The Relationship Between Exposure to Financial Education and Usage of Payday Loans

Abstract

Each year, approximately 12 million Americans use payday loans, which are short-term, high-interest loans that frequently trap low-income borrowers in cyclical debt. Payday loans are often predatory in nature, and policymakers in the United States have expressed a growing desire to enhance citizens’ – particularly economically vulnerable citizens’ – financial decision-making capabilities. In 2003, the U.S. Department of the Treasury established the Financial Literacy and Education Commission (FLEC) to set national guidelines for addressing financial literacy shortcomings with the goal of educating the public to better manage its personal finances. This paper examines the extent to which the provision of financial education reduces individuals’ usage of payday lending. Using individual-level data from the Financial Industry Regulatory Authority’s 2018 National Financial Capability Study, I find – contrary to my predictions – that financial education is positively associated with payday loan usage. My results call into question whether financial education can help to improve the outcomes that policymakers intend to address. The results suggest the need for a richer understanding of the factors that influence the demand for these high-interest rate, short-term loans.