[Senate Hearing 112-577]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-577

 
FINANCIAL LITERACY: EMPOWERING AMERICANS TO PREVENT THE NEXT FINANCIAL 
                                 CRISIS

=======================================================================

                                HEARING

                               before the

                  OVERSIGHT OF GOVERNMENT MANAGEMENT,
                     THE FEDERAL WORKFORCE, AND THE
                   DISTRICT OF COLUMBIA SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 26, 2012

                               __________

         Available via the World Wide Web: http://www.fdsys.gov

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs




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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware           SCOTT P. BROWN, Massachusetts
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri           ROB PORTMAN, Ohio
JON TESTER, Montana                  RAND PAUL, Kentucky
MARK BEGICH, Alaska                  JERRY MORAN, Kansas

                  Michael L. Alexander, Staff Director
               Nicholas A. Rossi, Minority Staff Director
                  Trina Driessnack Tyrer, Chief Clerk
            Joyce Ward, Publications Clerk and GPO Detailee


  OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL WORKFORCE, AND THE 
                   DISTRICT OF COLUMBIA SUBCOMMITTEE

                   DANIEL K. AKAKA, Hawaii, Chairman
CARL LEVIN, Michigan                 RON JOHNSON, Wisconsin
MARY L. LANDRIEU, Louisiana          TOM COBURN, Oklahoma
MARK BEGICH, Alaska                  JERRY MORAN, Kansas

                  Lisa Powell, Majority Staff Director
            Benjamin B. Rhodeside, Professional Staff Member
               Rachel R. Weaver, Minority Staff Director
                      Aaron H. Woolf, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statement:
                                                                   Page
    Senator Akaka................................................     1
    Senator Johnson..............................................     2
    Senator Merkley..............................................     4
Prepared statement:
    Senator Akaka................................................    47

                               WITNESSES
                        Thursday, April 26, 2012

Hon. Sheila Bair, Former Chairman, U.S. Federal Deposit Insurance 
  Corporation, and Senior Advisor, The Pew Charitable Trusts.....     5
Melissa Koide, the Deputy Assistant Secretary, Office of 
  Financial Education and Financial Access, Treasury Department..    19
Alicia Puente Cackley, Director, Financial Markets and Community 
  Investments, U.S. Government Accountability Office.............    21
Camille Busette, Ph.D., Assistant Director, Office of Financial 
  Education, Consumer Financial Protection Bureau................    23
Brigitte Madrian, Ph.D., Aetna Professor of Public Policy and 
  Corporate Management, John F. Kennedy School of Government, 
  Harvard University.............................................    31
Mark A. Calabria, Ph.D., Director, Financial Regulations Studies, 
  Cato Institute.................................................    33
Sharra R. Jones, Math Instructor, Oak Park Elementary School in 
  Mississippi....................................................    35
Michael Martin, Academy of Finance Instructor, Lansdowne High 
  School, Baltimore County Public Schools........................    37
Evan K. Richards, Academy of Finance Alumnus, Lansdowne High 
  School, Baltimore County Public Schools, and Undergraduate 
  Student, Towson University.....................................    39

                     Alphabetical List of Witnesses

Bair, Hon. Sheila:
    Testimony....................................................     5
    Prepared statement...........................................    49
Busette, Camille Ph.D.:
    Testimony....................................................    23
    Prepared statement...........................................    73
Cackley, Alicia Puente:
    Testimony....................................................    21
    Prepared statement...........................................    61
Calabria, Mark A. Ph.D.:
    Testimony....................................................    33
    Prepared statement...........................................    82
Jones, Sharra R.:
    Testimony....................................................    35
    Prepared statement...........................................    92
Koide, Melissa:
    Testimony....................................................    19
    Prepared statement...........................................    55
Madrian, Brigitte Ph.D.:
    Testimony....................................................    31
    Prepared statement...........................................    76
Martin, Michael:
    Testimony....................................................    37
    Prepared statement...........................................    95
Richards, Evan K.:
    Testimony....................................................    39
    Prepared statement...........................................    97

                                APPENDIX

Statements for the Record:
    Senator Coburn, prepared statement...........................    99
    Education Finance Council....................................   100
    The Financial Services Roundtable............................   103
    Nan J. Morrison, President and CEO, Council for Economic 
      Education..................................................   105
    The Office of the Special Inspector General for the Troubled 
      Asset Relief Program (SIGTARP).............................   108
Questions and responses for the Record from:
    Ms. Koide....................................................   125
    Ms. Cackley..................................................   133
    Ms. Busette..................................................   138
    Ms. Madrian..................................................   145
    Mr. Calabria.................................................   146


                          FINANCIAL LITERACY:
                    EMPOWERING AMERICANS TO PREVENT
                       THE NEXT FINANCIAL CRISIS

                              ----------                              


                        THURSDAY, APRIL 26, 2012

                                 U.S. Senate,      
              Subcommittee on Oversight of Government      
                     Management, the Federal Workforce,    
                            and the District of Columbia,  
                      of the Committee on Homeland Security
                                        and Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:33 p.m., in 
Room SD-342, Dirksen Senate Office Building, Hon Daniel K. 
Akaka, Chairman of the Subcommittee, presiding.
    Present: Senators Akaka, Begich and Johnson.
    Also Present: Senator Merkley

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. I call this hearing of the Subcommittee on 
Oversight of Government Management, the Federal Workforce, and 
the District of Columbia to order.
    Aloha and good afternoon, everyone.
    I want to welcome our witnesses to today's hearing. 
Financial Literacy: Empowering Americans to Prevent the Next 
Financial Crisis. I want to thank all of you for being here.
    As many of you know, this is the Subcommittee's fifth and 
my final, oversight hearing examining efforts to enhance the 
financial capability of all Americans.
    As Chairman, I have worked to promote financial literacy 
initiatives that help American families make smart choices to 
invest in their futures.
    The recent financial crisis put to rest any illusions that 
we can ignore our Nation's shortfalls in financial education 
without suffering serious economic harm. We must act decisively 
to make sure Americans are empowered to make sound financial 
decisions.
    The Financial Literacy and Education Commission (FLEC), 
which I worked to create in 2003, plays an important role in 
improving Federal coordination and collaboration on financial 
literacy activities. We must make sure the Commission has the 
funding and authorities it needs to fulfill its mission.
    To fully coordinate and streamline Federal financial 
literacy efforts, the Commission may need an independent budget 
rather than just rely on contributions from agencies. It also 
may need enhanced authority to coordinate member agencies' 
actions.
    I want to close by noting that I have found it incredibly 
rewarding to champion financial literacy and economic education 
during my time in the Senate. I am very pleased that financial 
literacy will continue to have a strong and dedicated champion 
in my good friend, Senator Merkley, who is here with us today, 
and my good friend also, Senator Ron Johnson.
    My passion for these issues is rooted in personal 
experience. Growing up in Hawaii, I was lucky to have parents 
and teachers who taught me how to save and raised me in a 
culture that valued saving and spending responsibly.
    Yet, despite these strong values, my family struggled with 
financial insecurity, and we did not even have a bank account. 
My upbringing informs my belief that financial literacy 
education efforts must begin at the local level with families 
and communities and with the Federal Government playing an 
important supporting role.
    I see my own parents in the millions of unbanked and 
underbanked families across the Nation. Often for reasons 
beyond their control, many hardworking people who do their best 
to provide for their families find themselves shut out of the 
mainstream financial system. This is where the Federal 
Government has a valuable role to play.
    I strongly support programs like Bank On USA, which have 
demonstrated how government can bring together local officials, 
nonprofits, and private firms to work together to make sure all 
families have financial security.
    The sheer scale of our Nation's financial illiteracy means 
a significant amount of work remains to be done. However, 
rather than be discouraged by the challenge ahead of us, I am 
really inspired by the dedicated witnesses here today, 
especially the educators who have graciously taken the time to 
appear before us today.
    I have faith that if we work together over the coming 
years, we can empower all Americans to make informed financial 
decisions and prevent the next financial crisis. I look forward 
to hearing from our witnesses today.
    I would like to now call upon Senator Johnson for his 
opening statement.
    Senator Johnson.

              OPENING STATEMENT OF SENATOR JOHNSON

    Senator Johnson. Thank you, Mr. Chairman. And aloha.
    Senator Akaka. Aloha.
    Senator Johnson. Aloha to everybody in the audience. I also 
want to thank the witnesses for taking time to appear before 
us. I will note that it looks like we may have some roll call 
votes about 3:20 so that will probably disrupt things a little 
bit.
    I, like you, Mr. Chairman, have a deep-seated belief in the 
importance of financial literacy. But I do think we may have 
some disagreement in terms of whose role is it. Is this really 
a legitimate role of the Federal Government or is this 
something that can be much more effectively and efficiently 
handled on a local level?
    One of the reasons I actually decided I could run for 
Federal office like this is because in my 10 years leading up 
to running for election, I was heavily involved in local 
education, volunteering 50 or 60 percent of my time on my last 
endeavor as the business cochair of a Partners in Education 
Council. And almost the entire efforts of that council had to 
do with providing basic life skills, training, and one of those 
key components was financial literacy.
    One of the things we talked about at the very end of that 
process was the next step after high school, a comprehensive 
counseling model to make sure that children and their parents 
had the full range of options in terms of what the next step 
after high school would be.
    So again, I think it is incredibly important to provide 
financial literacy training. But when you really start taking a 
look at what role of the Federal Government should be playing 
in it and when you take a look at our own finances here in the 
Federal Government, $5.33 trillion worth of deficit spending 
during this Administration, a $1.3 trillion a year deficit 
again this year, you really have to wonder, I mean, is this 
kind of the pot calling the kettle black here. I mean, should 
we really be relying on the Federal Government trying to teach 
our youth how they should be responsible?
    One of the key components in terms of young people starting 
their life successfully is not getting into debt. One of the 
problems we are finding is students taking on all of these 
loans and really digging themselves in a deep hole with not 
only credit card debt but again just taking a look at financing 
their education and taking a look at the type of degree 
programs that they are pursuing.
    A relatively depressing article was just released earlier 
this week from the Associated Press (AP). I do not want to 
quote the study because I do not think it is complete but it is 
basically reporting that current Bachelor of Arts (BA) 
graduates, only one in two are gainfully employed in the area 
of training.
    And if you take a look at just the average debt load of 
students graduating in the 2009-2010 school year from public 
institutions, is about $12,000, private is about $18,000.
    So again, we are encouraging our young people to pursue 
degree programs sometimes that are not particularly valued in 
the workplace, and we are also encouraging them to assume a 
fair amount of debt, and that is the Federal Government pushing 
that on them.
    So, I guess the thrust of my questions is going to be 
really about: Is this a real proper role for the Federal 
Government or not? And I just want to throw out, this is a 
little, I will not say totally on point, but I think it 
describes what I am talking about in terms of the role of the 
Federal Government, how effective it is--Pat, if you want to 
put that up.
    I have had my staff take a look at conditions, economic 
conditions from 1960 until today, from then versus now. If you 
take a look at three product areas, market areas that have 
basically been affected by the free market, clothing, food, and 
shelter in inflation-adjusted dollars the per-household expense 
for clothing, food, and shelter actually is below 1960 levels.
    Again, that is the power, the wonder of the free-market 
system in sharing the lowest possible price and cost, the 
highest possible level of quality and customer service.
    In two sectors that the government largely controls, 
education and healthcare, you can see the difference. Education 
has gone up 206 percent on a per-household basis. Healthcare is 
up 481 percent.
    So again, that sort of underscores the point, is 
government, is the Federal Government really the right entity 
to be pushing financial literacy.
    So thank you, Mr. Chairman.
    Senator Akaka. Thank you very much, Senator Johnson.
    Now, I am going to call on Senator Merkley for his opening 
statement.

              OPENING STATEMENT OF SENATOR MERKLEY

    Senator Merkley. Thank you very much, Mr. Chairman, and 
thank you for the series of hearings including the one today 
where we will also have a panel from the Consumer Financial 
Protection Bureau (CFPB). But thank you for your lifetime of 
leadership on financial education, going back to the Excellence 
in Economic Education Act (EEE) Act, if you will. The work that 
you did a couple of years later to establish the Financial 
Literacy Commissions.
    Like you, I was fortunate to have parents who stressed 
financial education from the very beginning. I think I was 
about 5 years old when my parents sent me to the bank to get my 
bank account, earlier than that I got my piggy bank, and they 
taught me to take part of every allowance and store it away, 
stash it away. And I am doing the same with my children today.
    But I must say the world has become a lot more complicated 
financially since I was a child. When I got out of graduate 
school and came to work for Secretary Weinberger in the 
Department of Defense (DOD), at that point I applied for a 
credit card, and I was turned down. I applied for my 
MasterCard, got my rejection letter, said you do not have 2 
years of work history yet. And so, 2 years later I applied 
again, got my credit card.
    What a difference from the weekly set of letters my 
children receive trying to get them to open credit card 
accounts and with all kinds of different qualifications.
    We did not have payday loans, 500 percent loans preying on 
folks. We did not have deregulated predatory mortgages. We had 
a system of Savings and Loan where you deposited in your corner 
savings and loan and they provided a low-cost loan to buy your 
house.
    And as the complexity of the marketplace has evolved, we 
have not geared up financial education. Despite your best 
efforts which have been substantial, we still have not met the 
challenge.
    And so, I do look forward to trying to help carry forward 
the message, you have so clearly established, that financial 
literacy is a key part of preparation for living in a complex 
society.
    This whole set of lessons was reinforced when I was 
Director for the Habitat for Humanity and worked with many 
families who would not have been able to be homeowners. They 
worked in the service economy, did not earn enough in wages but 
for habitat interest free loans and sweat equity where the 
families help build the homes.
    But a key piece of those families being able to be 
successful, to make sure they were able to make their home 
payments lower than the market but still substantial was 
financial literacy and that education that they went through as 
part of the habitat experienced was critical to the ongoing 
success.
    So, I do think this is extraordinarily important. I look 
forward to continuing to work on it. I think this is a 
bipartisan world in which education is so powerful and the 
quality of life, the quality of financial life that our 
citizens have. Thank you for your leadership.
    Senator Johnson. Mr. Chairman, I neglected to request that 
I received a statement from the Education Finance Council 
(EFC). I would like to have that included in the record please.
    Senator Akaka. Certainly. That will be included in the 
record.
    Senator Akaka. I now welcome our first panel witness. 
Sheila Bair, former chairman of the Federal Deposit Insurance 
Corporation (FDIC) and Senior Adviser at the Pew Charitable 
Trusts.
    Nearly 5 years ago, Ms. Bair was sitting in that same chair 
appearing as the lead witness at the Subcommittee's first 
financial literacy hearing.
    Welcome back, Sheila, it is good to see you again. As you 
know, it is the custom of the Subcommittee to swear in all 
witnesses. So please, stand and raise your right hand.
    Do you solemnly swear that the testimony you are about to 
give the Subcommittee is the truth, the whole truth, and 
nothing but the truth so help you, God?
    Ms. Bair. I do.
    Senator Akaka. Thank you. Let the record note that the 
witness answered in the affirmative.
    Before we start, I want you to know that your full written 
statement will be part of the record, and I would like to 
remind you to please limit your oral remarks to 5 minutes.
    Ms. Bair, would you please proceed with your testimony.

TESTIMONY OF HON. SHEILA BAIR,\1\ FORMER CHAIRMAN, U.S. FEDERAL 
   DEPOSIT INSURANCE CORPORATION AND SENIOR ADVISOR, THE PEW 
                       CHARITABLE TRUSTS

    Ms. Bair. Chairman Akaka, Ranking Member Johnson, Senator 
Merkley, Aloha. 
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Bair appears in the appendix on 
page 49.
---------------------------------------------------------------------------
    Senator Akaka. Aloha.
    Ms. Bair. Thank you very much for the opportunity to 
testify today on ways to improve the effectiveness of Federal 
financial literacy initiatives and the performance of the 
Financial Literacy Education Commission.
    And may I also say it is a distinct pleasure to be your 
bookends. I was glad I has here at your first oversight hearing 
and I am very glad to be here with you for your last oversight 
hearing. Thank you very much for including me.
    As this Subcommittee knows, financial education has long 
been of interest to me. I have written children's books and 
stories which deal with basic financial topics.
    I created Treasury's Office of Financial Education when I 
served as the Assistant Secretary for Financial Institutions; 
and when I later became Chairman of the Federal Deposit 
Insurance Corporation, I created an Advisory Committee on 
Economic Inclusion, or Come-In for short. This important 
committee helped guide the FDIC's work in promoting a banking 
system which is inclusive and serves the needs of all 
Americans, regardless of income status or financial acumen.
    After many years of promoting financial education, we have 
learned some important things. For young people, building 
financial education into core curricula and having it taught 
every year is more effective than ``one-off'' financial 
education classes.
    For adults, financial education offered in connection with 
a specific financial event, be it opening a banking account, 
applying for a credit card or taking out a mortgage, will be 
more effective than financial training which is offered in the 
abstract. We also know that financial education can make a 
difference though much more work needs to be done in defining 
and measuring the key metrics of success.
    For instance, when I chaired the FDIC, we completed a 
survey of adults who had completed our Money Smart curriculum 
and found that it did have a positive impact by making it more 
likely that they would open a bank account, save money, and a 
budget.
    We also noted that an important part of financial literacy 
is having information presented in a way that consumers can 
understand and use to make appropriate choices. Thus, 
disclosures for financial products and services needs to be 
presented in a format that is clear and understandable.
    This brings me to important work the Pew Charitable Trusts 
is doing on consumer financial security. In recent years, Pew 
has generated a variety of research focused on enhancing 
consumer financial security and understanding long-term 
economic mobility. Helping people make beneficial financial 
decisions is integral to this work.
    This is particularly important for checking accounts which 
allow consumers to transact and save often serve as a gateway 
to the use of more sophisticated financial products and 
services.
    Unfortunately, when Pew studied the checking account 
disclosures provided by the 10 largest banks, we found a median 
of 111 pages of information. Last fall Pew released the results 
of a longitudinal study of 2000 low income Los Angeles area 
households, 1000 with and 1000 without a banking account, which 
explores the connections between financial services, the 
populations they serve or are failing to serve, and the 
financial stability of those populations.
    Pew found that nearly one in three households listed 
unexpected and unexplained fees as the reason for leaving 
banking while only 27 percent attributed their departure from 
banking to job loss or lack of funds.
    Given the need for consumers to understand and maintain 
their checking accounts, we believe that the Consumer Financial 
Protection Bureau should require all financial institutions to 
provide a clear, concise, and uniform disclosure that would 
present account holders with easy to understand information 
about important fees and terms.
    In addition, I urge the CFPB to prohibit practices that 
have no business purpose other than to maximize fees and that 
are difficult or impossible for consumers to avoid like 
transaction reordering since this practice makes it very 
difficult for consumers to manage their money and avoid these 
charges.
    While at the FDIC, we issued guidance to our supervised 
banks to halt this practice. Transactions need to be processed 
in a fee-neutral manner that responsible consumers can 
understand and follow.
    Pew's Safe Small-Dollar Loans Research Project is currently 
evaluating the complicated issue of payday lending. Here is 
another reminder that empowering Americans to manage their 
finances effectively requires meaningful price disclosures.
    The case of payday lending reminds us that consumers must 
be enabled to understand not just what it initially costs to 
obtain a financial product but also to calculate the ongoing 
costs and risks of using those products.
    Consumers need to be educated so that they are less 
susceptible to debt trap which too often accompanies payday 
loans. Payday loans are not an easy fix to temporary emergency 
cash needs as their marketing suggests. Frequently borrowers 
use these loans for recurring expenses. They also find that 
they must repeatedly take out new loans to pay off the old 
ones.
    Indeed, the profitability of the payday lending model is 
driven by repeat usage. This is why I supported the creation of 
a small dollar loan pilot program when I was at the FDIC to 
encourage responsible alternatives to payday loans.
    This program recognizes the value of safe and affordable 
small dollar loans. Two of the most important features of this 
program are a minimum repayment term of 90 days and solid 
underwriting practices.
    One final point which I would like to make brings us back 
to the importance of teaching positive behaviors. Hoping to 
instill positive financial behaviors in certain areas such as 
saving and investing can also promote positive behaviors in 
other areas like credit usage.
    Just one example. Pew found that renters earning $40,000 to 
$100,000 a year use payday loans more frequently than 
homeowners who earn only $15,000 to $40,000 a year. Since home 
ownership has traditionally been a primary asset building 
vehicle, and we hope it will return to that, this finding 
suggests that asset accumulation can have a positive impact on 
reducing reliance on high-cost credit.
    Thank you very much for the opportunity to testify today 
and I would be happy to answer your questions.
    Senator Akaka. Thank you very much, Ms. Bair. I appreciate 
you testifying at this hearing, despite being under the 
weather.
    Ms. Bair. Thank you.
    Senator Akaka. Ms. Bair, I commend you for your work both 
as Chairman of the FDIC and as a children's book author, to 
promote the value of good saving and spending habits. As you 
know, I am very grateful to my fourth grade teacher who used a 
piggy bank to teach important lessons about saving and managing 
money that I still follow to this day.
    When it comes to financial education, how important is it 
that we start early, and what is the most effective way to 
bring financial literacy into our schools?
    Ms. Bair. Well, I think it needs to start very early. 
Children even in preschool start understanding what money is 
about. They like to play store. Money can be a wonderful tool 
for teaching math and math can be a wonderful tool for teaching 
children about financial management.
    My view has always been that it should be in core curricula 
year after year. It can easily be integrated into math with 
evermore increasingly sophisticated concepts being introduced 
with each grade.
    Literature class and history classes also offer wonderful 
opportunities to teach great literature as well as historical 
lessons about financial catastrophes that are brought about 
through, time-old problems of speculation, greed, excess 
leverage.
    So, I do think there is a wealth of educational materials 
that can be woven into the curricula year after year and 
offered and reinforced year after year in our schools.
    Senator Akaka. Thank you. While at Treasury, you founded 
the Department's Office of Financial Education. I am interested 
in your thoughts on how the office has performed in carrying 
out its mission, how the current structure compares to the 
original vision, and any proposals you have to improve the 
office's effectiveness.
    Ms. Bair. Well, I know you are going to be hearing from the 
Treasury Department later and will want to hear their views. I 
think the mandate has seemed to have gotten somewhat broader 
since I left and I think that is fine.
    I do think there does need to be a very sharp focus, 
though, on financial education and coordination of various 
Federal efforts on financial education.
    And if I would have one suggestion it might be to elevate 
the office perhaps to be in the Office of the Secretary. I 
think, making sure it is a priority issue, making sure that the 
head of the office has the power and the imprimatur at a very 
senior level to coordinate these programs and assure that there 
is effective coordination, efficiency. Sharing of research I 
think would be important. So, perhaps elevating the office 
might be a good thing.
    Senator Akaka. I commend you for initiating the landmark 
2009 FDIC national survey of unbanked and underbanked 
households. The results are incredibly valuable in helping us 
design the most effective policies to address this critical 
issue. In 2012, it is simply not acceptable that close to 30 
million U.S. households are either unbanked or underbanked.
    Would bringing these households into the banking system 
have broader economic benefits that would justify greater 
investments in programs such as the Model Safe Accounts Pilot 
or Bank On USA?
    Ms. Bair. Well, I think certainly in terms of helping and 
improving the efficiency of low-income support programs, 
reducing unnecessary fees and costs associated with alternative 
financial transactions, I think those can all be accomplished 
by getting more people into banks as long as it is the right 
type of account.
    We know that some bank accounts can be very expensive too 
and inappropriate for people who are inexperienced with 
finances. We modeled, as you have mentioned here, safe accounts 
at the FDIC as well to make sure that they are streamlined and 
simple and not laden with fees and are appropriate for lower 
income Americans.
    So, I do think there is a lot of return to get on that type 
of initiative. But I think absent even spending Federal money 
in those programs a lot more can be accomplished.
    The FDIC, and the banking regulators can perhaps do more in 
this area working with Treasury's leadership, the Fed and the 
Office of the Comptroller of the Currency (OCC) in terms of 
providing appropriate incentives for banks to provide these 
basic accounts. Community Reinvestment Act (CRA) credit is 
certainly an important tool.
    So, I think there are, even outside budgetary constraints 
which I know are severe right now, there are ways I think that 
the regulatory community, with Treasury's leadership, can help 
make those types of accounts more broadly available.
    And frankly, I think that would be supported by the 
industry too. I think unfortunately these types of accounts can 
not be very profitable. They are not big profit leaders and so 
relying on the private sector by itself to innovate and develop 
and market these types of products is probably not going to 
happen. But through regulatory coordination and encouragement I 
think you can get there.
    Senator Akaka. You have noted that a consumer who knows the 
right questions to ask, understands economic fundamentals, and 
most importantly has the confidence to challenge products that 
seem too good to be true--
    Ms. Bair. Right.
    Senator Akaka [continuing]. Is a regulator's best weapon in 
consumer protection.
    Would you please elaborate on how a financially literate 
consumer increases regulators' efficiency and effectiveness?
    Ms. Bair. Right. Well, yes, I mean, for one thing they will 
know to ask questions and understand that they should say no to 
a product that they do not fully understand.
    I look back at these horribly complex adjustable-rate, 
subprime mortgages that really were heavily marketed in lower 
income neighborhoods and targeted to people who had tarnished 
credit records in the past.
    So, we know that they had trouble in the past managing 
their finances, and just understanding the basic difference 
between a fixed rate and a floating rate.
    There is misleading marketing of these products too. They 
were advertised as fixed rate even though they were only fixed 
rate for 2 or 3 years. But if you look closely enough at some 
of the disclosures you could see that there was a payment 
reset.
    But, just understanding that basic difference between a 
fixed rate and a floating rate and if you have a floating rate 
you are at risk of your payment going up I think would have 
forewarned a lot of people away from these products.
    So, just basic information like that, making sure folks 
have a better understanding of the fundamental concepts I think 
could have avoided a lot. We needed more robust regulation too 
and more responsible behavior in the mortgage origination 
community. But better informed consumers certainly could have 
helped avoid a lot of these unaffordable mortgages that were 
made and subsequently ended up in foreclosures.
    Senator Akaka. Thank you.
    Senator Johnson, your questions.
    Senator Johnson. Thank you, Mr. Chairman.
    Ms. Bair, my background is in accounting and in 
manufacturing. My manufacturing background always causes me to 
look for the root causes of a problem.
    Ms. Bair. Right.
    Senator Johnson. Now, an awful lot of what we are talking 
about with financial literacy we are trying to attack some of 
these abusive financial practices and abusive financial 
products. I mean, can you describe for me what is sort of the 
root cause of some of these payday loans?
    Ms. Bair. Well, I think people in need, people in financial 
need is really what is causing it obviously. The ultimate 
problem is to have a robust economy, more jobs, better paying 
jobs because people turn to these products when they then 
become in financial straits.
    Some of those, though, financial problems can be avoided, I 
think, by better skills in learning how to budget money, 
learning how to live within your means.
    So, I do think financial education can play a role in terms 
of having better financial management skills to avoid the need 
that you have to turn to emergency high-cost credit to begin 
with.
    But, the higher-priced products are particularly targeted 
to people who are in need and do not have a lot of 
sophistication or have a past history of misuse of products. 
That is the conundrum you face when you try to make credit more 
available to people who in the past have had trouble on 
managing credit.
    So, I think, as a Nation and as a government, we need to 
ask, as a matter of good conscience, when do we say enough is 
enough. Can we live with the 500 percent rate? Can we live with 
the 3000 percent interest rate? I think at some point we have 
to say it is better to just deny that credit as opposed to, 
say, it should be available at any cost to people who cannot 
afford it.
    Senator Johnson. Is there anything in Federal law currently 
with the ability to prevent those types of abuses?
    Ms. Bair. There is--for the military there is but not 
otherwise, I think and I do not know if you need to go to rate 
regulation. There may be at some point where something is so 
abusive it would violate the basic tenets of Federal consumer 
protection laws. But certainly, I think, better disclosure and 
better provision of alternatives.
    There are a number of credit unions that have piloted 
alternative, small-dollar loans that can be used, that have 
longer repayment terms and much lower interest rates. We 
piloted on a voluntary basis; a number of banks did the same 
type of thing.
    So, market competition is always good. And I think banks 
are well-positioned to provide lower cost alternatives because 
they already have the infrastructure in place. But the payday 
lending infrastructure is a very expensive one. It is usually a 
storefront operation. It is labor intensive so they are very 
high cost.
    So, I think banks if they can have the appropriate business 
and regulatory environment to provide low-cost alternatives are 
well-positioned to do that.
    Senator Johnson. So, why do not basic laws against usury 
apply here?
    Ms. Bair. Well, sometimes they do. Usury laws are State by 
State. They vary by State. There is a question of whether they 
apply to Internet transactions. So, that can be another issue. 
Some States have laws that openly accommodate payday loans. So, 
it is a matter of State law.
    Senator Johnson. OK. Is there any evidence, again we are 
basically talking about individuals that really are in tough 
economic situations.
    Ms. Bair. Right.
    Senator Johnson. I am not sure that financial literacy is 
going to be particularly effective with that population base. 
Is there any evidence that it is?
    Ms. Bair. Well, I think it can be preventative. I think 
with better financial education can we help everybody? No. Can 
we help more? Yes. And I think, again, in the public schools in 
particular which is your broadest venue for providing financial 
education, having basic financial concepts taught, integrated 
into the core curricula of math especially so you are not 
really adding to cost is very important.
    I think making sure that it includes money management 
skills and understanding basic concepts about, risk and return, 
compounding interest, how compounding interest will hurt you if 
you borrow money and take a long time to pay it back, getting 
those types of notions built into core curricula in school, I 
think when folks become adults they can more responsibly manage 
their money, basic budgeting skills.
    And so, they have plans. So they have $500 in the bank 
account if the car breaks down or there is an unexpected 
doctor's appointment. But, that is hard to do. So, I think it 
really needs to get into the public schools and be offered year 
after year, I mean, enforced year after year.
    Senator Johnson. You just mentioned compound interest. 
Certainly one of my concerns in these artificially low rates 
that I think you just recently wrote about. We are certainly 
robbing seniors of their ability to have a decent return on 
their life savings.
    Ms. Bair. Right.
    Senator Johnson. We are also robbing youth of the wonder 
and power of compound interest rates now. Can you just kind of 
speak to that?
    Ms. Bair. Right. Well, that is true. I wrote a book ``Rock, 
Brock, and the Savings Shock''. It is about compounding 
interest. I used a five percent interest rate back then and 
obviously that is dated.
    The power of compounding obviously is much more difficult 
to teach when you are talking about these extraordinarily low 
interest rates.
    Though even at two percent for a long enough period of 
time, it can start gaining some momentum. I do think, though, 
as I said, we are talking about financial education, but I do 
think there are risks associated with this very long, 
protracted period we have had of near zero interest rates.
    Certainly, it has hurt savers. It has hurt pension fund 
managers, those trying to manage retirement savings in a way 
that will produce enough of an income to provide the promised 
benefit. What are we getting on the positive side?
    So, my sense is, as I said, is that it is time to perhaps 
start turning the ship. I do not suggest doing anything radical 
overnight but I think signaling that perhaps it is time to 
think of a transition period out of this or at least let the 
market bump rates up a little bit. If that is where the market 
wants to go, it would be well advised.
    Senator Johnson. I looked at the history of the U.S. 
borrowing costs from 1970 to 2000. It averaged 5.3 percent.
    Ms. Bair. Right.
    Senator Johnson. The last few years were at about one and a 
half percent.
    Ms. Bair. Yeah.
    Senator Johnson. Do you have any prediction when that 
little bubble is going to burst or when we--
    Ms. Bair. I think that is one of the problems, if we have 
continued Federal Reserve buying of longer-dated Treasury 
bonds, we really do not know whether that has camouflaging 
reduced investor interest in longer dated Treasury securities. 
We will presumably find that out when Operation Twist concludes 
in June.
    But I do think, and one of the points I made in the column, 
I think the Fed is, I do not fault the Fed, I think the Fed 
feels that fiscal policy is still frankly not being managed 
very well.
    So, they are trying to make up for it through monetary 
policy and I just think there is only so much you can do 
through monetary policy. So, it might be a good thing to bump 
those rates up a little bit. Maybe a little bond market 
discipline that people will start focusing on some of our 
short- and longer-term fiscal issues here and deal with them in 
a more effective way.
    Senator Johnson. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Akaka. Thank you very much, Senator Johnson. 
Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chairman, and 
thank you, Ms. Bair. I appreciate the work you have done before 
and the work that you are doing now. In your testimony, you 
note that unexpected fees drive customers out of bank accounts, 
I believe, one out of three who leave the banking system. You 
also mentioned transaction reordering.
    Ms. Bair. Yes.
    Senator Merkley. And I certainly have heard from lots of 
folks who, because the order of their transactions were 
reordered to having the largest transaction first with a string 
of perhaps small things like buying a soda pop or something, 
all of them then had $35 fees associated with that. So, instead 
of one $35 fee there were now eight. And one of the reactions 
is, what, I am going to shut down my checking account.
    Who would have the authority, if anyone, does the Consumer 
Financial Protection Bureau have authority to address the 
issues like the chronology of transactions being changed by a 
financial institution?
    Ms. Bair. Yes, I think, well, you have a representative 
testifying but my view is that, yes, that is within their 
power. And we, at least for the banks that the FDIC supervised, 
we put out guidance saying that the practice should stop.
    I think a lot of it has stopped already fortunately--
unfortunately, because of litigation as much as anything. But 
there is no reason for it other than to maximize fees, and I 
think a lot of responsible banks do not do it.
    But it damages customer trust. They feel like they are 
tricked, they are gamed. And it is not good. You cannot see it. 
You cannot do anything about it.
    So, I do think it is a good example of a practice that 
there is no legitimate business purpose for and it should be 
banned. Absolutely.
    Senator Merkley. Thank you. I want to return to the payday 
loans for a moment. You mentioned that the military has 
restrictions through those statutes that we passed.
    Ms. Bair. Right.
    Senator Merkley. And I remember the vivid testimony on how 
the 500 percent interest rates around military bases were 
demoralizing our young male and female GIs and quite frankly 
having a devastating impact on families.
    And the military leaders came before the Senate and said 
this is a terrible impact on families, a terrible impact on 
national security as a result, can you do something about it? 
And we did do something about it.
    But why is something that is very good for military 
families not also very good for all American families?
    Ms. Bair. Well, I would not disagree with you on that. I 
think it is hard. Flat numerical interest rate restrictions 
have had a checkered history when we have tried them in the 
past. And of course, interest rate environments can change. I 
think Talent Amendment's was 36 percent. That was when, maybe a 
standard interest rate was 18 or 20 percent and now it is so 
much lower. So, 36 percent even sounds pretty high. So, there 
is always that issue.
    My preference is always to try to get competition to drive 
interest rates down combined with robust disclosures so that 
people understand what they are getting themselves into.
    But, I think it is a legitimate issue to be concerned 
about; and especially with lower income folks, they get trapped 
into the serial loans that they keep paying and repaying and 
repaying.
    It really is wealth stripping. It does undermine other 
Federal support programs that we try to provide to assure 
everyone has a basic income and standard of living.
    So, I guess, Senator, my preference still would be to try 
to let market competition get it down with better disclosure 
but I can certainly see a policy justification for having a 
Federal limit if Congress wanted to do that.
    Senator Merkley. When I was in the Oregon legislature, led 
an effort to put a 36 percent cap on Oregon's payday loans, a 
successful effort. One of the concerns was that it would 
eliminate the industry and the availability of short-term 
loans. It did cut into about a third the number of storefronts; 
but instead of having a storefront every three blocks, there is 
a storefront about every 10 blocks.
    Ms. Bair. Right.
    Senator Merkley. And so, huge savings to low income 
families.
    I was very struck by going into a food bank and having the 
director of the food bank say the biggest single factor that 
she had noticed was that she no longer had folks coming into 
the food bank who have been driven to bankruptcy by the 500 
percent interest rates on payday loans, it had a big impact. 
She said then with the economy turned down the loss of jobs has 
gone the other direction.
    Ms. Bair. Yeah.
    Senator Merkley. But there are two challenges that Oregon 
has. One is that we did put a law on Internet lenders and made 
those loans unenforceable in Oregon. However, Internet lenders 
are using remotely created checks in order to essentially gain 
the right to extract the funds in a fashion that State 
regulators cannot get their hands around.
    The other challenge we have is that the State law cannot 
control national banks. And nationally chartered or federally 
chartered banks are starting to move into the payday loan row.
    Any thoughts on those two pieces?
    Ms. Bair. Well, again, there may be legal issues but I tend 
to interpret the CFPB's authority there pretty broadly. So, I 
think that might be a discussion that you need to have with the 
CFPB.
    Federal preemption of State laws is something that has 
troubled me for a long time. When I was at Treasury in 2001 and 
2002, I had objected then to the OCC's efforts to preempt 
mortgage protections that were being, anti-predatory lending 
laws that were being enacted State-by-State. And I left 
Treasury and later the OCC went ahead with that.
    You and I can argue about whether usury limits and rate 
regulations are a good thing or a bad thing. But I think we 
should all agree that if States want to protect their own 
citizens, they should have the ability to do that.
    And so, I would hope that perhaps that is an area that 
legal authorities could be explored with the CFPB.
    Senator Merkley. Thank you. You had mentioned the strategy 
of integrating financial concepts into regular curriculum.
    Ms. Bair. Right.
    Senator Merkley. You also note in your testimony the need 
to test the efficacy of better research, test efficacy of 
programs. Has there been research that has compared, if you 
will, the stand-alone financial literacy class perhaps required 
in high school or students who take it in high school versus 
the incorporation of financial literacy concepts more broadly?
    Ms. Bair. It is more anecdotal. I do not think there are 
good control groups. It would be nice to see research like 
that. I do know the one-off type of, high school classes, the 
research that has been done on it has been pretty weak in terms 
of showing that they are very effective in changing behavior.
    I noticed that your next panel of witnesses will be talking 
about a new research agenda for the FLEC. And I think this is 
an area where we are desperately in need for better, stronger 
survey data, perhaps studies that could actually track, find a 
few school districts that are doing this, and more and more 
are, and actually track the behavior of those students over a 
period of time versus a control group where that type of 
education is not introduced. I think it will be extremely 
helpful.
    Senator Merkley. That would be very helpful. Thank you.
    Ms. Bair. Thank you.
    Senator Akaka. Thank you very much, Senator Merkley. 
Senator Begich.
    Senator Begich. Thank you very much, Mr. Chairman. I know 
financial literacy has been an issue that you and I have talked 
about more than once, and I am glad to see this hearing moving 
forward and some discussion about it.
    Thank you for being here. When I was in high school, I 
peer-taught financial and personal finance back when it was 
required to graduate, a quarter credits.
    Let me ask a couple of questions. In Alaska, for example, 
if you are a first-time homeowner and you wanted to utilize the 
Alaska Housing Finance Corporation loan program, you can 
receive I want to say it is a quarter-point or maybe it is an 
eighth of a point but I think it is a quarter-point off your 
loan interest if you show that you have gone through a first-
time home owner program in the sense of learning financial 
industry but home ownership understanding.
    Why not, with our loan programs that we federally 
guarantee, offer the same thing for first-time homeowners?
    Ms. Bair. Well, that is interesting. Certainly. There is a 
lot of research that shows good programs can reduce default 
rates.
    Senator Begich. That's right.
    Ms. Bair. If the government is guaranteeing the mortgages, 
yes, that might make some sense.
    Senator Begich. We have one of the lowest default rates, if 
not the lowest, in the country.
    Ms. Bair. That is great.
    Senator Begich. And I think part of it is these first-term 
buyers actually understand the responsibility. It is not just 
buying a house and getting a payment but they actually have to 
take care of the lawn. There are utility costs. There are 
variables in their utility costs. It depends on usage of your 
house, gas heat versus electric, and a variety of things.
    I guess you kind of answered the question that if we are 
putting the guarantees up, we are the platinum basically, we 
should require some opportunity for them, at least first-time 
buyers it seems to me.
    Ms. Bair. Right. I would think so. I think that would be, 
again lower default rates should save the government money in 
terms of their guarantee so that would make a lot of sense.
    Senator Begich. And create more capacity for more loans 
because you do not have those default rates because you are not 
putting loan reserves and those kinds of things.
    Ms. Bair. That is right.
    Senator Begich. Let me, if I can follow on the commentary 
about, I have met with credit card companies. I have met with 
credit unions, I have met with banks, a variety of different 
groups and they are all very supportive of financial literacy 
but it is kind of disjointed.
    Ms. Bair. Yes, it is.
    Senator Begich. For example, I mean, I just did a refinance 
and they were very excited to give me I think it was an eighth 
off if I made sure my direct auto pay was with a bank account 
with their bank. But I had no incentive of any kind to talk 
about financial literacy.
    Do you think the private sector has or would be motivated 
in this arena? I mean, you think they would be but maybe not 
because we guarantee most of these loans. I mean, what is your 
experience.
    Ms. Bair. Yes, I think you get a mixed effort in the 
private sector. There is a lot of money thrown at it. There is 
a lot of curricula developed but some of it is of mixed 
quality. And I think there may be, with any business sector you 
have your better players and the ones who are not so good in 
dealing with their customers.
    To the extent you know some financial institutions make 
money over late fees, right?
    Senator Begich. Right.
    Ms. Bair. Or repeat overdrafts. And so bad financial 
behavior can generate income so perhaps it is a conflict 
between providing good financial education and improving 
financial skills and potential profit motives.
    So, I think the better managed banks do not approach it 
that way. I think they realize that it is ultimately in their 
long-term interest to have customers who do not overdraw their 
accounts and pay their loans on time.
    But you do get somewhat of a mix in quality I think which 
is why I think it is appropriate for there to be a Federal 
coordination effort.
    Senator Begich. Coordination research.
    Ms. Bair. Yes, exactly.
    Senator Begich. I note Senator Johnson was talking about 
some of the areas. We did something when I was mayor. We had an 
area of town that, as Senator Merkley described, every few 
blocks you would have a payday, I think it was every six feet 
there was a payday lender.
    And we encouraged through some land economic incentives to 
have a credit union move into the area with some conditions, 
and they now average, and it is one of the most impoverished 
areas of the most urban area of Alaska, Anchorage, Credit Union 
One.
    And they actually have an education center within their 
credit union. For an ``A'' average, I forget the number, but it 
was one of their fastest growing branches out of the whole 
State because they had no low cost entrance in. So, you would 
not have all of these fees and all this stuff but they also did 
an education. If you became a member, part of the membership 
was, here is some education.
    So, it seems like there are some players out there that are 
trying to figure out, especially in the lower income 
neighborhoods, how do we, in essence, create competition 
against the payday lenders. And I think there are some banks 
and in this case there was a credit union who was very 
aggressive about it.
    Do you see that in low income neighborhoods that there is 
opportunity as I just described or is it pretty limited?
    I mean, there is a risk because it is a lot of capital 
investment these facilities have to make. Payday lenders, they 
just show up with a little box and a little storefront, a 
little flashing lights that says open 24 hours, bring your 
check, we will give you a deal.
    Ms. Bair. Right. So, I think there is opportunity there and 
I think credit unions and the Community Development Financial 
Institutions (CDFIs) typically will lead this. They will 
innovate. They will come up with the models to have these 
successful products, and you will find the larger banks once 
the smaller institutions have pioneered this type of effort, 
you will see the larger institutions coming in which is why I 
think, supporting credit unions and CDFIs is important.
    It saddens me. We have had a lot of CDFIs fail as a result 
of the crisis because they serve the more distressed economic 
neighborhoods. But there are still a lot of them out there too 
doing a lot of good work in this area.
    And so, yes, I think there is opportunity and I think there 
are other people out there just like your credit union that are 
pioneering methods that can make economic sense for all 
providers.
    Senator Begich. Let me ask you one last question. I have 
just about a minute left. We passed, I did not vote for it but 
it is the initial public offering (IPO) legislation recently. 
Some call it a jobs bill but put that all aside. I did not vote 
for it. I think there are some problems in the future.
    But it will create, and I will use the people who sold this 
bill, new opportunities for investors. My worry is how do we 
ensure those folks who may not be so understanding of what that 
is all about are educated before they find out they just bought 
into a project that is never going to turn a profit, never give 
them a dividend.
    They thank them for the angel investment. They are 65 years 
old, just retiring. Any thoughts on that? Because we are about 
to enter this and, I can tell you the e-mail Web sites are 
going to be popping up overnight and selling you a lot of 
goods. And the reality is we know with venture capitalists, 
angel investors, that the return rate, it is one out of 50 if 
you are lucky on a good day.
    Ms. Bair. Well, I think the relationship with risk and 
return is something that is so basic and that really needs to 
be in the schools year after year. If it sounds too good to be 
true, it is. If it has a high rate of return, it is going to be 
very high risk. You are probably going to lose your money.
    Senator Begich. Right.
    Ms. Bair. That is something, a basic, that a lot of people 
do not understand right now. I can only hope that the Security 
and Exchange Commission (SEC) somehow finds a way to have red 
flashing lights on all of those investments that this is very 
high risk and you should not be putting money into this unless 
you are prepared to lose it.
    Senator Begich. Very good. Thank you very much. Thanks for 
your testimony.
    Thank you, Mr. Chairman.
    Senator Akaka. Thank you very much, Senator Begich.
    Let me call on Senator Johnson for his questions.
    Ms. Bair. OK.
    Senator Johnson. I had just one quick question. You were 
talking about curriculum. Is there a model that you have seen 
that would really be, kind of a drop-in for local school 
districts that does what you had suggested it do?
    Ms. Bair. I think there are pieces of it. Part of the 
problem I think with financial education is it is very 
piecemeal. Part of the problem with trying to get it in the 
education system is the education system itself is very 
balkanized so there are discrete aspects of a lot of different 
school programs that I think are good. One that has the perfect 
model, no, I could not give that to you.
    Senator Johnson. As long as it is a short answer, one quick 
last question.
    Ms. Bair. Sure.
    Senator Johnson. In terms of who is taking the risk, I 
mean, is it not the fact that these banks can just take these 
loans and just sell them and get rid of them and not hold on to 
the risk? Is that not part of the real problem too? They have 
to have a much greater vested interest in educating the 
consumers to be able to pay off loans.
    Ms. Bair. Right. Well, you are right. That is exactly what 
happened. When it used to be that a bank would make a loan and 
hold it in their portfolio, they had every incentive to make 
sure the borrower could repay the loan. With securitization, 
the risk was passed off.
    That is why I really like the risk retention component of 
Dodd-Frank. I hope that regulators finalize that and have very 
narrow exceptions because I think the best way to make sure 
that lenders will make responsible mortgages, ones that people 
can repay is to make sure that they take a good chunk of the 
loss if the loan goes bad, absolutely.
    Senator Johnson. OK. Thank you very much.
    Ms. Bair. You are welcome.
    Senator Johnson. Thank you, Mr. Chairman.
    Senator Akaka. Thank you.
    Ms. Bair, let me just ask one final question. I was very 
surprised that the median length of checking account 
disclosures provided by major banks is 111 pages.
    Ms. Bair. Yes.
    Senator Akaka. My question is what barriers have you 
observed to banks adopting Pew's model disclosure box and why 
have only two major banks adopted your model?
    Ms. Bair. Right. Well, we have two. I will say the cup is a 
little bit full not a lot empty.
    I was talking to the staff earlier about that. We hear 
arguments about costs. We hear, well, we have our own 
disclosure and we think that works. And that may or may not be 
true.
    Now, we have heard more recently that, well, they do not 
want to get ahead of the regulators at the CFPB, and I hope 
they do, that the CFPB goes ahead with a uniform disclosure 
that they will just wait for the CFPB to do that.
    So, we have heard a lot of reasons. But I do think this is 
one, so much of Federal disclosure laws in the past have 
focused on credit products because it used to be that is really 
where the costs and the risks were that deposit accounts really 
now have become so fee laden, and there are so many different 
ways you can end up paying money that you did not understand 
that you were going to have to pay that I think having uniform 
disclosure for deposit accounts really its time has come and I 
do hope the CFPB moves ahead with it.
    Senator Akaka. I want to thank you very much, Ms. Bair, for 
your valuable testimony and your responses to our questions 
this afternoon.
    Ms. Bair. My pleasure.
    Senator Akaka. And I want to wish you well.
    Ms. Bair. Thank you, Senator, you too. Thank you very much.
    Senator Akaka. Now I would like to ask the second panel of 
witnesses to please come forward. Let me introduce them.
    Ms. Melissa Koide, the Deputy Assistant Secretary for the 
Office of Financial Education and Financial Access, at the 
Treasury Department.
    Ms. Alicia Puente Cackley, Director for Financial Markets 
and Community Investments, U.S. Government Accounting Office. 
And Dr. Camille Busette, Assistant Director, Office of 
Financial Education, Consumer Financial Protection Bureau.
    As you know, it is the custom of the Subcommittee to swear 
in all witnesses. So, I ask you to please stand and raise your 
right hands.
    Do you solemnly swear that the testimony you are about to 
give the Subcommittee is the truth, the whole truth, and 
nothing but the truth so help you, God?
    Ms. Koide. I do.
    Ms. Cackley. I do.
    Ms. Busette. I do.
    Senator Akaka. Thank you. Let it be noted for the record 
that the witnesses answered in the affirmative.
    Before we start, I want you to know that your full written 
statements will be made part of the record and I would like to 
remind you to please limit your oral remarks to 5 minutes.
    Ms. Koide, would you please proceed.

  TESTIMONY OF MELISSA KOIDE,\1\ DEPUTY ASSISTANT SECRETARY, 
   OFFICE OF FINANCIAL EDUCATION AND FINANCIAL ACCESS, U.S. 
                   DEPARTMENT OF THE TREASURY

    Ms. Koide. Sure. Thank you very much, Chairman Akaka and 
Ranking Member Johnson. 
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Koide appears in the appendix on 
page 55.
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    I really appreciate the opportunity to be with you this 
afternoon to discuss the matter of improving Americans 
financial capabilities. This is, I think we all realize, one of 
the most critical issues we face as a country particularly as 
we begin to emerge from the financial crises.
    On behalf of my colleagues at the Treasury Department, I 
would like to thank you in particular, Senator Akaka. You have 
clearly demonstrated leadership over the years and a tireless 
commitment to improving the financial lives of families across 
the country.
    Today I am going to focus my remarks on the steps that we 
at the Treasury Department are taking to help strengthen 
Americans financial knowledge and skills. While I am new to my 
position as the Deputy Assistant Secretary for Financial 
Education and Financial Access and Consumer Protection, 
Treasury's work has been led by a dedicated career staff and 
has been ongoing for many years.
    Treasury's financial capability efforts are focused on the 
needs of families and individuals. We know strong households 
are key building blocks of our communities as well as our 
Nation. And the past 5 years have made it clear that our 
country's financial stability and long-term resilience is 
deeply tied to the financial health and stability of the 
Nation's families.
    Our country is stronger when families are able to pay their 
bills on time, when they are able to manage and maintain their 
homes, when they are able to build credit and also strong 
credit records, and able to build savings.
    To ensure that Americans are able to successfully manage 
their finances, we must ensure that they have a solid 
understanding of personal finance. We need to make sure they 
have access to financial information and advice, and that they 
have tools and products that enable them to make wise financial 
decisions.
    The basics I think we all recognize begin at home and in 
our schools but we cannot stop there. Families also need 
financial information throughout their life when they are 
making both routine decisions as well as big financial ones.
    New technologies are increasingly providing an avenue to 
deliver financial information and advice at scale. Families are 
also benefiting from high-tech, low-touch financial help. 
Online financial tools, mobile applications, and even video 
games are being developed and tested to help people develop 
decisionmaking skills and make wise, informed, real-time 
decisions.
    This is an area that we are going to be focusing on more 
deeply at the Treasury Department in addition to some of the 
other areas that I have described in my written testimony.
    I am now going to call your attention to some of the work 
that we have been doing with the Commission, the Financial 
Literacy and Education Commission, and also the President's 
Advisory Council on Financial Capabilities.
    These two initiatives draw national attention to improving 
the financial skills of individual Americans. They also, I 
believe, highlight the Administration's commitment to tackling 
these pressing issues.
    As you know, Congress established the 21-agency Financial 
Literacy and Education Commission to focus on the importance of 
financial literacy and to better coordinate the work of the 
Federal agencies.
    Treasury chairs the Commission and the Consumer Financial 
Protection Bureau recently joined as Vice Chair. The Commission 
last fall developed a broad planning framework for the field.
    Through regularly scheduled public meetings, the Commission 
highlights notable programs and strategies and also facilitates 
partnerships among Federal agencies.
    In order to strengthen interagency efforts, the Commission 
will launch this spring a research agenda. It was created by a 
working group led by Federal Reserve Board staff and it will 
serve as a roadmap for coordination and collaboration on 
Federal and private sector research over the coming 3 to 5 
years.
    The Commission will also soon announce the details of a new 
clearinghouse that will highlight federally funded research and 
evaluations to strengthen and emphasize the need to test and 
measure what is effective.
    Treasury is also going to be rolling out an online portal 
to facilitate information sharing and collaboration among 
members. The portal will help agencies share information, work 
together, and very importantly avoid duplication.
    Finally, I would like to note some of the important work of 
the President's Advisory Council on Financial Capability. I 
like to think of it as a brain trust composed of more than a 
dozen national leaders from the private sector with a broad 
range of perspective and expertise.
    To date, the Council has made a number of recommendations 
including calls for greater metrics and standards, support for 
more research and evaluation, strategies to encourage employer-
based financial education efforts and greater use of 
technology-based tools.
    Treasury and the White House are pursuing a number of the 
Council's recommendations. For example, we are assisting the 
Financial Industry Regulatory Authority (FINRA) Foundation to 
support a follow-up survey of its 2009 National Financial 
Capability Study. This new survey will provide rich information 
and help us assess American's skills. It will help to shape and 
inform the broad financial education field as well as our 
efforts among Federal Government agencies.
    To close, I realize I am out of time, I just want to 
reiterate that we realize this is critical to the long-term 
economic stability of families, their knowledge, and their 
skill sets with respect to their personal finances. We are 
committed to continuing to work in this area.
    I look forward to your questions.
    Senator Akaka. Thank you.
    Ms. Cackley, please proceed with your testimony.

  TESTIMONY OF ALICIA PUENTE CACKLEY,\1\ DIRECTOR, FINANCIAL 
      MARKETS AND COMMUNITY INVESTMENTS, U.S. GOVERNMENT 
                     ACCOUNTABILITY OFFICE

    Ms. Cackley. Thank you. Chairman Akaka, Ranking Member 
Johnson, thank you so much. I am pleased to be here today to 
testify as part of Financial Literacy Month 2012.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Cackley appears in the appendix 
on page 61.
---------------------------------------------------------------------------
    Financial literacy plays an important role in helping to 
ensure the financial health and stability of individuals and 
families. Economic changes in recent years have further 
highlighted the need for all Americans to be empowered to make 
informed financial decisions.
    In my statement today, I will discuss first the Federal 
Government's role in promoting financial literacy, including 
the role of the Government Accountability Office (GAO). Next, 
the advantages and risks of financial literacy efforts being 
spread across multiple Federal agencies, and finally, 
opportunities to enhance the effectiveness of Federal efforts 
going forward.
    The Federal Government plays a wide-ranging role in 
promoting financial literacy. Efforts to improve financial 
literacy in the United States involve an array of public, 
nonprofit, and private participants. But among those 
participants the Federal Government is, indeed, distinctive for 
its size and reach and for the diversity of its components, 
which address a wide range of issues and populations.
    At forums of financial literacy experts that we held in 
2004 and 2011, participants noted that the Federal Government 
can use its built-in bully pulpit, its convening power, and 
other tools to draw attention to the issue of financial 
literacy, as well as serve as an objective and unbiased source 
of information about the selection of financial products and 
services.
    During his confirmation hearing, GAO's Comptroller General, 
Gene Dodaro, noted that financial literacy was an area of 
priority for him. Since then, he has initiated a multi-pronged 
strategy for GAO to address these issues.
    First, we will continue to evaluate Federal efforts that 
directly promote financial literacy. Second, we will encourage 
research of the various financial literacy initiatives to 
evaluate the relative effectiveness of different approaches. 
Third, we will look for opportunities to enhance financial 
literacy as an integral component of certain regular Federal 
interactions with the public. And finally, we have recently 
instituted a program to empower GAO's own employees in the area 
of financial literacy.
    In terms of evaluating Federal financial literacy efforts, 
in prior work we cited the 2009 report by the RAND Corporation 
in which 20 Federal agencies self-identified as having 56 
Federal financial literacy programs.
    However, after subsequent analysis we found substantial 
inconsistency in how different agencies define their financial 
literacy programs and whether they counted related efforts as 
one or multiple programs. We developed a more consistent set of 
criteria and have more recently identified 16 significant 
Federal financial literacy programs or activities among 14 
agencies, as well as four housing counseling programs among 
three federally-supported entities operating in fiscal year 
(FY) 2010.
    Having multiple Federal agencies involved in financial 
literacy offers advantages as well as risks. Some agencies have 
deep and long-standing expertise and experience addressing 
specific issue areas or populations. In addition, providing 
information from multiple sources can increase consumer access 
and the likelihood of educating more people. However, the 
participation of multiple agencies in financial literacy 
efforts also raises the risk of inefficiency and the need for 
strong coordination of their activities.
    In general, we have found that coordination and 
collaboration among Federal agencies has improved in recent 
years, in large part as a result of the multiagency Financial 
Literacy and Education Commission. At the same time, we have 
found instances of overlap in which multiple agencies or 
programs including the new Consumer Financial Protection Bureau 
share similar goals and activities, which underscores the need 
for careful monitoring of these efforts.
    In our ongoing work, we have been pleased to see that the 
Commission, the CFPB, and others have several efforts underway, 
such as a research clearinghouse being developed by the 
Commission that seeks to enhance evaluation and effectiveness 
of Federal financial literacy programs.
    We believe that these measures are positive steps and that 
identifying the most effective programs and activities will 
help Federal agencies to make the most of scarce resources, 
potentially by consolidating their financial literacy efforts.
    The Consumer Financial Protection Bureau was charged by 
statute with a key role in improving Americans' financial 
literacy and is being provided with the resources to do so.
    As the Bureau's activities evolve and are implemented, it 
will be important to evaluate how these efforts are working and 
make appropriate adjustments that might promote greater 
efficiency and effectiveness.
    Mr. Chairman, this concludes my prepared statement. I would 
be happy to respond to your questions.
    Senator Akaka. Thank you very much. I am informed that we 
have votes that have been called. I have about a minute left to 
get to the floor. So, I will call a recess and we will probably 
be about 45 minutes for a number of votes and then we will 
reconvene.
    Thank you very much. We are in recess. [Recess.]
    This hearing will come to order.
    Now, I would like to call on Dr. Busette. Please proceed 
with your testimony.

  TESTIMONY OF CAMILLE BUSETTE,\1\ PH.D., ASSISTANT DIRECTOR, 
 OFFICE OF FINANCIAL EDUCATION, CONSUMER FINANCIAL PROTECTION 
                             BUREAU

    Ms. Busette. Thank you, Chairman Akaka. I want to thank you 
very much for the chance to appear before you today on a topic 
of critical importance to the Consumer Financial Protection 
Bureau and our Nation, Financial Literacy: Empowering Americans 
to Prevent the Next Financial Crisis.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Busette appears in the appendix 
on page 73.
---------------------------------------------------------------------------
    I want to especially thank you, Chairman Akaka, for your 
pioneering leadership in helping enact policies to increase 
financial education and financial access for all Americans.
    The CFPB's Office of Financial Education is a testament to 
your many contributions to the financial well-being of American 
consumers and to your longtime and vigorous champion for the 
financial empowerment of all Americans.
    To successfully navigate our complex financial system, all 
Americans, regardless of income and level of educational 
attainment, must be equipped with the financial knowledge and 
skills sufficient to make informed financial choices.
    The Dodd-Frank Act's creation of the CFPB's Office of 
Financial Education provides Americans with an office dedicated 
to serving as a trusted resource for financial information and 
to improving the financial literacy of Americans.
    The   Bureau   has     focused   early   resources   on   
providing critical information to consumers via our Web site, 
www.ConsumerFinance.gov, and our Consumer Response Center.
    We have launched initiatives to make costs and risks 
clearer for consumers, and our signature Know Before You Owe 
Mortgages initiative is focused on simplifying and streamlining 
duplicative mortgage forms that have been confusing homebuyers 
for many years.
    We also created and are piloting a Financial Aid Comparison 
Shopper to help students navigate the complex world of student 
loans, compare financial aid packages and to understand the 
payments they will face after graduation.
    We released a prototype credit card contract that is 
shorter and clearer than current credit card agreements and 
aimed to keep it at a seventh-grade reading level to make it 
accessible to as many consumers as possible.
    Through our Office of Consumer Engagement, the Bureau has 
launched ``Ask CFPB,'' an interactive tool which allows 
consumers to obtain information about financial services and 
products.
    The Bureau has produced consumer information to highlight 
the financial consequences of various checking-account 
overdraft fee choices. Each of these is part of a larger effort 
to provide Americans with understandable information that helps 
them make better, more informed financial choices to achieve 
their financial goals.
    American consumers will be better served if financial 
education effectively imparts fundamental knowledge and skills. 
Because there is no clear consensus about the conditions under 
which financial education is most effective, earlier this year 
we launched our initial Financial Education Program Evaluation 
Project, using a quantitative methodology to identify what 
elements of financial education programs increase consumers' 
ability to manage their finances, and why.
    We intend to use the study's insights to provide guidance 
to practitioners about how to design and support effective 
education programs. We are also identifying innovations in 
financial education that will help consumers successfully 
navigate common financial challenges. We will consult with 
innovators over the next couple of months to understand how 
these innovations can help consumers and how we can use them to 
improve Americans' financial literacy.
    American consumers benefit when the fruits of our work and 
of organizations that are excelling in financial education are 
shared broadly. So, we have held listening sessions with 
financial education providers, addressed faith communities and 
community organizations, held webinars, and spoken at numerous 
conferences and events. We had the pleasure of participating in 
Financial Literacy Day on the Hill last week.
    Our outreach efforts inform how we approach financial 
education and how we structure our work so that it most 
benefits American financial consumers.
    While Federal agencies involved in financial education have 
different missions, regulatory authorities, expertise, and 
resources, the CFPB is the only Federal agency whose focus and 
mandate is the protection and education of the American 
financial consumer.
    But there is a lot we can learn from each other so the 
Bureau is coordinating with financial education efforts already 
underway in the Federal Government. The Bureau's Director 
serves as the Vice Chair of the Financial Literacy and 
Education Commission, and Bureau staff are engaged with each of 
the Commission's working groups.
    In addition, we meet regularly with Department of Treasury 
staff members in the Office of Financial Education and 
Financial Access to leverage our respective activities.
    As the economy continues to recover from the worst 
financial crisis since the Great Depression, American families 
focused on building more secure financial futures must be able 
to evaluate the choices available to them in the financial 
marketplace.
    We must seek to ensure that individuals and families have 
the knowledge and skills to manage their financial resources 
effectively and to plan for future life events. It is only with 
knowledgeable and informed consumers that we will be able to 
fully and responsibly harness the financial system's tremendous 
capacity to fuel growth and investment, which is critical to 
our continued economic recovery.
    The CFPB's Office of Financial Education looks forward to 
working with this Subcommittee, other agencies, the private and 
non-profit sectors, and others to improve the financial 
literacy of all Americans.
    Thank you again for the opportunity to testify today. I 
look forward to answering your questions.
    Senator Akaka. Thank you very much, Ms. Busette.
    GAO has conducted two forums on financial literacy where 
the Federal Government's role in promoting greater financial 
literacy was addressed. My question to each of you on this 
panel is: What unique capabilities does the Federal Government 
contribute to financial literacy efforts? Ms. Koide.
    Ms. Koide. I would be happy to start. It is a really 
important question and I think one we need to think through 
particularly since we have had the Commission in existence and 
it is important to make sure that the work of the Federal 
Government is really, if you will, moving the needle with 
respect to financial education.
    I think in terms of its unique ability, it is hard to miss 
the fact that the financial education needs of families and 
individuals are very complex and they are varied. They pertain 
to the big decisions the families make and they also pertain to 
the small decisions that people make on an individual daily 
basis.
    Do I use my debit card? Do I use my credit card? What is 
the smart decision on how I am managing my finances are? What 
are my longer-term goals and my short-term goals?
    I think the fact that the Federal Government with the 
different agencies and the regulators have unique knowledge and 
expertise pertaining to many of those different facets of a 
consumer's financial life.
    I think that it is important that the Federal Government 
can be leveraging those unique levels of expertise among the 
different agencies to provide that kind of information to 
consumers their particular needs but then also making sure that 
we are coordinating across the agencies and learning from each 
other.
    I think the Federal Government has a particularly important 
role to play in terms of research and evaluation and really 
drilling down to make sure that we understand what works when 
it comes to these different financial matters.
    And then of course, there is the role of the Federal 
Government in terms of moving policy. The Dodd-Frank Act 
includes a number of financial education provisions including 
the creation of the CFPB and the Office of Financial Education.
    So, I think it has a wide-ranging set of levers that it can 
use. And then the one last thing that I should mention is it 
also has direct connections to communities which is a really 
important piece of all this, and it goes to Senator Johnson's 
point earlier, it's resources to communities, it's resources to 
localities, it's introducing ideas and research and innovation 
that I think can ultimately help to move the needle in 
consumer's financial skills.
    Senator Akaka. Thank you. Ms. Cackley.
    Ms. Cackley. Thank you. Yes. This is a subject that our two 
forums definitely addressed. The participants of those forums 
felt very strongly about the role of the Federal Government in 
addressing financial literacy issues and they spoke about a 
number of different things that they thought were important.
    One, as Ms. Koide said, is just the deep experience of 
different agencies of the Federal Government, experience with 
certain subject matter, and experience with certain populations 
that need to be served in terms of providing financial 
literacy.
    Another important point is the fact that the Federal 
Government can certainly serve as an unbiased and objective 
source of information whereas the private sector often has a 
certain set of interests in mind. When they are providing 
information to the public, the Federal Government can be an 
unbiased source.
    Another issue is the different distribution channels that 
the Federal Government has available to provide information, 
through things like the Social Security statement or VA 
benefits. These are distribution channels that the Federal 
Government can use to provide information.
    And then there are things like just the fact that the 
Federal Government has a built-in bully pulpit that the 
government can use to raise these issues to a higher level than 
anyone else.
    And again, the convening power of the Federal Government to 
really bring folks together and address the issue in a much 
more coordinated fashion.
    Senator Akaka. Thank you. Ms. Busette.
    Ms. Busette. I would concur with my colleagues on this 
panel that each Federal agency has its own mission and 
expertise; and for that reason, each agency makes a unique 
contribution to the financial literacy of Americans.
    Collectively, the Federal Government serves hundreds of 
millions of Americans. So, Federal agencies have the 
opportunity to integrate financial literacy efforts with other 
activities in a manner that achieves broad reach across the 
country.
    As you know, Congress mandated that our Director serve as 
the Vice Chair of the Financial Literacy and Education 
Commission. That role affords us the opportunity to assist in 
the coordination of financial literacy efforts throughout the 
Federal Government so that the unique opportunities to serve 
broad swaths of American consumers are optimized. It also 
allows us to identify the most effective approaches and target 
our efforts accordingly.
    Senator Akaka. Thank you very much.
    Ms. Koide, GAO has recognized the Commission's progress in 
recent years promoting public-private partnerships and 
recommended building on this progress to implement the goals of 
the 2011 national strategy for financial literacy.
    As the official responsible for directing the activities of 
the Commission and the President's Advisory Council on 
Financial Capability, how will you leverage these coordinating 
entities to make sure public and private resources are used 
efficiently to implement the strategy?
    Ms. Koide. Yes, I am happy to answer that. It has been 
something that we have been thinking about quite a bit since I 
joined the Treasury Department 4 weeks ago but I am happy to 
share with you where my head is on this really important 
opportunity, frankly, that this position holds with respect to 
financial education.
    As I said in my opening remarks, I really look at the role 
of the President's Advisory Council on Financial Capability as 
being a brain trust for the Federal Government but especially 
for Treasury and the Administration with respect to where we 
should be driving our work at the Federal level in financial 
education efforts.
    And I think there are some really important and 
complementary ways in which the two bodies can work together to 
drive efficiency. A number of the recommendations, for 
instance, that have come out of the President's Advisory 
Council are recommendations that I think the Commission is 
already moving in the direction of helping to implement.
    Some of the big ones are around issues of making sure that 
we are truly rolling out means of assessing effectiveness in 
the range of the different programs that the Commission is 
doing itself or supporting at the local level.
    Another area that the Commission has defined some focus 
around is youth and really boosting the financial knowledge of 
our youth. And I think there are some important ways in which 
the Commission, through the different agencies such as the 
Department of Education, the FDIC, and some of their money 
smart curriculum targeted at youth, are leading the charge.
    But I would also say that I think the work of the 
Commission and frankly the work of the financial education 
field are at a point where we need to really define what are 
some concrete goals that we want to achieve and how can we do 
that together as a body of Federal agencies.
    So, the work that I am going to be doing over the next few 
months or so is going to be working with the Commission, 
building on the knowledge from the President's Advisory 
Council, what are we trying to achieve and how are we going to 
set up some metrics to pursue these goals.
    Senator Akaka. Ms. Koide and Ms. Busette, schools can play 
an important role in improving the financial capability of 
young people. As you know, one of the three things the 
President's Advisory Council is emphasizing is the need for 
financial education to take its rightful place in American 
schools.
    Ms. Koide. Absolutely.
    Senator Akaka. How is the Commission, working primarily 
through the Department of Education, collaborating with State 
and local governments to accomplish this goal? Ms. Koide.
    Ms. Koide. I am happy to start off with giving a few 
examples. A couple I just mentioned and Chairman Bair mentioned 
some of these as well which are testing various types of 
curriculum that can be embedded into the education courses.
    Other approaches have been actually trying to embed, if you 
will, banks and credit unions into the schools so that the 
children are learning in a real tangible, hands-on way what it 
means to manage your finances.
    I think the Department of Education, I would be happy to 
get more details for you, has been also trying out some other 
research approaches around how you can include financial 
education into schools.
    I think the learnings from each of these different 
strategies are going to be things that we will be looking at 
more closely across the agencies through the work of the 
Commission.
    Senator Akaka. Thank you. Ms. Busette.
    Ms. Busette. Chairman Akaka, we certainly agree with the 
Council's theme that financial education should take its 
rightful place in American schools.
    Students need to be provided with effective financial 
education before they enter into financial contracts and make 
important financial decisions.
    As you are probably aware, research has revealed that 
financial education in schools can have a very significant 
impact on encouraging healthy financial behaviors later in 
life.
    And research has also shown that the right access, 
education and incentives, even for low income students and 
families, particularly when they are incentivized to save, can 
leave students with savings, making them more likely to enroll 
in college.
    At the Bureau, we definitely embrace the concept of having 
a financial education throughout the school system. We are 
working with key stakeholders that have spent many decades 
working in this particular area to highlight policy 
opportunities and to promote innovative approaches to financial 
literacy for youth.
    Senator Akaka. Thank you.
    Ms. Cackley, the Commission's 2011 national strategy and 
its accompanying implementation plan appeared to address many 
of GAO's prior recommendations.
    How many of GAO's recommendations for improving the 
national strategy have been implemented and for those 
outstanding recommendations would you please elaborate on the 
benefits of implementation?
    Ms. Cackley. Certainly. There have definitely been some of 
our recommendations that have been addressed. We recommended 
fostering new partnerships with non-Federal sectors and 
organizations and the Commission has taken a number of steps in 
this regard, among them the National Financial Education 
Network, which is a partnership with State and local 
government, and also facilitating the President's Advisory 
Council on Financial Capability, which is a partnership with 
the private sector.
    We also recommended that the Commission provide for an 
independent review of Federal programs and activities and the 
Commission has done this. There has been both a report by the 
RAND Corporation and also a graduate student who did a review 
of Federal programs and provided that to the Commission.
    We recommended that the Web site MyMoney.gov measure 
customer satisfaction and also test usability of the Web site. 
They did do a measure of customer satisfaction. We do not know 
yet if they have tested the usability of the Web site, and that 
is something we can follow up on.
    We also recommended that the national strategy for 
financial literacy incorporate some additional elements, this 
is something we are reviewing in ongoing work. We are reviewing 
the newest national strategy and we will be providing an 
assessment later this year of that.
    Senator Akaka. Thank you.
    My next question is for Ms. Koide and Ms. Busette. One of 
the Subcommittee's most successful oversight efforts has been 
its work together with GAO and an interagency Coordinating 
Council to reform and remove the security clearance program 
from the GAO high risk list, an achievement that no other DOD 
program has accomplished.
    A critical factor in this success was top agency officials' 
commitment to developing close working relationships that 
enabled them to resolve differences and hold each other 
accountable for achieving results.
    I strongly urge the Commission to analyze the security 
clearance reform efforts. Many of the practices, particularly 
the development of tools and metrics to objectively measure 
progress, are worth following.
    As you both know, last year GAO recommended that Treasury 
and CFPB closely coordinate financial literacy roles and 
activities. I understand your respective offices meet once a 
month to do this.
    What joint actions have your offices initiated as a result 
of these meetings and do you have plans to enhance these 
efforts?
    Ms. Busette. Chairman Akaka, the goal of our monthly 
meetings that you mentioned is to coordinate the activities and 
to inform each office of future plans so that we achieve 
maximum synergy.
    To that end, we have collaborated on the activities of the 
financial literacy and education commission, the upgrade of the 
MyMoney.gov site and on informing each other of research and 
innovation plans. We certainly look forward to continuing and 
broadening that collaboration.
    Senator Akaka. Thank you, Ms. Busette. Ms. Koide.
    Ms. Koide. Sure. I would just add, again, I am a month in 
so I have not been able to be a part of these prior 
conversations but we could not be more happy about having the 
CFPB joining us as Vice Chair.
    I think that the Bureau is going to bring both a wealth of 
information, a wealth of knowledge, and real strength in terms 
of our ability to help shape and craft the direction that the 
Commission is headed. It is going to be a really important 
partnership when it comes to setting out what goals we are 
trying to achieve with the Commission.
    So, we are quite pleased.
    Senator Akaka. Thank you.
    Ms. Koide, I strongly support GAO's recommendation that the 
Commission incorporate into the national strategy a description 
of the resources required for implementation.
    This would help policymakers make informed decisions on 
allocating resources. Would the Commission provide Congress a 
supplemental report that clearly identifies the level of 
resources required to accomplish the strategy's goals?
    Ms. Koide. I appreciate the question and I appreciate the 
presentation of the opportunity to do that; and by all means, 
we would welcome the chance to come back in and talk to you 
about how we are going about achieving our goals with the 
Commission, what are the metrics we are going to set up for 
ourselves in moving the needle in financial education.
    So, we welcome the opportunity to have those conversations 
with you.
    Senator Akaka. Thank you for that.
    Ms. Cackley, would you care to comment on the benefits of 
providing policymakers with information on the resource 
requirements needed to effectively implement the national 
strategy?
    Ms. Cackley. Certainly. We have recommended that the 
Commission itself as part of its strategy describe the 
resources required and the appropriate allocation of those 
resources. We felt that determining resources and their best 
allocation is key to ensuring the most efficient and effective 
implementation of a national strategy for financial literacy.
    Senator Akaka. Thank you very much. I want to thank this 
group of witnesses for their statements and responses, and I 
look forward to working with them on these issues. Of course, 
the end result we all hope for is that this can be put together 
to prevent the next financial crisis from happening.
    Ms. Koide. Agreed.
    Senator Akaka. So, I want to thank you very much for your 
testimony and your responses. Thank you.
    Ms. Koide. Thank you.
    Ms. Cackley. Thank you.
    Ms. Busette. It has been a pleasure. Thank you.
    Senator Akaka. Now, I would ask our third panel of 
witnesses to come forward. I welcome Dr. Brigitte Madrian, 
Professor at the Harvard Kennedy School; and Dr. Mark Calabria, 
Director for Financial Regulations Studies at the Cato 
Institute. Ms. Sharra Jones, Math Instructor, at Oak Park 
Elementary School in Mississippi and Mr. Michael Martin, 
Academy of Finance Instructor, Lansdowne High School in 
Maryland and Mr. Evan Richards, Graduate of the Academy of 
Finance and undergraduate student at Towson University.
    As you know, it is the custom of this Subcommittee to swear 
in all witnesses, so I ask you to please rise and raise your 
right hand.
    Do you solemnly swear that the testimony you are about to 
give this Subcommittee is the truth, the whole truth, and 
nothing but the truth so help you, God?
    Ms. Madrian. I do.
    Mr. Calabria. I do.
    Ms. Jones. I do.
    Mr. Martin. I do.
    Mr. Richards. I do.
    Senator Akaka. Let the record note that our witnesses 
answered in the affirmative.
    Before we start, I want you to know that your full written 
statements will be part of the record and I would like to 
remind you to please limits your remarks to 5 minutes.
    Professor Madrian, please proceed.

  TESTIMONY OF BRIGITTE MADRIAN,\1\ PH.D., AETNA PROFESSOR OF 
PUBLIC POLICY AND CORPORATE MANAGEMENT, JOHN F. KENNEDY SCHOOL 
               OF GOVERNMENT, HARVARD UNIVERSITY

    Ms. Madrian. Thank you. It is a pleasure to be here today. 
One does not need to search hard to find evidence of poor 
financial decisionmaking by U.S. households. Individuals do not 
shop around for financial products and consequently pay far 
more than necessary for products such as credit cards and home 
mortgages. 
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Madrian appears in the appendix 
on page 76.
---------------------------------------------------------------------------
    When interest rates are falling, many homeowners fail to 
refinance. Individuals do not understand the factors that 
should matter most in making investment choices; for example, 
they chase past returns and pay too little attention to 
investment fees.
    Individuals hold poorly diversified portfolios with heavy 
exposure to investments like employer stock. Individuals 
neglect to enroll in their 401(k) savings plans even when their 
employer is offering a generous match, and a sizeable fraction 
of households do not have a rainy day fund to help meet 
emergency expenses and report that they would have difficulty 
coming up with $2000 from any source in less than 30 days.
    One also does not need to search hard to find evidence that 
many U.S. households are not particularly financially literate. 
Individuals do not understand how inflation impacts their 
purchasing power. They do not understand how the interest rate 
environment impacts their investment options. They do not 
understand the power of compound interest. They do not 
understand how to diversify against labor market and financial 
market risks, and they do not understand the salient 
characteristics of many different financial investments.
    Unfortunately, there is no evidence that the financial 
capabilities of U.S. households have been improving over time. 
Not surprisingly, there is a correlation between financial 
literacy and the quality of financial decisions made by 
individuals.
    Those who are more financially literate are less likely to 
make financial mistakes and are more likely to report 
confidence in their financial decisions. The consequences of 
limited financial literacy and poor financial decisionmaking 
are particularly acute for low income households who have 
little leeway for coping with financial mistakes.
    The positive correlation between financial literacy and the 
quality of financial decisionmaking has led many to the 
conclusion that increasing financial literacy through financial 
education will improve financial outcomes.
    But what do we really know about how well financial 
education works? The evidence on whether financial education 
improves financial outcomes is suggestive at best. The most 
substantial problem in the research on financial education and 
financial outcomes is that if financial education programs are 
available and take-up is voluntary, those who receive financial 
education are likely to be quite different from those who do 
not receive financial education.
    In particular, those who are capable of making better 
financial decisions in the first place may be those who 
recognize the value of and invest the time in obtaining 
financial education.
    If so, we would likely observe a positive relationship 
between financial education and better financial outcomes, but 
it would be unclear what part of that relationship is due to 
differences in the types of people who do and do not get 
financial education, and what part is due to the actual 
provision of financial education.
    From a research standpoint, the ideal approach for 
ascertaining the effectiveness of financial education would be 
through randomized controlled trials, the same approach that is 
used to ascertain the effectiveness of different medical 
treatments.
    A population would be randomly assigned to either receive 
or not receive financial education, and then outcomes for both 
groups would be followed over time.
    Unfortunately, there have been very few studies that have 
used this approach to study the impact of financial education. 
The conclusions of the very small number of studies that have 
used this approach paint a mixed picture, with some finding no 
significant difference in financial outcomes for those who do 
and do not receive financial education, and others finding some 
evidence that financial education may have small beneficial 
effects on outcomes such as savings and credit utilization.
    From a policy standpoint, the biggest current need on the 
financial education front is a better understanding of whether 
financial education is effective and, if so, what types of 
financial education interventions work best.
    It makes no sense to fund programs that do not work, and 
yet we know very little about what does and does not work 
because most financial education interventions have not been 
implemented in a way that allows for convincing analysis of 
their efficacy.
    Here are the broad questions on which further research 
would be most valuable. What are the basic financial 
competencies that individuals need? What type of financial 
education content works best and for whom?
    Some of the emerging literature suggests that actionable, 
rule-of-thumb based financial education may be more effective 
than principles-based content, at least for certain groups.
    What type of delivery works best? Courses, apps, games, 
things like that. How do we induce the people who need 
financial education to get it?
    School-based programs have the advantage that, while in 
school, students are a captive audience, but schools can only 
teach so much. Most of the financial decisions that individuals 
face in their adult lives have little relevance to elementary 
and high school students.
    How do we deliver financial education to adults before they 
make mistakes when we do not have a captive audience?
    These are important questions and ones about which 
unfortunately we have very little, to say.
    Despite the dearth of evidence, financial literacy is in 
short supply, and increasing the financial capabilities of the 
population is a desirable and beneficial goal.
    I believe that well designed and well executed financial 
education initiatives can have an effect. But to design cost 
effective financial education programs, we need better research 
on what does and does not work.
    Thank you.
    Senator Akaka. Thank you very much, professor. Director 
Calabria.

   TESTIMONY OF MARK CALABRIA,\1\ PH.D., DIRECTOR, FINANCIAL 
              REGULATIONS STUDIES, CATO INSTITUTE

    Mr. Calabria. Chairman Akaka, thank you for the invitation 
to appear today and let me begin by commending you for your 
long efforts toward increasing financial literacy.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Calabria appears in the appendix 
on page 82.
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    I believe this is a goal we all share. I think we would all 
like to see consumers make better, more informed choices. I 
think we do have to separate out, when evaluating public 
policy, though, that intentions are one thing and outcomes are 
another.
    I think we also need to separate out the difference between 
means and ends. For instance, I look at financial education 
which is an attempt to improve financial literacy as ultimately 
about not simply imparting more knowledge but also improving 
decisionmaking and behavior. So again, the ultimate objective 
is to change behavior, to help improve behavior.
    I should say, maybe stating the obvious, that we can and do 
spend a considerable amount of resources on financial education 
as does the financial services industry. I will note that State 
and local governments also spend a considerable amount of 
resources on financial education particularly in the form of 
classroom hours and the compensation and the time of educators.
    I think it is important to keep in mind, however, that 
dollars or hours should not be our measure of success. They are 
a measure of cost. The true measure of success is, again, 
whether households are making good financial decisions and 
behaving in a responsible manner.
    I think the notion that an informed consumer makes a better 
one is appealing, but that notion leaves us with little 
concrete guidance. Whether financial literacy programs actually 
make a ``better'' consumer is ultimately an empirical question.
    I would say, having read some of the very large literature 
there is on this, much of which is peer-reviewed, again I would 
echo I think mixed was maybe the word that was used. I would 
agree with that.
    I would say you could take a variety of different 
conclusions from that literature. I would say that it is very 
hard to read that literature and walk away with the conclusion 
that there is a strong, consistent, positive impact on 
financial literacy on the behavior.
    I do think that there is a strong impact of financial 
literacy on knowledge. There does seem to be some suggestion 
that these classes, the courses, people end up learning more 
but there does not seem to be a strong suggestion that they 
consistently change their behavior and such.
    So with that, again, I think we need to be concerned about 
the impact of that and make sure that those programs are 
working effectively.
    I also do think that there are some potential downsides 
that we do need to make sure we are taking care of when we 
address this. For instance, if financial education programs 
increase consumer confidence without actually increasing 
knowledge or judgment, then a sense of overconfidence can bias 
consumers to an under estimation of risks. On the other hand, 
under-confidence could dissuade consumers from entering into 
financial transactions that would improve their welfare.
    I recognize that striking the appropriate balance is easier 
said than done but we do need to make sure that we are 
imparting, if we are going to impart more confidence, we need 
to impart more knowledge at the same time.
    I want to focus for a little bit on housing counseling. 
Obviously, housing played a very unique role in this financial 
crisis. First, it is important to recognize we have been 
funding, at the Federal level, housing counseling since 1969.
    While those funding levels remained modest until about the 
1990s, they increased dramatically under the second Bush 
Administration. In fact, by the time of the financial crisis, 
we were spending close to $50 million annually in the Housing 
and Urban Development (HUD)-directed housing counseling 
dollars.
    While we cannot say with any certainty that the housing 
crises would have been worse or how much worse if we had not 
spent hundreds of thousands of dollars on housing counselors, 
we can say that such expenditures did not stop a financial 
crisis from happening.
    Part of this lack of effect is due to whether housing 
counseling is effective at reducing defaults. Again, the 
empirical evidence is mixed although I think one of the things 
we can take away from that empirical evidence is that, on the 
one hand, light touch counseling, sort of like over the phone 
or computer-based or home study, seems to have almost no effect 
on defaults whereas classroom-based, one-to-one intensive 
counseling does seem to have impact on defaults.
    There is also some possibility that counseling might 
increase strategic defaults. At least one study has found that 
which, of course, has been linked to underwater borrowers 
walking away from their mortgages.
    I think my primary concern, however, with linking financial 
literacy to the recent financial crisis is that, in my opinion, 
it distracts from much needed changes in our financial 
regulatory system not to mention our monetary system.
    At the risk of overgeneralizing, I do not believe we had a 
financial crisis due to a lack of financial literacy. I believe 
we had a financial crisis due to very perverse incentives in 
our financial system that encouraged excessive risk-taking on 
the part of lenders and borrowers while also reducing 
incentives for appropriate due diligence on the part of 
investors and creditors.
    And while it is beyond the scope of today's hearing, I 
should be very clear that, in my opinion, the recently passed, 
or I should say 2 years ago, Dodd-Frank Act I do not believe 
fixes our financial system.
    Too big to fail is still with us. Moral hazards are bigger 
problems than they were today before the crisis. So again, 
while I commend the Chairman's efforts, I think we cannot lose 
sight of the urgent need for reform in our financial regulatory 
system.
    Let me wrap up by emphasizing that financial education is 
only going to be as good as the information that is imparted. A 
very basic question to start out with is what is it that 
consumers do not know.
    If financial education focuses on minor or even relatively 
irrelevant issues such as, for instance, the impact of pulling 
a credit report on one's score to the exclusion of central 
issues like the impact of timely debt payments on one's credit 
score, then I think consumers can be made worse off. So again, 
the emphasis has to be on content.
    Counseling also runs the risk of having it's substance 
driven by the bias of both providers and regulators. Take the 
largely positive image of home ownership presented by many 
housing counselors or the negative image presented by mortgage 
prepayment penalties. Both of these images in my opinion were 
driven far more by bias than fact.
    From my own experience working at HUD on Real Estate 
Settlement Procedures Act (RESPA) reform, I watched lawyers 
drive mortgage disclosure in such a way that harmed consumers 
because these lawyers were convinced that mortgage brokers were 
inherently bad.
    Efforts at financial education have to devote more 
attention to the substance rather than the form. Before we can 
hope to de-bias consumers, we have to de-bias providers, 
regulators and quite frankly politicians as well.
    I thank you for your attention and look forward to your 
comments and questions.
    Senator Akaka. Thank you very much, Director.
    Ms. Jones, please proceed with your testimony.

    TESTIMONY OF SHARRA JONES,\1\ MATH INSTRUCTOR, OAK PARK 
                ELEMENTARY SCHOOL IN MISSISSIPPI

    Ms. Jones. Chairman Akaka, thank you for the opportunity to 
be allowed to speak at the hearing on financial literacy today. 
Once again, my name is Sharra Jones and I am a third grade 
teacher at Oak Park Elementary School located in Laurel, 
Mississippi.
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    \1\ The prepared statement of Ms. Jones appears in the appendix on 
page 92.
---------------------------------------------------------------------------
    I graduated from Millsaps College where I first became 
exposed to and aware of financial literacy and the Mississippi 
Council on Economic Education.
    Upon my first year of teaching, I began to integrate 
economics within my math class. My sixth grade math students 
placed third in competition that year. So, I found the 
integration to be very effective. Not only did they place third 
but their test scores increased on the district level and on 
the State level. The only difference between my math class and 
the other math class was just the integration of economics.
    After my first year teaching, I was chosen to attend the 
Achieving Demonstrated Economics and Financial Literacy at 
Millsaps College that was offered by the Mississippi Council on 
Economic Education and funded by the No Child Left Behind Title 
II, Part A.
    At this former Institute, I gained knowledge on all the 
concepts of economics as well as entrepreneurship and personal 
finance. From leaving this training, I was given materials to 
implement in my classroom. The most effective material, or the 
one that was my favorite, was the Council of Economic Education 
virtual economic CD.
    The reason why I like that one so much was because it 
provided a bunch of lists from different literature and lists 
were given by subject duration, and I was able to increase or 
decrease the rigor depending on where my students were as well 
as a financial fitness for life curriculum that I was able to 
implement in my classroom.
    Even though the institute was over, it also provided many 
professional development opportunities where I was able to 
collaborate with colleagues, share ideas or exchange ideas. And 
also, they provided extra information like bringing in the 
Federal reserve banks to give us more information and teach a 
lesson on savings.
    With my sixth grade students, as I previously mentioned, 
they made significant gains with the integration. Then I taught 
fifth grade.
    With my 5th grade students, I had 17 out of 20 students who 
were on the Response to Intervention system (RTI). There I 
needed to provide intervention three times a week.
    So, during those interventions I integrated the economics 
within the math concept which gave them a real life connection. 
With the hands-on approach and a desire to learn, they were 
able to grasp the concept and apply it to the State test and 
district test.
    Now, I am currently teaching third graders. With my third 
graders, the lesson that we are currently on is savings and 
investing. We are in a program called Positive Behavior 
Interventions and Support (PBIS) system which is where you 
focus on the positive behavior and not the negative behavior.
    We reward our kids by giving them Dragon Dollars. They are 
able to use the Dragon Dollars at the dragon den; and within 
our dragon den, there are different prize levels that they are 
able to spend their money on. The bigger the prize, the more 
money it costs.
    So, with my third graders, I do an extra twist because 
every time we win I have some student who never had enough 
money to buy the bigger prize. So, I did like a credit 
situation.
    You can borrow Dragon Dollars from me; but realizing when 
you borrow the Dragon Dollars, for every dragon dollar you 
borrow you have to pay two back, trying to teach them the 
concept of it is better to save than to buy it on credit, not 
unless you can pay it off at one time.
    So, when my students figured out that they were losing all 
of their Dragon Dollars from buying on credit because they were 
having to pay me twice as much as what it costs, they began to 
save their own and they learned if I save these, then I can pay 
what the original price was without paying extra for it.
    In conclusion, I think teaching financial literacy to 
children at a young age is very beneficial as they get older. 
They are more prepared to make more financial decisions.
    And again, thank you for giving me the opportunity to 
speak.
    Senator Akaka. Thank you very much, Ms. Jones.
    Mr. Martin, please proceed with your testimony.

TESTIMONY OF MICHAEL MARTIN,\1\ ACADEMY OF FINANCE INSTRUCTOR, 
     LANSDOWNE HIGH SCHOOL, BALTIMORE COUNTY PUBLIC SCHOOLS

    Mr. Martin. Thank you, Chairman Akaka. I first want to 
thank you for asking me here to testify before your 
Subcommittee about a topic as critically important as personal 
financial literacy.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Martin appears in the appendix on 
page 95.
---------------------------------------------------------------------------
    Educating young people about the real world of personal 
responsibility when it comes to managing one's finances could 
never be more crucial than it is in today's economy.
    It matters not whether one sees the economic glass as half 
full or half empty. There are always market pundits who are 
quick to see Bulls and Bears. What is truly vital is making 
sure that the glass is full of knowledge when it comes to 
making sound financial decisions, especially when it comes to 
educating our youth.
    And the best way, indeed the only way, is to get kids 
learning the real Xs and Os of personal finance. All aspects. 
It has to be real. It has to be engaging. And it has to be 
meaningful. That is something I have tried to do at the 
Lansdowne High School, Academy of Finance (AOF).
    At Lansdowne, which is one of just 264 high schools in the 
Nation that is part of the National Academy Foundation, I have 
seen first-hand what real-world teaching does for students who 
hail from the poorest neighborhood in all of Baltimore County.
    Ninety-seven percent of our AOF students, nearly half of 
whom are minorities, graduate, going on to higher education or 
the military. And each one of them takes knowledge with them, 
personal knowledge that will, and has, enabled them to 
confidently make smart financial choices.
    It is so satisfying to hear from students who have gone on 
to college and tell myself that what they are being taught in 
their finance courses in college is actually much of what they 
already learned in high school.
    I must admit that textbooks, while they certainly have 
their place, are not the main source of material to teach my 
students. Instead, my kids get real world, real hands-on 
lessons designed by myself and created by the Maryland Council 
on Economic Education.
    I found that if I can reach a student, I can teach a 
student. The best way is to make it real. For example, my 
students first learn about investing in the stock market. It is 
a great way to get them excited right out of the gate.
    My passion for investing began about 30 years ago when my 
late father-in-law gave my wife and I shares of a stock he 
acquired years before. I was instantly hooked on investing and 
have been re-investing the dividends from that stock and others 
ever since. I still own that stock which invests in real estate 
in the D.C. area.
    Today, students are so adept at technology that teaching 
them is easy, fun and engaging. We are fortunate to have a 
computer in front of every kid in my room so, why not use them.
    Every one of them creates their own personal stock 
portfolio using a custom Excel chart that I created and then 
each tracks their holdings the entire course. It only takes me 
a short time to get them comfortable with Web sites to research 
stocks and before long they are calculating yields on 
dividends, PE ratios, and the like. They also complete a two-
week long budget lesson that I designed, all using the 
computer.
    Lessons designed by the Council on Economic Education also 
find their way into my class room, like one of my favorites. 
``Was Babe Ruth overpaid?'' It compares the salary of the 
Sultan of Swat with stars of today in order to determine how 
prices of yesteryear relate to today's dollars. It is a 
fascinating and fun way to get kids excited to learn about a 
not so exciting topic like the CPI Index. But it works.
    I have also designed a real-world project where my students 
simulate the Federal Reserves' Beige Book for use at its 
Federal Open Market Committee (FOMC) meetings. It is a great 
way to incorporate writing and research into the classroom in a 
way far more interesting and real than simply answering 
questions in the back of a chapter.
    As a former newspaper reporter, I insist that my students 
write well, and because I am competitive, I feel students need 
to learn how to work as a team to win or lose together. That is 
the way the real world operates so why not in school.
    To that end, I was extremely fortunate to open an email 
several years ago from the Maryland Council on Economic 
Education that was looking for some teams to compete in a State 
championship on personal finance knowledge. I figured, why not.
    So, I took two teams from our not so upscale school to 
Towson University to go head-to-head with public and private 
schools from across Maryland. We took second place that year 
and in the past 2 years our neighborhood kids won the Maryland 
State Championship and an opportunity to compete for a national 
title in the Midwest both years, finishing 6th in the Nation 
last spring in St. Louis.
    It was an incredible opportunity for four young men who now 
find themselves off to college, all doing quite well in various 
business related majors.
    I would like to close by saying way too many people, young 
and old alike, including a vast number of teachers, simply have 
no idea about personal finance, or very little. It has been 
kept quiet for way too long and it has to change.
    Educators need to get educated on how best to instruct 
students on personal finance to avoid the next looming bubble 
that is waiting to burst, that collective ignorance of 
Americans about how best to handle their own money.
    With innovative instruction, and groups like the Council on 
Economic Education, the Federal Reserve's vast education 
resources and so many other options available, all at limited 
costs, our students can obtain an education that will truly 
make a difference and stay with them the rest of their lives. 
There is nothing more important for our students.
    I would like to thank you for allowing me the opportunity 
to appear before the Subcommittee and I would also like to give 
you a personal thank you for your service in World War II in 
the Pacific.
    Thank you.
    Senator Akaka. Thank you very much, Mr. Martin.
    Now, Mr. Richards, please proceed with your testimony.

  TESTIMONY OF EVAN RICHARDS,\1\ ACADEMY OF FINANCE ALUMNUS, 
  LANSDOWNE HIGH SCHOOL, BALTIMORE COUNTY PUBLIC SCHOOLS AND 
         UNDERGRADUATE STUDENT AT THE TOWSON UNIVERSITY

    Mr. Richards. Thank you so much, Chairman Akaka, for having 
me here today and for being such a pioneer on this very 
critical issue.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Richards appears in the appendix 
on page 97.
---------------------------------------------------------------------------
    Coming from a family with two stable incomes growing up, a 
lot of financial stress was never seen in my house. My parents 
had enough income to provide for me and my younger brother, 
while maintaining an adequate household for us. That is, until 
something known as the great recession hit.
    It was not long after that, about the spring of 2009 when 
my father had emergency back surgery and had to go on short-
term disability, followed by long-term disability and ended up 
being terminated from employment.
    We saw a dramatic cut in our household income. It was 
slashed to a level that we never dreamed of, and we saw it as 
the end of the tunnel. We were going to try our best to get by, 
but with no plan set for our future, everything was in 
jeopardy.
    About that fall, I began my junior year, which is when 
members of the Academy of Finance were open to new aspects of 
the financial world; things we had never really considered 
until then. Stocks, bonds and contracts were terms that I 
became familiar with, and by extensively studying the nuts and 
bolts of these financial products, I understood that these were 
items that I would have to face in the near future.
    When my senior year came around, this was the time when the 
major points of the financial world became apparent. We were 
taught about things such as budgets, where we not only analyzed 
how personal budgets should be handled, but we took our 
education a step further and examined how governments handle 
their budget issues.
    We also looked at things such as mortgages, credit cards, 
and interest rates, which are things that usually begin to hit 
you right after you finish your schooling, and in these 
troubling financial times, sometimes right after high school.
    My high school education even went a step further, thanks 
to the Maryland Council on Economic Education, which is an 
affiliate of the Council for Economic Education (CEE). This 
gave us an opportunity to finally test ourselves. Do we have 
enough knowledge to enter the financial world? Can we make it 
on our own?
    And of course, every year the Maryland Council holds a 
personal finance challenge where schools from across the State 
were brought together to test their financial knowledge. I am 
glad to say when Lansdowne High's team in 2010 and 2011 took 
first place and I was a member of the team that went to St. 
Louis last year and placed sixth in the Nation.
    Obtaining these skills from the Academy of Finance has 
truly helped me as of last fall when I began my college career 
at Towson University. Budgets and contracts were two main 
substances that I truly began to explore in detail as a college 
student.
    For many students across America, this is the first time 
where we are required to sign a contract and can legally do so, 
whether it would be for just a college loan or admission to 
their school. Until this time, many students would not consider 
these items seriously, and therefore not exactly understand 
what they are getting themselves into.
    Luckily for me, with my Academy of Finance education, I 
already knew what was occurring and was quite comfortable with 
all of these new endeavors.
    My instructors also pressed the importance of paying for 
college via scholarships and minimal loans. I was fortunate 
enough to receive enough scholarship money to attend Towson 
University full time without paying out of pocket. I consider 
myself to be extremely lucky to have that opportunity.
    However, paying for transportation and books is something 
that needed my budgeting skills. I knew that instead of paying 
a ridiculous amount for a textbook, I can shop around, much 
like you can do with mortgage rates and credit card rates, et 
cetera, and find the book for a cheaper price.
    It is the small things like that, that truly make a 
difference to college students when they are first entering the 
financial world, where a huge amount of responsibility is 
placed on them, possibly for the first time.
    So, as I have stated before, the knowledge I have obtained 
through the Academy of Finance, it is not difficult knowledge. 
It is basic concepts that you need to survive. I am very 
fortunate to have it, and I know that by learning these things 
at such a young age, I will have a ``leg up'' in the world, and 
I will be able to make better financial decisions as a result.
    These life financial skills will impact all of us, no 
matter what we do. From farmers to mechanics to top company 
executives, we all have to learn how to manage finances. For 
me, a career in business, with a possible tenure in state 
politics, is what I have in mind for my future. I know that 
with my financial skills, I can reach these goals by continuing 
my education, and just keeping my head straight financially.
    Thank you for your time and consideration.
    Senator Akaka. Thank you very much, Mr. Richards.
    Ms. Jones, listening to your testimony, particularly the 
use of Dragon Dollars to teach your students to save, reminded 
me of my fourth-grade teacher who used a piggy bank in the same 
way.
    As Ms. Bair noted, financial education may be most 
effective if introduced to children early on. In your own 
experience, have lessons you have taught your students had a 
lasting impact on their spending and saving habits?
    Ms. Jones. Yes, in my experience it has. I have the younger 
kids. Whenever they feel that they had an exciting time or fun 
doing, they go home and share with their parents because they 
like to take this same concept in school and apply it to 
something in their daily lives.
    I have actually have had parents who come and approach me 
and ask me about some of the terminology that their child has 
learned because they are unfamiliar with it. It also gives me 
opportunities to talk with the parents and maybe give them a 
little advice or little leg up about savings as well.
    Senator Akaka. Thank you, Ms. Jones. Mr. Martin.
    Mr. Martin. Yes.
    Senator Akaka. Your ability to transform important economic 
concepts that students might initially think are boring into 
engaging lessons is very impressive.
    Mr. Martin. Thank you.
    Senator Akaka. I have not met many high school teachers who 
teach their students to simulate the preparation of the Fed's 
Beige Book. I am interested in learning more about that project 
and its impact on your students' understanding of broad 
economic principles and how they apply in their local 
communities.
    Mr. Martin. Well, it is a really interesting concept 
because when I first came across it we were teaching the Fed as 
part of our lessons and I really did not think the textbook 
would do it justice.
    So, as a newspaper reporter, I decided to turn the 
classroom into a newsroom and I had all students, I had 35 
students involved in this project and each one of them had to 
interview a local business just as the Federal Reserve does 
when it does Beige Book.
    But first they had to actually read the letter Federal 
Reserve Beige Book. They had to understand the terminology, the 
language, the way they wrote it.
    Then they had to go out and analyze it in the community and 
they have the actual data from the community. When they came 
back, each of those students then had to write a summary and 
their sector, whether it was housing or banking or whatever it 
may be.
    When they were finished, they had to submit their summary 
electronically to two students who I selected as managing 
editors. The students were really good at writing skills.
    When that was done, then they put it in the exact format 
the Federal Reserve did. Well, before we published it, which we 
actually did, the school actually got us some money. We went 
out and we published about 500 copies of it even with a Beige 
Book cover on the front just like the Fed does and we 
distributed in the community. We have done that three times 
now, once each year, and the businesses now look forward to it.
    So, it is really a neat concept. The kids love it. Every 
single kid participates in that project and they had different 
jobs just like the real world. The managing editors did not 
have to do the research but they had to create the final 
product, and it has worked very well.
    Senator Akaka. Thank you. It is good to hear that.
    Mr. Richards, this is a question for you. In recent years, 
I have been troubled by the rapid increase in student debt 
levels. I am interested in how the education and support you 
received from the Academy of Finance helped you make informed 
decisions when it came to deciding how to pay for your 
education.
    Mr. Richards. Well, I would say one of the main concepts 
that I mentioned in my testimony that really sticks with me 
today is budgeting.
    As Mr. Martin mentioned, there was a project where we were 
to pretend as if we were going out in the real world and we 
were to buy an apartment, to pay utilities, to pay all bills, 
to get groceries, to buy a car, everything.
    And at the end of that, I was $200 in the red. I consider 
myself extremely lucky to have that opportunity because when 
you are 17 years old sitting in the classroom, you are not 
really $200 in the red. And to be honest, I would have rather 
done that then than to graduate from college and then be $200 
in the red every month because $2400 a year in debt is not very 
good.
    So as for paying for college, like I mentioned, I am 
extremely fortunate. I attend Towson University on full 
scholarship; but when it comes to transportation and books, I 
am not. So, here is where my budgeting practices had to come 
into play.
    I know that two times a week I have to fill up for gas. I 
know that almost a quarter of the funds I receive for schooling 
have to go toward books. Of course, that is a different story 
for another day with the price of those.
    But I have to remember that especially with the rising 
prices of gas recently. You have to make sure you know your 
budgeting skills so when things rapidly change you have to be 
able to make adjustments to your budget.
    And by being a member of the Academy of Finance, I learned 
all of those skills to a ``T'' so when I actually have to 
implement these in the real world, I know exactly what I am 
doing and I really feel bad for a lot of students who have not 
really had this opportunity. They should really have access to 
all of this financial knowledge.
    Senator Akaka. Thank you so much, Mr. Richards.
    This next question is for both Professor Madrian and 
Director Calabria. Many other witnesses today have focused on 
the need to learn more about what works and what does not work 
to improve Americans' financial capability. What do you think 
the top research priorities should be in this field and how can 
the Commission best support these efforts?
    Ms. Madrian. I think the top priority should be to document 
what works and what does not work, and to do that we need to 
have studies that evaluate more than one way of doing things 
and studies that follow people who have access to different 
types of financial education and compare them with people who 
do not.
    A lot of the research that we have right now, and as I 
mentioned in my testimony and Mark mentioned this also and 
Sheila earlier as well, we actually do not know a lot about 
what is effective and most of the studies that have been done 
look very narrowly at financial education courses.
    But courses only work for students who are enrolled in 
them. There are a lot of financial decisions that people need 
to make long after they have graduated from school and for 
which a course may or may not be the best solution.
    So, I think we need to think expansively about what 
constitutes financial education. And in funding research 
projects on financial education, I think we should give 
priority to projects that are comparing multiple approaches and 
give priority to projects that have a credible strategy for 
documenting the effectiveness by comparing treatment groups 
with control groups just as is done in studies in the medical 
literature to establish the effectiveness of different medical 
treatments and prescription drugs.
    Senator Akaka. Thank you. Dr. Calabria.
    Mr. Calabria. Let me start with saying that I pretty much 
agree with everything that Brigitte has said so let me add a 
few things and maybe emphasize a few things.
    One of the things I would start emphasizing is the 
statistician in me is that you need a lot of differences in 
variability for any sort of statistical analysis to tell you 
anything, and so it is important to have multiple approaches so 
you can sort of test which ones work. So that is important to 
keep in mind.
    Some of the things I think I would want to know in terms of 
testing is, (a) it is one thing to educate people and then, a 
month, 2 months later for them to perform well on a test, how 
long does it stick with them. Is this knowledge that is there a 
year later, 2 years later, 3 years later? Is it knowledge that 
changes behavior later? So, those are some of the things that I 
think are very important to test.
    One of the interesting things, and, I love the Dragon 
Dollar story. Part of what we think about is it is also 
combining not just knowledge but also experience.
    I would actually emphasize I think a lot of financial 
consumer protection issues take the perspective that you cannot 
ever have failure and I think the truth is we learn the most 
important things and lasting lessons in life through failure.
    So, if you can set up circumstances where you borrow and 
you have to pay back two Dragon Dollars, you remember that. And 
so my point being is try to set up experiments where students 
actually fail but they fail in very small ways that are not 
detrimental but that they learned from it and turn around that.
    So again, I would emphasize some of the testing to me needs 
to not just be knowledge based but also experience based where 
you are changing the incentives based on the students.
    Senator Akaka. Thank you very much.
    This question is for Professor Madrian. It is often a 
challenge to encourage employee participation in any retirement 
savings plan.
    In 2009, Congress passed legislation to automatically 
enroll Federal employees in the Thrift Savings Plan (TSP), 
unless they opt out. You mentioned auto enrollment in your 
testimony. I would like to hear more about how automatic 
enrollment helps individuals to save for retirement.
    Ms. Madrian. Thank you for that question. I have done a 
fair amount of research on automatic enrollment so I feel like 
I have something to say on the matter.
    Let me just preface this by saying that I think we need to 
keep in mind the goal. I think the goal is to improve financial 
outcomes, and financial education is one approach for doing 
that but there are other approaches that also improve financial 
outcomes and automatic enrollment is a good example of that: 
Automatically enroll people into a savings plan and let them 
opt out if they do not want to be there instead of putting the 
onus on them to enroll in the first place.
    You asked specifically why does it work so well, and based 
on over a decades worth of research, I can give you a confident 
answer to that question.
    Automatic enrollment works well for two reasons. Number 
one, people actually want to save for retirement. So, it 
encourages something that people want to do already. And 
secondly, it makes a complicated decision easy for them to 
follow through on.
    So, one might ask if people want to save why are they not 
doing it in the absence of automatic enrollment, and the reason 
is because it is a complicated task if you are not a financial 
expert. Enrolling in your savings plan requires making a 
decision about what asset allocation to have for your savings, 
and many of those options are not very familiar to individuals, 
especially to younger, newly-hired employees who do not have a 
lot of financial experience.
    Automatic enrollment separates the participation decision 
from the decision about how much to save and what the asset 
allocation is. It allows individuals to start saving and then 
later on, if they want to choose a different asset allocation, 
they can do that, but you do not have to do both of those 
things at the same time.
    And I think that an important lesson more generally is that 
as the financial marketplace becomes more complicated, it 
becomes more challenging for individuals to make good financial 
decisions because they do not have the requisite level of 
knowledge and expertise. And simplifying the process of making 
a good decision can be an extremely effective tool for changing 
behavior.
    Senator Akaka. Thank you. Let me ask you a follow-up 
question. A 2012 retirement confidence survey suggested that 
automatic escalation, increasing 401(k) contributions over 
time, may lead to a significant increase in savings, especially 
for low income workers.
    What has the impact of automatic escalation been in the 
private sector and should Congress consider authorizing 
automatic escalation in the TSP as we did with automatic 
enrollment?
    Ms. Madrian. The evidence from the private sector is that 
automatic escalation is, in fact, extremely effective at 
increasing employee savings rates. And you asked specifically 
is this something that should be considered for the Thrift 
Savings Plan, and I would say absolutely.
    I think the biggest question is would you want to add it as 
a feature to the TSP where participants who want to have 
automatic annual contribution increases would opt into that, or 
would you want to make it automatic like automatic enrollment, 
a feature you are automatically enrolled in but you have to opt 
out if you do not want it.
    The evidence there from the private sector is if it is a 
feature you have to opt into, about 25 percent of participants 
will opt into it and experience the automatic contribution 
increases every year. If you make it an automatic feature that 
you have to opt out of, about 25 percent of them will opt out 
of it.
    So, you get a different impact on about half of the 
participant population depending on whether you make it an opt 
in or an opt out feature. But I absolutely would make it part 
of TSP and the only question would be opt in or opt out.
    Senator Akaka. Thank you very much. I appreciate all of you 
sharing your experiences. This will be helpful to especially in 
regard to improving financial education in elementary school, 
as well as high school.
    This is something, as I mentioned earlier, I believe will 
help prevent another economic crisis in the future.
    For me, it was in the fourth grade that all of this hit me. 
My teacher at that time had asked us a question about what we 
wanted and whether we had the money to purchase it, and of 
course, in my particular case, I did not have the money.
    And so, the question was how are you going to earn it. I 
had to become very practical about how I was going to earn that 
money to get what I wanted.
    It was good to hear that these lessons are being taught to 
students today. So, I want to thank you very much for your 
testimony and let me say thank you for being so patient.
    I would also like to thank my friends Senator Merkley and 
Senator Begich for joining Senator Johnson and me in conducting 
this hearing.
    The hearing record will be open one week for after 
additional statements or questions from other Members.
    So, thank you again for your testimony and your responses 
and we look forward to working with you to improve our Nation's 
financial literacy.
    This hearing is adjourned.
    [Whereupon, at 5:56 p.m., the Subcommittee was adjourned.]


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