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The School of Hard Knocks

Student-oriented financial literacy is a band-aid on an axe wound Poster Boy

In November of last year, Columbia University announced they were going to start offering students the use of iGrad, a financial literacy web tool. According to the school’s student newspaper, the initiative was launched in response to a survey that found 29 percent of students felt that while at Columbia, they “often” or “sometimes” “had trouble paying for basic necessities like food, clothing, housing/rent or transportation.” Joseph Greenwell, the vice president of student affairs, stressed that the university has “a diversity of student community,” and that the “app really supports you where you are.”

iGrad is a “financial literacy platform” that was founded in 2009 by Rob LaBreche, a self-described financial aid professional and former president of consumer marketing at College Loan Corporation. iGrad claims to serve over 1.2 million students in five hundred schools and organizations across the country. Harvard and Yale both use it, as well as schools like New York University. An introductory video on the website explains that “iGrad is where folks come to get better at money management, make sense of their student loans, and get ready for their dream job. You know, all those real-world skills that there just isn’t a class for. iGrad’s got you covered. Hooray!” When you begin using the platform, you can “unlock cool mini courses” and take a quiz that offers personal finance recommendations. “But iGrad,” the video continues, “is way more than just courses and recommendations. Every day we post articles, infographics, and videos with must-know money, career, and student loan tips.” Some representative examples: “5 Sneaky Ways You Can Spend Less Money”; “Quiz: Is It Possible To Be Single, Fun, and Frugal?”; “Financial Wisdom from Joe Biden.” (“Don’t tell me what you value, show me your budget . . . and I’ll tell you what you value.”)

Rising student loan debt has ushered in a golden age of financial literacy programs aimed at students.

iGrad has benefitted from being in the right place at the right time, as more colleges move to institute some kind of financial literacy education. Steve Mnuchin and the Treasury Department’s Financial Literacy and Education Commission recently recommended that institutions of higher education make financial literacy mandatory. Many schools now have whole departments dedicated to the cause. The University of Arizona has their Take Charge Today: Financial Education for a Better Future program, Syracuse University has an Office of Financial Literacy, Indiana University employs a Director of Financial Literacy, and Penn State has a Financial and Life Skills Center. The list goes on.

It doesn’t stop—or start—at colleges. Today, twenty-one states require high school students to take some kind of financial literacy course, with North Carolina most recently hopping on the bandwagon. Iowa City schools have also made it mandatory. West Virginia is reportedly considering it. In Arizona, even middle schoolers have a financial literacy course: “The students might not be old enough to hold a job, but they’re already thinking about how to invest.” Seven-year-old Kennedy O’Neal recently released a rap song about the importance of financial literacy.

These initiatives have arrived at a time of record-breaking indebtedness. The total national student loan debt, as we all know, is larger than it’s ever been at more than $1.6 trillion. The average student loan debt per person is $33,310. Moody’s recently released a report showing that enrollment in higher education has gone down by 11 percent since 2011, and yet student loan balances are up by 74 percent over that same period. How could that be? It’s because most people have stopped paying off their student loans. On average, only a minuscule 3 percent of borrowers paid their balances off each year over the last decade.

Rising student loan debt has ushered in a golden age of financial literacy programs aimed at students. But as the irrepressible journalist and expert on the failures of the personal finance industry Helaine Olen writes in 2012’s Pound Foolish,the problem with the rise of financial literacy is that “no one has been able to prove financial literacy actually works.” “In fact,” she goes on, “by almost every available measure, the financial literacy of the American public has remained dismal in the almost two decades since the movement began.” Even behavior economist Richard Thaler thinks it’s useless. “The depressing truth,” he told TheEconomist, “is that financial literacy is impossible.” Which raises the question, why is it still proliferating, and where did it come from?

In the 1990s, Ford Motor Company’s lending arm, Ford Credit, noticed an uptick in the number of loan defaults. This, of course, threatened their profits. They could have reduced the number of loans they were making, but the mid-1990s were not a time of financial moderation; loose, predatory credit was still the solution to every downturn. So, Ford Credit started offering subprime auto loans to high-risk borrowers, loans that were much higher in interest and thus much more profitable. And in 1996, along with the CEO of the American Financial Services Association, Ford Credit CEO William E. Odom also started the Jump$tart Coalition for Financial Literacy, first running PSAs on the radio, then quickly switching their focus to K-12 education. The hope was that these future borrowers would grow up knowing how important it was to pay back their predatory car loans.

Jump$tart wasn’t the first financial literacy program––many banks offered educational services a decade prior––but it was one of the first to focus on schools. Beginning in the 1980s, loose financial regulations allowed for an explosion of complicated banking products, and financial literacy sprung up as something of a response to this new complexity. Rather than suggest creating a regulatory agency to review these products and make sure they didn’t exploit customers, the financial literacy movement insisted that everyone should learn to be a financial wizard who can tear into a forty-page loan origination document and parse out all its details. But the problem, as Olen notes in Pound Foolish, is that this kind of education was almost never the main thrust of financial literacy programs. Instead, these initiatives often instructed people to spend less, invest their money, and generally use morebanking products. In other words, they were, and are, little more than advertisements for the financial services industry. It’s no surprise that many banks themselves offer such programs or sponsor their use. When Elmo taught kids about the need to “save, spend, share” on Sesame Street, the segment was provided with “major support” by PNC bank.

The problem is not debt, per se, which nearly everyone takes on. The difference is how much the debt costs.

If financial literacy served its supposedly intended purpose, it would encourage people to use fewer banking products and probably never take out a loan, including for higher education; it might even encourage students to drop out of college or start a mass mobilization to bring down the untenable cost of tuition. But browsing iGrad’s offerings reveals this is the opposite of the message. Under the website’s “topics” are six subheadings: Spending Less, Managing Your Debt, Repaying Student Loans, Types of Aid, Job Search, and Resume and Cover Letters. The message is clear: cut back on wasteful spending––hey, maybe even take out more loans––but whatever you do, don’t cut back on your loan payments!

Setting aside the fact that higher education has gotten tremendously expensive while wages have completely stagnated—the cost of college room and board alone has more than doubled since 1980—financial literacy programs miss a crucial part of the picture: debt is much more expensive for poor people than it is for wealthy ones. According to the Federal Reserve’s Survey of Consumer Finances, in order to repay equivalent amounts of debt, families in the bottom 20 percent of incomes pay two to three times more per month than families in the top 10 percent. Within income brackets, black and Hispanic families pay more than white families. The problem is not debt, per se, which nearly everyone takes on. The difference is how much the debt costs. Wealthy families with ample collateral and other assets are able to negotiate lower rates and longer repayment periods. But with increasingly volatile incomes in the middle and lower classes, the cost of debt sets most other families behind, at rates that far outpace––by exponents––what you can save by eating out less and forgoing big coffees, the kind of boilerplate advice proffered by your typical financial literacy program.

So, it’s no coincidence that iGrad partner Columbia University’s student newspaper reported that this exactsituation was playing out on their campus. “Over the past decade,” Jason Kao writes “the net price—the total cost of attending Columbia after grants and scholarships are subtracted—for middle- and higher-income students has steadily decreased. Yet, the net price for low-income students has steadily risen.” A contributing problem is that Columbia levies an annual “student contribution” fee of at least $2,400 that all students must pay regardless of income. This means that even low-income students on a full scholarship—like sophomore Alysha Acosta, who sends money home to help her parents with bills––are squeezed for money by the school. Another student, Mackenzi Turgeon, wrote in an op-ed, “Perhaps it was na?ve of me to expect a $10 billion-endowed institution to support its low-income students in meaningful ways.”

Financial literacy programs tell students that they’re in debt because they don’t have the proper education—in other words, that when it comes to their finances, they’re stupid. Their logic makes you wonder how anyone in this country survived paying for college without the wisdom of financial literacy. Surely, prior to the proliferation of slick tools like iGrad, the country’s graduates must have been writhing in a puddle of their own diarrheal debt? It turns out the opposite is true: debt-to-income ratios have exploded alongsidethe rise of financial literacy; after a drop-off following the 2008 recession, the nationwide DTI remains considerably higher than it was in the 1980s.

Financial literacy lets major financial institutions that have failed the public off the hook.

The financial literacy movement places the onus for debt squarely on the individual; it is a coordinated program of victim-blaming. Imagine if, after a rash of faulty cars exploded and maimed drivers, policymakers ran to the dais to exclaim the dire need to educate our population about the complexities of automotive engineering. If only it had been mandatory to teach our students about the ins and outs of the stoichiometric air-fuel ratio (and its relation to the mass airflow sensor), we wouldn’t be in this mess! This doesn’t happen, of course, because the United States has the National Highway Traffic Safety Administration, which is charged with ensuring cars are safe to drive, and we cluelessly, happily trust them to do their jobs. What makes a car go zoom? Few drivers know, and it doesn’t matter.

Financial literacy lets major financial institutions that have failed the public off the hook. It absolves government officials who have cut subsidies and funding to colleges, an educational finance industry that has produced a dizzying array of complicated and often predatory products, and colleges and universities that have cynically raised the cost of tuition all while dramatically cutting back on the number of tenured faculty they employ. As cultural anthropologist Caitlin Zaloom says, “advocating for colleges to offer financial literacy programs demands nothing from those in power.”

So, before we start another single personal finance course, let’s first demand that the cost of college everywhere be first arrested, and then lowered. Then, let’s ensure that no financial intermediary is making a profit funding education, and that no college is amassing a $10 billion endowment while some of its students can’t afford to pay tuition. We could tax these endowments, and at least begin subsidizing college education again. We could give up the illusion that the way out of our predatory economy is to turn everyone into a finance bro. We could perhaps attempt some realfinancial literacy, educating borrowers about how fraudulent and untenable our student debts are, and how necessary it is to dispute them. Genuine financial education might suggest that the only way to counter the power of a broken, regressive system is to bind together and do something that is potentially just and possibly illegal: abandon payment all together. That is, debtors could go on strike, freeing everyone to do whatever it was they intended to, before they got sucked into debt quicksand.