, Lusardi says. Here are some good potential questions:

If you want to buy a car for $15,000 using a five-year loan with an annual interest rate of 4%, how much will you pay in interest over the life of the loan?
If you are saving for a car or another large purchase, what percentage of your income should you set aside in your savings account every month?
If you miss a few car payments, how much damage will that cause to your credit score? A lot, a little, or none?

For most teenagers, a driver's license is far more than a state-issued permit to operate a motor vehicle. It's freedom, a social life, first dates, an early flowering of what will soon become adult independence. Letting them take the road without first teaching them the basics of financial realities is like encouraging them to speed down a twisty two-lane mountain highway. Mandating financial questions on driver's tests will help to reduce the danger.

Whether it's a car, an auto loan or a credit card, it's our parental responsibility to make sure that our kids are safe.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.