Consumer Education Initiatives in Financial and Health Literacy. Financial Literacy Research Overview

12/06/2010

Financial literacy has been studied in three main settings: (1) as part of individual development account (IDA) programs; (2) financial education programs aimed at low-income audiences or underserved areas; and (3) secondary data analyses. IDAs are short-term, limited use, matched savings accounts that are typically bundled with services, such as financial education and peer mentoring, into a program intended to help low-income individuals purchase or develop assets, such as a home, a small business, or postsecondary training or education. While there are a number of studies examining IDAs, there are limitations: Self-selection into these programs which increases the likelihood of having characteristics that differentiate participants from the general public; inconsistency between financial education across IDA programs thus decreasing the comparability; the value of the financial education component as a secondary to the matched program thus limiting generalizability to other financial education programs; and none of the IDA research studies have a control group to evaluate the differences between those who receive financial education and those who do not.

Financial education has been evaluated in financial management courses directed at low-income audiences in community settings. Four of these studies were evaluations of specific training programs, All My Money (developed by USDA) (two studies) and the Financial Links for Low-Income Persons (two studies). Two evaluations examined credit counseling programs and one examined a mandatory financial education program in a low-income housing program. All My Money sought to provide a comprehensive financial education program to educate persons about spending choices, budgeting, planning, understanding credit, managing a checking account, and planning expenditures. Financial Links for Low-Income Persons sought to educate individuals about opening banking accounts, banking practices, credit use, savings, and in one program, potential public- and work- related benefits (Zhan, Anderson, & Scott 2009; Zhan, Anderson, & Scott 2006). Collins (2010) examined a similar program, only participants were required to take the financial education courses. None of these studies included a control group and all but one (Collins, 2010) allowed participants to select into the counseling, thus it is unclear whether self-selection or the program was the key factor in improving financial literacy.

The two credit counseling evaluations had different foci: Elliehausen, Lundquist, and Staten (2007) examined counseling relating to the financial goals, financial strengths and weaknesses, and examining the familys budget; Hatarska and Gonzalez-Vega (2006) examined counseling programs to improve spending, improving the use of credit, and consolidating debt. Both of these studies had limitations including self-selection; a lack of control-group for the Hatarska and Gonzalez-Vega study; and, although Elliehausen et al. included a control group, the participants were not randomly selected into either group. Elliehausen et al. (2007) discovered that counseling resulted in virtually no improvements in credit scores. It was the self-selection, not the counseling, which had produced financial improvements.

Finally, the literature review also examined research from data sets (Courchane, Gailey & Zorn, 2007). Using datasets from a 2000 Freddie Mac survey and 1.2 million mortgage loans, the authors examine the accuracy self-assessment of credit and the association between self-assessment of credit and the ability to obtain a mortgage loan. The limitation to this study is that the data do not combine consumers subjective assessments of their financial records with observed financial market outcomes in a later period. The definitive analysis of whether or not accurate self-assessment of credit improves financial outcomes likely awaits such data.

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