Spring boarding from a piece in the Pacific Standard, we’ re spending some time this week taking a look at a school of thought that is contrary to that of the mainstream: debt and loan counseling may not prevent student overborrowing.
According to the essay, in the event that counseling is delivered at the stage of sale, for instance, the potential for conflicts of interest is huge. Where does education end and marketing begin? With no credentialing or oversight needs in the financial literacy world, it is up to the consumer—the one in need of enlightenment, remember—to determine whether a lesson objectively and thoroughly covers the most important bases. Take, for example , Ally Financial, a company that offers car loans and other products. It offers put together an entire online education site called Ally Wallet Wise. But the web site makes no mention of subprime auto loans, does not say how to determine whether you are being offered one, and doesn’t assist users find out what an optimal rate of interest might be.
In addition , the very notion that there is some moment that’s “just in time” for many monetary decisions may be a mirage. Consider pension savings for a moment. In our current, do-it-yourself model of financial planning, built on instruments like the 401(k), consumers must begin saving early in life to maximize the money they will have on hand at the end of their careers. But that often does not happen. People stay in school until their late 20s, or, confronted with competing demands on their funds, go to believe they can’t afford to put money away for some ill-defined future need. They make bad decisions regarding what seem like good reasons. If a counselor comes along at some point in this process, it is likely not going to be “just with time, ” but either too early to help make an impression—or too late to make a significant difference.
Finally, it’s really worth noting that standards of good recommendation have a way of shifting over time in a way that, say, basic facts of history or math do not. It used to be that individuals saving for retirement were informed to set aside 10 percent of their income. Now, many experts suggest that number should be more like 15 or 20 percent.
A FEW MONTHS AGO, an internet site called Low Pay Is Not OKAY brought a burst of national attention to a financial literacy initiative developed by Visa and McDonald’s, designed to coach low-wage McDonald’s employees “practical cash skills for life. ” The online plan included a suggested monthly budget for a typical employee that left area for $800 of “spending money” after expenses. The budget assumed that this employee would take a second work to bring in extra money, while not spending a penny on child care or temperature, and spending a laughable 20 dollars a month on health insurance. The meant moral of the budgeting exercise: “You can have almost anything you want, as long as you strategy ahead and save for it. ”
The sheer cluelessness of this exercise caused uproar on the Internet, and no wonder. The United States is an significantly class-stratified country, where the engines of mobility appear to have stalled. Minimal wage jobs lead to other minimal wage jobs. Salaries are flat. College tuition has soared at prices well beyond that of inflation, forcing students to turn to loans to get by, which in turn leaves them providing massive amounts of debt in their 20s, a time when financial literacy classes—citing the power of compound interest—say they need to save. The leading cause of bankruptcy is not overspending, nor lack of adequate monetary planning, but the financial free fall caused by a health crisis.
Personal shortcomings and mistakes within managing money can indeed worsen the particular financial situation for many of us, but also these may be more a functionality of stress and scarcity compared to ignorance. Recent research by the behavioral economists Sendhil Mullainathan and Eldar Shafir has shown that perfectly intelligent people become much less so when these are experiencing a shortage of money, time, or attention. They develop a type of tunnel vision that erodes the particular long-term thinking essential to financial planning. (Indian sugarcane farmers, for instance, perform worse on cognitive tests prior to a harvest, when they are cash poor, than they do after they’ve sold a crop. )
Trying to take some of these realities into account, a small group of educators is fundamentally rethinking the concept of financial literacy. Chris Arthur is an eighth grade teacher and a Ph. D. applicant in education at York University in Toronto. When he taught the subject in the past, he exposed his students to the Great Piggy Bank Journey, a traditional financial literacy game created by T. Rowe Price and Disney, and introduced them to the business concepts promoted by Junior Achievement, the particular children’s entrepreneurship organization. But a year ago he also made them enjoy an online game called Spent, that is not a financial literacy product whatsoever.
Spent was designed a few years ago for the North Carolina charity Urban Ministries of Durham. The concept is simple. The gamer assumes the role of a low-wage worker—like, say, somebody at McDonald’s—attempting to get by till the end of the month. Players are usually faced with a relentless series of decisions and tradeoffs, and almost anything—a gift for a child’s birthday, a request from a family member to help pay for needed medication—can send them into a monetary downward spiral.
Needless to say, it is just about impossible to achieve anything resembling financial success in the game of Invested. And that’s the point. “It difficulties the dominant framing of monetary insecurity as wholly a problem of ignorance and irresponsible consumer conduct, ” Arthur told me.
Spent, like the controversy that wound up swirling around McDonald’s suggested worker budget, points to an oft-buried truth. The financial literacy movement presumes that with a modicum of training, we can all be equal in the monetary and economic marketplace. But that’s a false promise. Financial literacy is, first of all, no substitute for monetary regulation. It’s also an ultimately ineffective personal solution to a systemic political and economic problem. And even McDonald’s knows it. As I had been reporting this piece, the Low Spend is Not OK website released the recording of a McDonald’s employee contacting the firm’s help line regarding financial advice, saying she cannot make ends meet on her salary. The counselor she spoke with suggested the lady locate a local food pantry and apply for food stamps and Medicaid.
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