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Federal grant to bolster consumer financial education at UW-Madison

September 30, 2010 By David Tenenbaum

The Social Security Administration has awarded $3.1 million to support research on financial education at the University of Wisconsin–Madison.

The funding will go for a basket of projects aimed at identifying audiences for financial education, measuring financial literacy and testing the impact of different educational tactics. “I think this is further recognition that many people are struggling with financial management, and one reason for that is a lack of basic financial information,” says J. Michael Collins, an assistant professor in the School of Human Ecology who is the principal investigator on the grant.

Collins tests financial education — both in terms of how much is learned and in how that learning may change behavior. Unlike classical economists, he is less interested in supply and demand than in the financial decisions people actually make — the approach called behavioral finance.

In a recent study, for example, Collins compared employees of credit unions before and after 12 hours of online financial education. “It was high quality, but pretty simple, mostly focused on retirement planning, budget, credit, basic stuff somebody might need,” he says. After the course, employees increased their use of Individual Retirement Accounts (IRA) by 10 to 20 percent. “That’s pretty remarkable,” Collins says. “Sure, they learned something, but the fact that this resulted in something as tangible as increased funding for their IRA accounts, that’s big.”

Instead of making assumptions about financial matters, Collins tries to remain rooted in the real world. Many consumer advocates decry payday lenders (“cash stores”) as usurers because they offer short-term loans at extremely high interest, but Collins views the situation from the borrower’s point of view. “Studies show that people use payday lenders because they are out of money: It’s the middle of the month, they get paid in two weeks, and bills are due now. Without a payday lender, they have to turn to some really nontraditional funding source, or bounce a check, and the cost of bouncing the check often exceeds the payday lender.”

The results of other studies are more in accord with conventional wisdom. During the recent wave of mortgage foreclosures, Collins has looked at two legal approaches to foreclosure. Some states, including Wisconsin, require a judge’s order (“adjudication”) before foreclosing, which can double the delay before the borrower must leave. Some economists maintain a slower foreclosure process harms everybody in the long run because it takes longer. “The borrower gets further behind, and the home loses value,” says Collins.

To explore adjudication, Collins studied the real estate market in metropolitan areas that span states with and without adjudication. “These areas had different laws, but similar housing markets, and we found that when it takes more time, it’s more likely there will be a loan modification instead of a foreclosure,” says Collins.

While working for the nonprofit NeighborWorks America during the early 2000s, Collins noticed flaws in a fundamental economic assumption — that people rationally decide to optimize their economic position. “I was seeing people getting 8 percent loans rather than 4 percent loans, or refinancing three times, and even though the housing price was rising, they were losing their homes.”

To get a better picture of the real world, Collins decided to go to graduate school, “to learn some research techniques, and approach consumer financial decisions from an empirical angle.”

At UW–Madison, Collins teaches undergraduates who may be planning to become financial planners or credit counselors. He directs the Center for Financial Security in the School of Human Ecology. One center project looked at people in a federal program that encourages savings, “to encourage people who are not in the banking system to start saving.”

Collins found that people had a variety of well-considered reasons to not use traditional bank accounts, including cost, inconvenience and lack of trust.

For an appointment at UW-Extension, Collins teaches financial educators housed in about two-thirds of the state’s county cooperative extension offices, who work directly with lower-income Wisconsinites. The ultimate beneficiaries want basic financial knowledge to keep their heads above water, or as Collins says: “Budgeting, borrowing, managing bank accounts.”

The focus is on people in vulnerable situations, Collins says, “But almost any one of us could be vulnerable. We have talked to healthy, middle-income families that then had a child with a disability. Or face an early retirement, or an increase in housing payments. No matter how much money they make, they are at risk for all sorts of financial problems. Financial knowledge is not just a matter for lower-income people.”