|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!”