NEW HAVEN–Lynn Smith showed a slide with three names: Larry King, Ulysses S. Grant, MC Hammer.
“What do they have in common?” she asked a small classroom of 10 at-risk students at the New Haven Family Alliance Center. “They all went bankrupt.” What followed was an immediate burst of excitement, some giggles, a few disparaging comments.
“It’s true: MC Hammer went through 30 million dollars in like, 30 days!”
This was the first session of a four-part “Loot Camp,” provided by Smith, senior vice president at Start Community Bank of New Haven. Start is a full-service bank, but also works to improve financial access in New Haven by lending to local businesses, homebuyers and non-profits while offering financial education and support to low-income, or at-risk individuals.
So last summer, Smith took her “Loot Camp” to the Youth@Work (Y@W) program, which offers part-time summer jobs to 14 to 21 year olds in New Haven who might face socio-economic and academic challenges. Now, with the help of a few Yale students and an international non-profit, she’s trying something that’s never been successfully done. She’s trying to track whether or not financial education actually works.
The students Smith reaches out to, she said, may have never thought about a checking account, or may not know what credit means. “They have to learn things that many of us take for granted.”
The core of her curriculum is saving, Smith said. “It’s about knowing the difference between want and need–knowing what money really is,” she said.
In the course of giving her classes, Smith found that the young people were being paid by paper check. Many of them were relying on check cashers, and paying high fees. Thus the START Bank Youth At Work Account was born, offering students savings accounts attached to an ATM card, along with direct deposit from the Y@W program. No co-signer was necessary–Smith hoped to instill a sense of agency and ownership in the students. Seventy four percent of those eligible signed up for the accounts, which came with weekly coaching letters with tips and suggestions for saving.
By the end of the summer, of the 167 students with accounts, 40 percent saved more than $300. “We did use a little bit of behavioral economics,” Smith said. They raffled off an iPad 2 for those who saved the most.
Then Smith saw a further opportunity — to track effectiveness of those literacy classes and the account.
“We still don’t know two years out, five years out, 20 years out, whether they have better credit scores, whether they’re better savers, or whether they borrow less money,” she said.
Smith got in touch with Rebecca Rouse at Innovations for Poverty Action in New Haven.
“As far as we’re aware, there really aren’t any rigorous quantitative evaluations that say ‘Yes, financial education programs do lead to behavior change,'” Rouse said. “It’s a really hard thing to evaluate.”
Failed attempts
In 2010, the President’s Advisory Council on Financial Capability was born with the stated goal of “assisting the American people in understanding financial matters and making informed financial decisions.” Last week, education Secretary Arne Duncan openly advocated for adding a financial planning component to public grade school curriculum. While Connecticut doesn’t require financial literacy courses, as many states do, it offers grants to districts that provide such courses.
But are these programs accomplishing their intended goals? That’s still unclear.
“There have been very few attempts to track financial literacy programs — and they have all failed,” said Loyola Law Professor Lauren Willis. In fact, she’s published papers doubting their effectiveness.
“What it boils down to is that knowledge and skills aren’t enough,” Willis said. “You can offer these courses and in the end someone might know a lot about finance, but they still end up engaging in riskier behavior. They don’t tend to save.”
But the most successful programs are the ones that include a practical component, like Start’s Y@W account, and try to instill values of thrift and include a built in support group, she said. “So it sounds like this bank is headed in the right direction.”
Tracking students long term will be important, she said.
“And often, the survey question will be ‘Do you think you make better financial decisions now?’ But with that kind of self-reporting, a student may not want to disappoint, so they may not be totally honest.”
Long term tracking
START and IPA hope to conduct that kind of formal, long-term trial including a control group–kids with no savings account–and a treatment group–those who opt to go for the account.
“And then we track outcomes after time. Is the treatment group managing money better, do they accumulate more savings? Pay less in check cashing fees? Or is it the control group exactly same?” said Rouse.
The longer trial would take anywhere from 12 to 18 months and would start next summer, with a new crop of account holders. So for now, Rouse and Smith have recruited a group of Yale undergraduates–Students for Proven Impact–to do an introductory survey. That will make the real trial easier, Rouse explained.
SPI will send out letters, foreshadowing a survey call made by volunteers from the Yale club. They will run through a list of questions about the accounts and the classes, and create a database. They hope to have the letters out before Thanksgiving.
“If we’re able to continue to offer this product over time and continue to track these young people, we might be able to learn something about the impact of these kinds of classes on behavior,” said Rouse.
And, she added, they might be able to track the same people in the program year after year, making the results more reliable.
“Anecdotally,” Smith said, “we know in our gut that this is the type of real-life training that people should have. But we’ve never measured whether people do better with them or not.”