Because we know the rainy days will come...

Imagine paying a nearly $400 loan payment knowing that interest and a “customary/fee” had eaten up $344 of the total. Imagine walking into several different businesses every two weeks, handing each a check for $400 and getting $340 in return. These examples are real. The people living through them are hard-working parents who want the best for their children.  

Predatory lending offers can be appealing. The process
is easy to begin and hard to end.

When thirst threatens to stop you in your tracks, it’s hard to resist a cup of cold water – even if it has shards of glass at the bottom. That analogy fits better than we wish it did here in Central Appalachia. Many families face financial challenges that threaten to stop them in their tracks. And seemingly on every corner, a friendly face offers a “cup of cold water” in the form of high-interest predatory loans (279.5 percent in the first case above).

You may think, “why would people subject themselves to this?” Sarah Halpern-Meekin and her co-authors have some answers in “The Rainy Day Earned Income Tax Credit…” a paper published early this year.

Sometimes high-interest debt can be better than the
immediate alternative. Ultimately, it creates a vicious cycle.

Citing numerous studies, the authors show that many American families lack “financial slack” due to little or no savings and unstable income. When financial shocks occur – work hours get cut, a car breaks down, unexpected medical expenses hit – “families often rely on high-interest credit cards and other forms of debt,” the authors write. Often, the answer to “why” is to pay the rent, feed the kids or keep the car from getting repossessed.

That’s a stressful way to live. It seemingly puts the stability of a good car or home ownership out of reach. But it doesn’t happen so often in February, March or April, when tax refunds arrive. Many ACFCU coaching clients and people who use our VITA tax prep services tell us that’s when they do things like catch up on late rent and car payments, or pay off predatory loan balances. Some try to save, but as the study notes, those savings are “often spent down in the months following tax time,” so the cycle continues.

Halpern-Meekin and her co-authors evaluate a couple of pilot tax time savings programs before proposing a new option to the Earned Income Tax Credit. The “Rainy Day” proposal would defer 20 percent of a family’s EITC until six months after filing, and add a 50 percent savings match.

She didn't get to the mountain top without hard work.
Neither do our financial coaching clients.

Take a $4,000 EITC as an example. The taxpayer would get $3,200 in February or March, and $1,200 ($800 plus the match) six months later. Combined with financial coaching and availability of innovative products that CDFI credit unions can offer, that $1,200 could help a family avoid high-interest debt, begin saving and increase credit scores. If that mid-year boost helps the family avoid a predatory loan averaging $150 interest per month, the impact will be magnified.

Senators Cory Booker (D-NJ) and Jerry Moran (R-Kansas) offered a bipartisan version of the Rainy Day legislation in 2016 that included a pilot savings match program. Here in “flyover country,” we applaud any politician willing to propose innovative solutions to peoples’ everyday problems. We applaud the researchers who show those solutions’ importance and potential.   

We’ve found that helping families move the needle takes time, effort and expense on their part and ours. Missteps and setbacks are common. But we’ve seen real families use real chances to produce real change in their lives. Innovative programs like a Rainy Day EITC offer hope for even more positive change.

(Jeff Keeling is vice president of communications and community relations for Appalachian Community Federal Credit Union.)