Time and time again, I overhear people speaking about how they wish they would have learned the importance of personal finance in high school. Whether it is information about how to file taxes, understanding credit, or guidance on getting loans to purchase a vehicle, home, or to attend school, it has become clear to me that people acknowledge having to make these types of financial decisions with little to no background knowledge about it beforehand.
For instance, when I enrolled in graduate school, I had very little understanding of how loans worked. Having benefited from a generous financial aid package made up of mostly federal and institutional grant aid, I did not have to take out many loans to attend college. Even with a scholarship of about $13,000, I still took out about $60,000 in loans for a 9-month program. However, I did so because I thought I had to — I actually took out about $20,000 more than I needed.
What happened? During the transition between graduation and starting graduate school, I received countless emails of what needed to be done — including financial aid and paying tuition. When I received my financial aid email, it included two loan packages — I thought I had to pick one. I chose the one that made more sense to me, and then a week before classes began I had an outstanding bill. When I contacted the financial aid office they informed me that I still had federal loan aid that I had not tapped into. I took out the max thinking what they offered was what I needed to get out of my registration hold. Maybe I could have done more to understand what I was doing, but the chaos that comes with moving and starting graduate school overshadowed the gravity of the long-term financial decisions I was making for myself.
Millennials currently comprise the largest share of the U.S. labor force at 35 percent, a major share of our country’s economy. Despite how accessible personal financial information is made available through technology, a recent report from TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business, shows that despite this access, Millennial’s have lower levels of financial literacy than older adults. According to this report, more than 90 percent of millennials own a smartphone, and 80 percent of this group uses their smartphone to execute financial transactions like depositing checks, paying bills and transferring funds. Although mobile apps have helped making financial transactions easier, this report finds that this does not necessarily result in better financial management.
This study used data from the P-Fin Index, an annual survey that examines financial literacy across eight areas of personal finance: earning, consuming, saving, investing, borrowing/managing debt, insuring, comprehending risk and go-to information sources. According to the report, millennials answered 44 percent of the questionnaire correctly where all adults collectively answered about 50 percent of these questions correctly. More specifically, only 11 percent of millennials were seen to have a “high level of financial literacy” answering over 75 percent of these questions correctly, where as 28 percent of millennials had “very low financial literacy” answering 25 percent or less of the questions correctly.
Data from the 2017 P-Fin Index demonstrated that financial literacy among Hispanics was lower than that of the U.S. adult population as a whole, which is important to take note of given demographic shifts in the nation with Hispanics being the fastest growing minority group in the U.S. 2018 data suggests that African-American financial literacy is lower among all adults and White adults. These data show that there is a gap among underrepresented communities — what can we do about it?
Given the growing diversity in the nation, it is imperative that we become more intentional on increasing financial literacy among young adults, especially those of underrepresented backgrounds. This report from TIAA is an opportunity for higher education to take notice and take action. Can you partner with financial organizations tied to your institution to provide educational programming to your students? How can we integrate important life-long issues like financial management into our programs? The emerging technology in making financial transactions easier is not enough when you do not have the background knowledge to understand the decisions you are making. Millennials are already the largest share of the labor force and is still growing — for the future of our economy, it is important that we address this gap.
Andrew Martinez is a Ph.D. student at the University of Pennsylvania’s Graduate School of Education and research associate at the Penn Center for Minority Serving Institutions. His column appears in Diverse every other week. You can follow him on Twitter @Drewtle.