 |
| This predatory lender charges 279.5 percent interest for the "flex loan" product that's advertised here. |
“Income
volatility, which drives financial instability, is threatening the social mobility
and independence of working families, and neglecting this issue will only lead
these families further into debt.”
Restructuring
the EITC: A Credit for the Modern Worker
Dylan
Bellisle and David Marzahl, Center for Economic Progress
Could
tax refund-based “income smoothing” help prevent the stories I’m about to
convey?
Don
and Danielle (not their real names) have already taken out an advance on their
2018 tax refund. As so many low and moderate-income families who receive large
refunds do, they’d come to the end of the calendar year in desperate need of
funds. The multi-billion-dollar tax company that provided the advance based on
their pay stubs (with a 4.5 percent fee and at 36 percent interest) was only
too happy to oblige.
Janelle
(also not her real name) is working on a monthly budget right now. She has
three kids and brings home about $1,800 a month, but she gets a tax refund of
around $7,000. Janelle has faced the same cycle – get a big refund, get caught
up on delinquent debt, buy some essentials, live a little less hand to mouth
for a few months, then start the slow descent into not making ends meet.
 |
| A graphic from the Center for Economic Progress shows the outsized role debt plays for low-income taxpayers at refund time. |
Very
often, the families in these situations – families that Appalachian Community Federal Credit Union
(ACFCU) provides financial coaching and free tax preparation for – turn to
high-interest predatory lenders to get by until the next tax refund.
Rent-to-own shops, “buy-here-pay-here” vehicle lots, payday lenders, “flex loan”
lenders charging 279.5 percent interest – even Fortune500 companies that are seeing their bread and butter business eaten away by theInternet as great equalizer get in on the act, as Don and Danielle can
attest.
The
stories above are true. I know because I am coaching both these families. They
are working families with children. They don’t make much money, but they earn
what they make. As I pointed out last week, the large refunds they receive are in part thanks
to one of the most popular bipartisan programs in the country, the Earned
Income Tax Credit.
How
do we put a dent in this trend of three or four good months followed by eight
or nine lean ones that has created such a booming industry? The high-interest
options so many people turn to are legal. Whether that should change or not, it’s
the current reality.
At
ACFCU, a mission-driven financial institution using financial coaching to help
people decrease their financial stress and meet financial goals, we’re
continuing to strive for an answer. One key is income smoothing. As the Center
for Economic Progress’s Dylan Bellisle and David Marzahl pointed out in this paper: “Many working families are filling the gap between their monthly
income and expenses by going without necessities, using high interest credit
and predatory short term loans, and borrowing from family and friends.”
 |
| Another graphic from the Center for Economic Progress reveals that many Americans in the bottom 40 percent of income spend more than the earn. |
I’ve
spoken with these coaching clients about escrowing large parts of their refunds
and paying themselves monthly to smooth income. That doesn’t work without the willingness
to form a realistic budget and follow it, so coaching is key as well. But it does
offer a path forward until things change. We’re fortunate to have a great Volunteer Income Tax Assistance (VITA) partnership with Tusculum University.
Until
things change, we’ll take the approach of the proverbial kid who walked along
the seashore at low tide throwing starfish back into the water so they wouldn’t
be burned up in the sun. When informed that with thousands of those starfish
along the beach, he wouldn’t be able to make much different, the boy said, “It
made a difference to that one!”
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