The Rationale for Our Financial Services and Education Project
Families across America face a complex and growing array of financial decisions. While financial illiteracy is a problem for youth and adults across all socioeconomic lines, those with low-incomes -- who disproportionately lack both financial know-how and any relationship with financial institutions -- are especially vulnerable to being shut out of an increasingly sophisticated financial marketplace. The lack of contact and familiarity with financial institutions such as banks has negative consequences for families, with many paying a high price to conduct their financial lives.
Many American families do not have a bank account of any kind. The Federal Reserve’s Survey of Consumer Finances estimates that ten percent of the population lacks a bank account, while the Survey of Income and Program Participation and GAO studies have estimated that perhaps one in five families do not have a bank account. Regardless of the exact percentage, these families not only lack a safe place to keep their money, they also are far less likely to have financial assets. Families with bank accounts put themselves on a path to financial security, which has been described as the “credit path” by the Alternatives Federal Credit Union in New York. The first step along the credit path of owning an account leads to other financial tools, such as well-priced car loans, credit cards, and mortgages. For example, a study by Stacie Carney and Bill Gale showed that households lacking an account of any kind were 43 percent less likely to have positive holdings of net financial assets, 13 percent less likely to own a home, and 8 percent less likely to own a vehicle.
Unbanked families are not the only ones at risk -- many low- and moderate-income families are underbanked or do not have the credit history or education to take advantage of the broad array of quality financial services. Many of these families instead have one foot in the mainstream financial services sector and the other in the alternative sector, relying on payday lenders, check cashers, and rent-to-own stores which together generate an estimated $78 billion in revenue annually.
However, this lack of financial knowledge and good money management is not limited to the unbanked. Regardless of income level, American families’ bankruptcy rates and debt levels are on the rise, while the savings rate has sunk into negative territory over the last year -- the lowest level since the Great Depression. This growing financial insecurity is occurring amidst the proliferation of financial education programs for youth and adults offered by non-profit and private sector entities. The effectiveness of these programs at improving financial behaviors, however, is not clear -- research to date has been spotty at best, with mixed conclusions on the best way forward. For example, students that have completed a money management course did not perform any better on the survey than their peers. Dr. Lewis Mandell, who conducted the survey, explains this finding by suggesting that the classes were perceived as not relevant to their daily lives.
Meanwhile, the regulatory framework which was established to provide better access to quality financial services while reining in abusive lending practices is outdated for the current financial marketplace -- which spans far beyond traditional banking institutions. In addition, the relationship between state and federal laws governing financial actors, as well as the growth of technological innovations such as internet-based institutions, has complicated the financial services landscape.
Finally, compounding all of these issues is the growing amount of debt of many American families. According to Christian Weller’s analysis of the latest Survey of Consumer Finances data, middle-income families increased their debt burden by 33 percent from 2000 to 2004. In fact, debt is now 108.4 percent of income across all households for the first time since these data have been collected by the Federal Reserve. Many Americans start on this debt path as young adults: More than one in five college students with credit cards have already accumulated balances between $3,000 and $7,000 before earning their bachelor’s degree, according to Sallie Mae.
