Monday, October 29, 2007

Financial Illiteracy Hits “HOME”

These days it is virtually impossible to open a newspaper or listen to a media report without encountering comments about the ongoing mortgage crisis which is roiling our financial markets. Mortgage companies by the hundreds are vanishing, major institutions are reporting billions in losses, thousands of good people are losing their homes to foreclosures and high profile executives dismissed on what seems like a daily basis.

The commentators and editorialists are busily conducting their customary hunt for those deemed responsible for this state of affairs. All the while, they pontificate about the evils of sub-prime finance and the sales tactics which led regular people to assume financial obligations beyond their means. “Wall Street”, mortgage brokers, bond syndicators and regulators have all been singled out for a share of blame for the current debacle.

But what of the victims, the innocent homeowners who took on loans they could not service? Enticed by low teaser rates and minimal monthly payments in the early years of long term mortgages they signed on to risky loan agreements in droves and are now suffering undeniable financial and personal pain. Should they have been more cognizant of the risks they were assuming?

Everyone is accustomed to seeing easy terms and low monthly payments for consumer goods and automobiles. “Buying the low payment”, even without considering the term of the contract or true cost of the deal is frequently the most important factor in the car purchase decision.

All of us would like to obtain some items which might be beyond our means and, after all, how badly can we be hurt by paying a bit too much for a car or expensive electronics system by paying an affordable amount on a monthly basis even if the total outlay makes the transaction less than a bargain? The answer is that while we can be out of pocket for an extra year or so there won’t be fatal financial consequences so long as we keep up the payments.

On the other hand, fatal financial consequences can ensue very quickly when this mindset is applied to the purchase of a $400,000+ house where the 2/28 loan agreement requires the monthly payments to nearly double after the first two years as the rate resets and the loan principal increases to accommodate the cost of the below market interest rate for the initial 24 months.

Slick sales presentations, easy credit and lax regulation are a significant part of the problem here but our first line of defense is ourselves and our financial literacy. Understanding compound interest, the mechanics of a loan agreement and the applicable mortgage tables are vital skills which all of us need to survive the financial realities of the 21st century. A failure to understand the principle financial elements of the mortgage and credit card contracts we enter can be extraordinarily expensive if subsequent events result in foreclosure, bankruptcy or even a reduced credit rating.

As the world becomes more complex and paternal corporations go the way of the dinosaur, financial literacy is becoming more and more important as illustrated by the current upset. Even those not involved have to be wary of their respective futures as the promise of social security is less certain, health care costs are soaring and pensions are moving to extinction for non-government workers.

These undeniable social trends heap more and more responsibility upon the individual to prepare, plan and execute an affordable lifestyle strategy as well as an equally important retirement plan. Financial literacy is rapidly becoming something we cannot afford to be without, yet the public schools do not address these skills.

All the writing and mathematical skills and abilities, carefully taught and absorbed over an educational career, will not allow today’s young adult to recognize the importance of early retirement planning, personal finance, credit card management and the elements of the myriad mortgage contracts available today without specific financial training.

The lack of financial literacy training in the prevailing educational systems is as serious a deficiency as can be imaginable. False financial moves early in life involving student loans, credit cards or other instruments can haunt young people for the rest of their lives through large debt loads and the expensive consequences of a poor credit score.

The public education system must take notice of this hole in their programs and address the matter or many financial lives will continue to be damaged and essentially lost!

Patrick L. Ryan, Esq.
Hopewell Valley Community Bank

Sunday, October 21, 2007

Idea for Demonstrating Generic Distance Learning Effectiveness

The concept of distance learning for generic areas might have a very interesting possibility for demonstrating its effectiveness.

Many colleges of business (particularly those located at many regional and local colleges and universities) have students who are “convinced” they do not have the ability to do math. These colleges if accredited by AACSB International nearly all have an introductory math course that teaches linear programming among other topics, they have Statistics I and II, and they have a Production and Operations course (also called Operations Management). Some of the schools still require a first course in Calculus (aimed at business students—not the course taught by traditional math departments). Even if they do not require Calc, it is required to get an MBA or in many cases to be accepted into an MBA program.

The next point seems to be that many of the people who teach these math courses to business students come from the liberal arts tradition (they may be housed in departments in the business schools but are more akin to liberal arts teachers in math). The worst part is that they seem to know (or want to know) only one way to teach. Research has shown that there are four different patterns in learning (different research seems to create different sets of four, but four different approaches seems to be the norm). Therefore, the implication is that if a student is in a different set than the teacher, the student would naturally have great difficulty following the teacher—and they do.

Next, you have the psychological aspect of students “knowing” they can’t do this. I have seen students who have an overall B- grade point average, who really study for their math courses and do very poorly. We have students who flunk the course twice before they pass—and I believe if they flunk three times they cannot get a degree in some schools. They totally cannot get the material from the teacher and the text is not sufficient for them to teach themselves.

Therefore, if the Straube Foundation effort were to be able to create some of these courses. They could be sold either like language tapes for students to learn on their own or could be filed with authorities (and I do not know how this is done) so that they carry the weight of three college credits approved by some group which makes them transferable to a student’s transcript at their school. (Students can usually transfer a course if it is C or better into their transcript. The course transfers but not the grade and so it will not count in their g.p.a. at their current institution. But it counts toward graduation. That is true of all transfers in America.)

(By the way, once the student is a junior they cannot transfer courses from a community college—only junior or senior level courses can be transferred.) Unfortunately, business students cannot transfer anything in their last 30 credits—which equals their senior year. This might be relevant to what level the course is pegged at for credit. Traditionally the first math course is freshman level, the stat at sophomore and the production and operations at the junior year. Students can transfer a freshman course in their junior year if it was taken at a four-year school and not a community college.)

If students were to find an approach that they could be successful with, it would really cause people to look at the product. Understand that faculty in the math areas would probably oppose this. Colleagues have told me that with calculus, they aren’t supposed to help simplify the student’s learning since the student will miss the growth they can get from learning the old fashioned way. It doesn’t matter that it hasn’t worked for years (except with the outstanding students you find at the best schools in America). They also talk about the elegance of the discovery in math by students. If the students are getting through by taking “the well known easy professor” or an adjunct that will let them pass, there is not much elegance occurring. In fact left to the desires of the math faculty most schools would have to flunk out many of their students (once you get past the elite schools in America). These students can pass or do well in all their other courses just not in this area.

A further note, my colleagues in Liberal Art areas such as English talk about their students having the same problem taking Finite Math in the Math Department. So this is not just a business school problem. The difference is that the B-Schools: a: have so many courses the student has to take, and b: many that become leaders later in corporate world will remember the experience of the generic distance learning approach and become advocates of it politically when they hold executive positions.

Mark Sandberg
Assoc. Prof. of Management
and Organizational Behavior
and Dean Emeritus
College of Business Administration
Rider University