INCOME AND EDUCATION

Income and Education

Income and Education

Introduction

Several studies have documented the extent to which consumers in the United States and other countries fail to demonstrate financial literacy, numeracy, or both. Financial knowledge measures tend to be higher for more-educated consumers and lower for lower-income consumers. Consumers' understanding of interest and interest rates tend to be particular areas of weakness. One problem in financial literacy research is establishing accurate measures of financial knowledge. Many studies utilize self-reported knowledge scales (“how confident are you in your knowledge of…”). At least one study found that people tend to overestimate their financial knowledge relative to what they actually know. Thus, studies that rely on self reported data may yield ambiguous findings. Selection bias is an even more significant problem within existing financial education evaluations. (Andrew, 2010)

Research the hypothesis that if total income is low then so is level of education.

Unobserved characteristics including greater motivation and patience levels may drive certain individuals to seek out financial education or counseling. If these same characteristics also facilitate financial success, then selection effects and not financial education may be responsible for positive findings associated with financial literacy education. The types of services examined in previous studies include short programs delivered in the context of a particular decision, more intensive one-to-one counseling, and longer-term formal education programs. The clients targeted are often moderate-income individuals faced with impending financial decisions, such as buying a home, investing for retirement, or correcting credit problems. (Andrew, 2010) Few evaluations have analyzed financial education programs targeted to very low-income families, and few have evaluated mandatory financial education programs delivered over several weeks. Furthermore, no evaluations have randomly assigned clients into treatment and control groups, so selection effects may have biased past evaluations.

Overall, the evaluation literature suggests that financial education can help individuals gain financial knowledge and that financial knowledge is linked to financial behavior. Possible outcomes from financial education include greater levels of savings, use of bank accounts, and improved credit behavior. Because of selection effects, however, further studies are needed for better estimates of the causal impacts of financial literacy education. (Andrew, 2010)

The literature on financial literacy education lacks a strong theoretical framework. Most studies rely on a “black box” model such that information or counseling is the input and the expected outcome is a measurable effect on knowledge and/or behavior. In general, theories of behavior change in the financial education field are derived from the health literature. These approaches all emphasize that behavior change results from a combination of attitudes, social norms, and intentions; knowledge gains alone are insufficient. The model of behavior change that underlies this study is based largely on Ajzen's Theory of Planned Behavior. It is expected that housing voucher clients who complete a mandatory financial education program will exhibit greater improvements in three areas than a control group. First, consumers who complete a mandatory financial education program are expected to report greater increases in their self-assessed knowledge of financial issues. Second, they are expected to report greater improvements ...