Graduation season will soon be upon us, and with it, so many admonitions explaining why students are unprepared for the challenges of the real world. Graduation speeches will discuss the trillions in student-loan debt, why spendthrifts need to stop buying lattes and why we all need to save more money for retirement. Someone will mention the miracle of compound interest, misattributing the quote to Albert Einstein, along with terrible advice about “following your passion” and lots of other well-intentioned but equally worthless platitudes.

But the one that always grabs me is the lament about a lack of financial literacy. We looked at this a few years ago after the Financial Industry Regulatory Authority’s National Financial Capability Study found only a little more than a third of respondents in a survey were considered highly financially literate. This lack of basic understanding about money among a majority of Americans has been a consistent finding over the years. Look no further than the subprime-mortgage debacle and loans with teaser rates as an example of how awful things can get when consumers don’t understand the financial products they buy. 

It is bad enough that most people are not financially literate, but the painful reality is that investor education does not work — at least not much beyond six months. After that, it is like any other abstract subject taught in a classroom, mostly forgotten.

Academic research has confirmed this. One research paper looked at more than 200 studies, and reached the conclusion that the lessons of financial education are fleeting, and degrade quickly without frequent use.

Nobel economist Richard Thaler has suggested several behavioral nudges that might help; he too acknowledges the limits of teaching financial literacy. Learning decays rapidly, so whatever we teach high school students is mostly forgotten by the time it’s needed. By way of example, Thaler suggests trying to recall what you learned in high school chemistry.

Not that this has stopped states from mandating financial literacy for high schoolers. The Washington Post reported last week that financial-literacy classes are mandated by 19 states in order to graduate from high school, up from 13 states eight years ago. This is well-meaning, but without a radical break from how financial literacy is taught, it is destined to be ineffective.

Why? There are a number of reasons: The subject is abstract and can be complex; specific skills deteriorate fairly soon after graduation from high school; the rote memorization and teach-to-the-test approach used so much in American schools is ineffective for this sort of knowledge.

There are some potential solutions for these issues:

No. 1. Hands-on education: Teaching finance is not well-served by the standard format of classroom lectures. Instead, if we want to make students proficient in budgeting, help them understand credit and teach them about investing, a better approach would be a learning experience from real life. Student-run businesses on campus, and internships at local businesses, or actual jobs in finance do better at showing students how to do these tasks than the lecture-and-test approach.

No. 2. Repetition: Unless financial literacy is constantly reinforced, as we noted above, it fades pretty fast. Core concepts need to be repeated and reinforced after graduation. It is not realistic for us to expect high schools to be able to accomplish this.

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