College students lack basic financial knowledge

We have written about financial knowledge (or shall we say the lack of it) and another data point shows how much it is lacking. Even college students are struggling to get most basic financial questions correct. In fact it is so bad that only about 1% of students answered 6 basic questions correctly per a 2019 study from Education Technology Online Courses and Training (EVERFI) as well as AIG.

The questions are below. The results of the survey of 25,000 students was as follows. Over 10% got them all wrong. About 20% only answered one correctly. Only 1% answered all 6 of the questions correctly. The average number correct was about 2.2 out of the 6 questions.

On the survey, only about 35% of the students said they have ever taken a financial literacy class. It is so unfortunate. Understanding numbers, budgets, investing, living with means, etc. is so critical to really “living life”. People need to know what debt is, interest rates, compound interest, and so many other key terms. I was fortunate while growing up in that my mom was learning about investing and encouraged saving, etc. I learned from her and took her emphasis on “financial literacy” and started to invest at a young age.

And college students are not gaining these basic skills as shows from the 2019 survey. Since only about 35% of Americans have college degrees (this does not factor in skills based trades), we would not be surprised if the financial literacy knowledge was even worse for those with no college, skills trader or technical type degree.

Is it too late by the time they are in college?

Probably. Only 17 states require some type of financial literacy class as a requirement for high school graduation. It should be every state. As by the time someone goes to college, kids/adults need to know about student loans, building credit, making purchases, maybe signing a lease, and so much more. Even find importance of savings accounts for kids.

I am a firm believer that if people knew about money, and how to plan, budget, and save properly, it would not be the case that most Americans don’t have $400 for an emergency expense. Or that maybe the retirement crisis in the US would not be as dire. As if someone learned how important it was to save and invest early (even a little money) they would benefit from compound interest.

Or if a college student knew about interest rates and inflation (such as questing #3 on the 2019 survey) that they may seek a somewhat higher yielding place to save their money vs. a savings account. Or they need to know about question #4 about student loans. College students, and really everyone, should have basic financial literacy.

Now should someone be able to get all six questions correct? I don’t know…maybe not. But the 30% of college students who got 1 or zero right…that is not acceptable. 2 right is also not acceptable. Even a passing “grade” would be 4 of the 6 right, and maybe that should be the bare minimum goal.

Questions with the answers

  1. If a late payment is sent to a collections agency, how long will it remain on your credit history even if you have paid it off?
    A) Less than a year
    B) 1 to 3 years
    C) 4 to 5 years
    D) 6 to 7 years
  2. What is the formula for calculating your net worth?
    A) Assets plus liabilities
    B) Liabilities minus assets
    C) Assets minus liabilities
    D) Assets divided by liabilities
  3. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year would your ability to buy something with the money in this account be:
    A) More than today
    B) Exactly the same
    C) Less than today
  4. Which of the following about federal student loans is not true?
    A) For certain federal-loan programs, the interest on your loans is paid for by the federal government while you are in school and during grace periods
    B) Your parents must sign a promissory note before loan funds are distributed
    C) Entrance loan counseling for all first-time borrowers is required
    D) You will have to pay back your student loans even if you do not complete your degree or find employment after college
  5. If you have too many credit cards, what should you do?
    A) Close as many as possible
    B) Request a higher credit limit
    C) Be cautious about closing cards
    D) Close cards with the lowest balances
  6. As a general rule, how many months’ expenses do financial planners recommend that you set aside in an emergency fund?
    A) 1 to 3 months’ expenses
    B) 3 to 6 months’ expenses
    C) 6 to 12 months’ expenses
    D) 12 to 15 months’ expenses
    Answers: 1-D; 2-C; 3-C; 4-B; 5-C; 6-C

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