CANADA: Low financial literacy hampers access

There has been significant interest in the issue of financial literacy over the past decade, as highlighted by a recent OECD conference "Partnering to Turn Financial Literacy into Action". The Toronto conference drew experts from around the world - including Australia, Canada, Europe, Kenya, Mexico, South Africa and the United States - to share their experiences and best practices in enhancing financial literacy.

The common experiences of having increasingly complex financial systems in place (be it paying for higher education, credit and debt management or planning for retirement), demonstrates that systemic policies and practices place more responsibility on populations that may not, or do not, have the basic financial literacy or capacity to make good decisions.

The financial literacy required to plan for post-secondary education is a case in point. Post-secondary education is consistently proven to be a good financial investment. The advantages for those who have a post-secondary credential are significant.

For example, the gap in average weekly earnings in Canada in 2005 for those with a postgraduate degree relative to those with only a high school diploma was more than 50% for men and more than 60% for women. The gap for bachelor degree holders relative to high school diplomas was only 40% for men and 45% for women. For diploma holders relative to high school graduates, the gaps were 20% for men and slightly more than 20% for women.

Despite the clear value in obtaining a post-secondary credential, some demographic groups do not attend at the expected levels, particularly low-income youth.

The Higher Education Quality Council of Ontario (HEQCO) is considering how financial literacy impacts low-income youth's participation in post-secondary education. Research from around the world indicates that individuals from low-income families are more likely to be 'unbanked' and have lower levels of basic financial understanding.

We know that low-income youth attend post-secondary institutions in lower numbers, and that the gap is widening. We also know that levels of financial literacy increase with age. How then do we reconcile the increasing complexity of the post-secondary system of tuition fees, loans, grants and back end relief with a population proven to be the least financially literate?

The potential barriers are considerable.

Young people must first understand the inherent value of what higher education can provide, understand the difference between the sticker price and the true cost, make the financial commitment to engage in it, have the ability to wade through the forms and applications for grants and loans, be able to financially survive during their post-secondary education, and ultimately understand the terms of repayment if they received a loan.

This is a lot to ask of teenagers, particularly if the teenagers do not have the family background or social network to guide them.

Research into understanding the level of financial literacy in youth and the impact of it on their post-secondary decisions is a young but growing field. HEQCO recently published a report by Marc Frenette and Jennifer Robson of the Social Research and Demonstration Corporation (SRDC) that provided an overview of this type of research, which is primarily conducted in the US and Canada.

In Financial Literacy of Low-income Students: Literature review and environmental scan, Frenette and Robson found that low-income students tend to vastly overestimate the cost of post-secondary education while both low- and high-income youth underestimate the economic benefits of attending university. Knowledge about financial aid programmes is lacking even among university students who hold student loans.

The OECD is also currently seeking to gain a better understanding of financial literacy of youth. The Programme for International Student Assessment (PISA), an international study of 15-year-olds, will have a financial literacy component piloted in select countries in the 2013 study. This research should provide a comparison of levels of financial literacy in various countries, which will support the identification of effective national strategies and good practices.

Globally, there are literally hundreds of different programmes and strategies in place intending to address issues of financial literacy. Some of the initiatives take place in elementary or high school curriculum.

Australia and New Zealand, for example, led the way in having financial literacy as a core skill embedded in a variety of courses. An Ontario task force on financial literacy recently recommended that Ontario incorporates financial literacy into the high school curriculum.

Other countries are developing their information and activities through government, the private sector and community organisations, with websites, training the trainer sessions, resource development, hands-on guidance and incentives.

Yet there are few financial literacy programmes and strategies in the world that focus on the particular issue of access to higher education for low-income youth. Having reviewed 34 programmes worldwide directed at financial literacy, within Canada SRDC's Frenette and Robson identified only two initiatives, the Toronto-based Pathways to Education Canada and the Manitoba-based Career Trek, that simultaneously promote participation in higher education while offering some financial literacy support targeted to lower-income youth.

Post-secondary access for under-represented groups is a stated goal of most nations. Given the striking correlation between low income, financial literacy and likelihood to participate in post-secondary education, it is surprising that there are a limited number of financial literacy programmes with a post-secondary focus targeted at this population.

HEQCO is continuing to examine this issue. On 3-4 November, we are hosting a conference specifically examining the impact of financial literacy on post-secondary participation in low-income youth.

"Fear of Finance: Financial literacy and planning for post-secondary education" will feature leading researchers discussing their work in the field, innovators sharing their approaches to improving financial literacy and an in-depth discussion session on next steps toward improving financial literacy, particularly for low-income youth.

* Mary Catharine Lennon is a senior research analyst at the Higher Education Quality Council of Ontario, an arm's length agency of the Ontario government that conducts research on the accessibility, quality and accountability of Ontario's post-secondary system.

* For more information on the upcoming HEQCO conference, click here.