Academic journal article The Journal of Consumer Affairs

Financial Literacy among the Young

Academic journal article The Journal of Consumer Affairs

Financial Literacy among the Young

Article excerpt

We examined financial literacy among the young using the most recent wave of the 1997 National Longitudinal Survey of Youth. We showed that financial literacy is low; fewer than one-third of young adults possess basic knowledge of interest rates, inflation and risk diversification. Financial literacy was strongly related to sociodemographic characteristics and family financial sophistication. Specifically, a college-educated male whose parents had stocks and retirement savings was about 45 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents were not wealthy.


Consumers must confront complicated financial decisions at a young age in today's demanding financial environment, and financial mistakes made early in life can be costly. Young people often find themselves carrying large amounts of student loans or credit card debt, and such early entanglements can hinder their ability to accumulate wealth. To aid younger consumers, it is critical for researchers to explore how financially knowledgeable young adults are. Understanding the factors that contribute to or detract from the acquisition of financial knowledge can help policymakers design effective interventions targeted at the young population.

To examine how well-equipped young people are to make financial decisions, we analyzed financial literacy questions newly added to the National Longitudinal Survey of Youth fielded in 2007-2008. This rich data set was used to study the relationship among financial literacy and respondents' sociodemographic characteristics, family characteristics and peer characteristics. Three key research questions were addressed: (1) how well-equipped are young people to make financial decisions? (2) what are the determinants of financial literacy among young people? (3) how can this information aid policymakers seeking to devise interventions aimed at young consumers?


The financial situation of today's youth is characterized increasingly by high levels of debt. Between 1997 and 2007, average undergraduate student loan debt rose from $9,250 to $19,200--a 58% increase after accounting for inflation; average debt for college students graduating with loans rose 6% in just one year between 2006 and 2007, from $18,976 to $20,098 (Reed 2008). In addition, median credit card debt among college students grew from $946 in 2004 to $1,645 in 2009 (both figures in 2004 dollars), a 74% increase (Sallie Mae 2009).

Recent survey results suggest that these debt loads are causing anxiety among young people and influencing major labor decisions. A 2006 USA Today/National Endowment for Financial Education (NEFE) poll of young adults aged 22-29 found that, of those with debt, 30% said they worried about it frequently; 29% had put off or decided against furthering their education because of debt; and 22% had taken a job they would not have taken otherwise because of debt. There are other potentially costly consequences of accumulating high levels of debt early on, such as bankruptcy (Roberts and Jones 2001). For instance, the US Senate Committee on Banking, Housing and Urban Affairs reported in 2002 that

the fastest-growing group of bankruptcy fliers was those aged 25 and younger (US Congress Senate Committee on Banking, Housing, and Urban Affairs 2002). These high levels of debt also may prevent young workers from taking advantage of employer-provided pensions, tax-favored assets or building a buffer to insure against shocks: 55% of young adults report they are not saving in either an individual retirement account (IRA) or a 401(k) account and 40% do not have a savings account that they contribute to regularly (USA Today/NEFE 2006).

These debt loads are of particular concern given recent evidence that young people may lack sufficient knowledge to successfully navigate their financial decisions. …

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