The new bankruptcy reform law that will take effect in October fails to address one of the root causes of bankruptcy, particularly among young adults: a lack of basic financial education.
So where can we remedy that?
In our schools. Supporters of the bankruptcy reform effort argue that because it will be harder for individuals to wipe out their debts by filing for bankruptcy, it will curb the abuse of the bankruptcy system by imposing greater responsibility on spending decisions. This greater accountability is coupled with some promising changes, such as requiring prebankruptcy counseling and better information on the costs of making only the minimum monthly credit-card payment.
But it entirely misses the larger point by focusing on helping people only after they get into financial trouble.
And trouble it is. Research shows that, regardless of income or race, kids are growing up without knowing the basics that will keep them out of financial trouble.
The numbers speak for themselves. Young adults have the second highest rate of bankruptcy and are more likely to file for bankruptcy than baby boomers were at the same age, according to a recent bankruptcy study by the nonprofit group Demos. The average credit card debt for 18-to-34-year-olds rose 55 percent between 1992 and 2001, to $4,088, and nearly a quarter of their incomes must be spent on debt repayment. Imagine saving enough to start or finish college, or for a first home - let alone retirement - with those levels of debt so early in life. The American Dream? An elusive, priceless dream. For everything else, there's MasterCard.
Kids need to learn to make smart decisions before being inundated with credit-card offerings, loans for cars and college, and the like - and schools are the perfect place to do that. This could be done by integrating this teaching into existing subjects such as math, social studies, or English in lower grades and a stand-alone course in high school that would be a graduation requirement.
This education should be active rather than passive, with children learning by doing real financial transactions. For example, some high schools have allowed a bank branch to open on campus where students can open their first checking and savings accounts. In addition, a bipartisan proposal before Congress to create KIDS Accounts for every child at birth would give kids a practical way to apply what they learn about saving and investing. (The legislation calls for each account to be government-endowed with $500 - withdrawals would only be allowed upon reaching age 18 for education, home ownership, or retirement.)
This would be money well spent. Research also shows that kids are positively impacted by financial education over both the short- and long-term.
For example, the high school financial literacy curriculum designed by the National Endowment for Financial Education has been found to make kids much more knowledgeable and confident in their money-management skills than they were before taking the course. In addition, a Stanford University study comparing the financial habits of adults who went to schools mandating financial education with those without the requirement found that adults who took a financial-education course in high school had higher reported savings rates and a higher net worth as a percentage of income in adulthood.
A growing number of states have already recognized the importance of these courses, with seven states now requiring that high school students take a financial education course to graduate and nine states requiring testing on personal finance subjects.
Will financial education in schools and elsewhere solve the problem of high rates of bankruptcy filings completely?
There will always be people who seek to game the system and others will still fall on hard times from a medical emergency, job loss, or divorce, no matter how well they manage their finances. However, if every child and young adult is given the proper tools to make good financial decisions over their lifetime, chances are good that we'll see more adults leading financially responsible and secure lives.
• Leslie Parrish is a senior research associate at the New America Foundation.