Everything You Wanted to Know About Payday Loans but Were Afraid to Ask

Editor’s Note: On Friday, October 7th, the Consumer Financial Protection Bureau will close the public comment period on a rule to rein in payday loans. Please submit a comment to tell the CFPB why a strong rule to rein in the worst payday abuses is critical.

For seven straight years the United States’ economy has been in an expansion—one of the longest on record. Even better, data released earlier this month by the Census Bureau showed that middle class and low-income Americans have finally started to benefit.

Still, a huge number of Americans live paycheck to paycheck. Almost half of all Americans—a full 46%—say they would not be able to come up with $400 in the event of an emergency. Unfortunately, many will turn to payday loans to make ends meet.

What are payday loans?

Payday loans are advertised as quick and easy loans that borrowers can repay when their next paycheck comes around. There’s a catch, though. The interest rates are so high—often 400% and above, compared to about 16% on the average credit card—that borrowers simply cannot afford to pay back the loan and cover basic expenses at the same time. Instead, the vast majority of loans—80%—are rolled over or followed by an additional loan within just two weeks. The result is that borrowers wind up in debt—the median borrower for more than six months in a given year.

Why do borrowers use them?

It’s fairly common knowledge that payday loans are a trap. So why do borrowers—let alone 12 million annually—even bother?

First of all, most payday loan borrowers—who are disproportionately people of color—have low or moderate incomes and struggle to obtain credit from mainstream sources like a credit card company or banks mostly because they have low credit scores. As a result, payday loans often appear to be the most accessible option.

Most of these borrowers take out payday loans cover everyday expenses (it’s a common misperception that payday loans are used as stop-gaps for unexpected financial setbacks). Since the cost of basic necessities, like rent and child care, has surged in recent years—at the same time that wages have stagnated—many low-income Americans have been left without an adequate and reliable cash flow.

How bad are they?

Payday lenders have the right to seize borrowers’ bank accounts.

All told, the median borrower will pay $458 in fees on a typical $350 two-week payday loan. Many borrowers, however, will pay an even steeper price. Small payday loans often balloon into thousands of dollars in debt, and the effects of default are severe. If loans aren’t repaid quickly enough, payday lenders have the right to seize borrowers’ bank accounts to make sure that they are prioritized for payment above all other bills—no matter how urgent or essential. Borrowers can also end up saddled with insufficient fund fees from banks when lenders try to draw too much money from borrowers’ accounts. Even worse, an indebted borrower is more likely to have her bank account closed against her will, which pushes many consumers further out of the financial mainstream and forces them to use expensive alternative financial services—like check cashers and pawn shops—that carry higher fees and risk.

These problems affect entire families. Low-income families with access to payday loans are also more likely to struggle with bills like the mortgage, rent, and utilities. This can lead to foreclosure or eviction, which can devastate families in the short- and long-term. Payday loans are also linked with delinquency on child support payments, which deprives families of needed income and carries severe consequences for the parent unable to make payments, from a suspended drivers’ license to incarceration.

On some level, the entire nation is paying for this practice. Each year, payday loans drain more than $4 billion in interest and fees from the economy—and that’s just the direct cost.  It doesn’t include the costs associated with homelessness (like emergency shelter) for families who lose their homes, or increased enrollment in public assistance programs to cope with the debt trap.

How can we protect borrowers?

State-level efforts to cap interest rates and fees to 36% or below—as 14 states and the District of Columbia have done—are key. But attempts to regulate predatory lenders otherwise have, by and large, proven to be exercises in futility. For example, after 64% of Ohio voters elected to ban the practice in 2008, loan sharks obtained licenses as mortgage lenders and continued to peddle payday loans under that guise. Predatory lenders in Texas acted similarly. In states where payday loans have been banned altogether, lenders have lured borrowers through online channels that can operate nationwide.

This “legislative Whack-a-Mole” at the state level has made it clear that the country needs federal reform to effectively protect borrowers.

Fortunately, the Consumer Financial Protection Bureau proposed new rules in June that target some of the most egregious practices in the industry. Under the new rules, loan sharks will have to determine whether prospective borrowers are actually able to repay a loan before they take one out (in most cases). The rules will also prohibit the repeated loans that trap borrowers in debt: Lenders will not be permitted to directly roll over loans or loan to those who seek to re-borrow within 30 days, unless those borrowers can prove that they will be in a better position financially. It will also place important limitations on lenders’ ability to seize borrowers’ bank accounts.

But here’s another idea: Eliminate the need altogether. If borrowers use payday loans to address chronic shortfalls, then economic insecurity has to be addressed as well through wage hikes and improvements to public assistance programs. These can go a long way to protect against cash shortages that lead families to take out loans with such insidious costs.



It’s Time to Ask the Candidates: #Wheredoyoustand on Fighting Poverty?  

Last week’s first presidential debate got off to a promising start.  The very first question of the night focused on the growing gap between the rich and the rest of us.

“There are two economic realities in America today,” said moderator Lester Holt. “There’s been a record six straight years of job growth, and new census numbers show incomes have increased at a record rate after years of stagnation. However, income inequality remains significant, and nearly half of Americans are living paycheck to paycheck.”

Holt is right about the challenges Americans are facing. Nearly 50 percent of all U.S. households report that they would struggle to come up with $400 during an emergency. And 80 percent of Americans will experience at least one year of economic insecurity—either living in poverty, needing public assistance, or having an unemployed head of household.

The fact that inequality and income volatility were mentioned at all is a big deal.

In 2008, as millions lost their jobs in the midst of the financial crisis, the first presidential debate featured no questions on poverty or income inequality. And in 2012, just as Americans were beginning to climb out of the Great Recession, poverty was ignored by debate moderators—although President Obama still managed to talk about issues like low-wage work, access to community colleges and training, affordable healthcare and childcare, and pay equity. Meanwhile, in the lead-up to the presidential election this year, news networks have devoted less and less attention to poverty and inequality in favor of horse-race election coverage.

But just talking about poverty isn’t enough.

It’s critical that we move beyond talk, and focus on real solutions. Case in point: According to a recent analysis by Media Matters for America, Fox News covers poverty more than any other network on the air—but rather than educating the public on solutions, their stories reinforce stereotypes and false narratives about those of us who are struggling. Similarly, conservative politicians like Paul Ryan have delivered high-profile speeches and put forward so-called “poverty plans” for low-income communities, while still supporting trillions of dollars in cuts to antipoverty investments over ten years.

The same goes for the presidential debates. We need to know where the candidates stand on the policies that would dramatically reduce poverty and expand opportunity for everyone in America.

Where do the candidates stand on Unemployment Insurance, which is woefully underfunded and currently reaches only 1 in 4 workers who need it? What would they do to address college affordability—at a time when student debt has ballooned to about $1.3 trillion and too many low-income students are simply priced out of a college education? Where do they stand on raising the minimum wage—even $12 an hour by 2020 would lift wages for more than 35 million workers and save about $17 billion annually in government assistance programs. What about expanding Social Security—the most powerful antipoverty program in the nation—which lifted 26 million people out of poverty in 2015?

It’s time to ask the candidates: #Wheredoyoustand

The idea is simple: if the media isn’t going to dig into the candidates’ policies, we will.

That’s why this election season, TalkPoverty.org is working to push questions about where the candidates stand on poverty solutions into the presidential debate.

Unlike the first debate, the next forum will be a town hall featuring questions submitted through social media. Building off a successful 2012 #TalkPoverty campaign led by The  Nation magazine and the Center for American Progress, today we’re launching our #Wheredoyoustand campaign encouraging you to share the questions you want to hear in the next presidential debate. The idea is simple: if the media isn’t going to dig into the candidates’ policies, we will.

Share your question now.

Whether it’s through a photo, a video, or a tweet, we want to know the questions you think need to be asked. Once you’ve tweeted your questions using #Wheredoyoustand, share them on the Open Debate Coalition website so that more people can vote to hear them in the debate.

Below are some examples of questions to get you started.  It’s time to move beyond focusing on whether someone said “the p-word,” and make sure the debates address real solutions to poverty.



The Hyde Amendment Made Abortion a Privilege—And It’s Holding Back the Economy

Today is the 40th anniversary of the Hyde Amendment, the policy that severely limits the use of Medicaid to cover the cost of an abortion. Since Medicaid enrollees are predominantly low-income women, the Hyde Amendment has essentially turned abortion into a luxury item for women who can afford to pay for the procedure out-of-pocket.

Hyde is often siloed as a “women’s issue.” But when women cannot control their bodies and their reproductive futures, it is more difficult for them to advance economically. And since women make up more than half of the U.S. population, it matters when something holds women back.

Because of the Hyde Amendment, women who receive health coverage through Medicaid face two sets of financial obstacles if they need an abortion. First, they must cover the direct costs of the procedure without insurance. A first trimester abortion cost an average of $470 in 2009, which is already more money than many Americans would be able to come up with in the case of an emergency. Second, these women must also bear the practical costs imposed by state restrictions, like multiple doctor’s office visits and unnecessary waiting periods. A low-income single mother who needs to pay for travel to the nearest clinic, a night at a hotel due to a mandatory waiting period, childcare, and lost earnings from work, could end up paying an additional $1,380.

Women who want an abortion but can’t afford the out-of-pocket costs inflicted by Hyde face major consequences over the course of their lifetimes.  Studies show that women who wanted an abortion but were not able to obtain one faced worse economic outcomes, were more likely to live in poverty, and often carried unwanted pregnancies to term.

This isn’t just a burden on these individual women. When women do not have the power to choose the lives they want, it affects everyone.

This isn’t just a burden on these individual women.

This is clear on a state level: The states that have the most open access to abortion are often the states that have a general climate of greater opportunity for women. In Massachusetts, where the only restriction on abortion access is parental notification, legislators recently banned employers from asking prospective hires about previous salaries as part of their effort to close the pay gap. At the other end of the spectrum, states that have the most restrictions on abortions oftentimes have lower economic opportunity for women. Alabama and Mississippi are tied for the worst economies for women, and these are also two states with significant abortion restrictions.

This matters on a national level, too. When a woman can gain access to the best opportunities for herself, she will be more productive and earn more. That allows her to contribute more to her local economy and to the GDP in a multiplier effect, where economic activity generates even more economic activity and contributes to growth. Since nearly 21 million adult women are currently covered by Medicaid, that has the potential to make a major impact on the national economy.

The way our country—and our legislators—address bodily autonomy and economic opportunity reflects the value we place on women as full members of our society. If we are a country that values women, regardless of income, then it is time to repeal restrictions on abortion. When our public policies promote the prosperity of women and families, the country prospers too.



The Child Tax Credit Doesn’t Reach the Poorest Families. Here’s Why It Should.

Earlier this month, the U.S. Census released its annual data update on poverty in America. The child poverty rate remains alarmingly high—over 16% after accounting for assistance from government programs—which is both damaging to kids and expensive for the country.

Fortunately, boosting the incomes of very poor families has been found to reduce the effects of child poverty, and the Child Tax Credit (CTC)—which offsets some of the cost of raising children—should be a key part of that effort. The problem, however, is that the CTC excludes families earning $3,000 or less per year and does not provide the maximum credit to other very poor families, so the children with the greatest need don’t receive full benefits.

If very poor children received the full tax credit—just like middle-class children do—the evidence suggests we would see healthier, better educated children with greater earning power as adults.

Boosting incomes for poor young children has long-term benefits

The benefits of income support during a low-income child’s early years last a lifetime—from higher birth weights (which impact future health), to better performance in school, to higher expected lifetime earnings.

Studies consistently show that income matters most for the poorest children. After conducting a systematic review of the academic literature on the effects of income during childhood, researchers at the London School of Economics and Political Science found that “there is very strong evidence that increases in income have a bigger impact on outcomes for those at the lower end of the income distribution.” For example, one study found that the Earned Income Tax Credit (EITC) boosted children’s test scores by almost three times as much for the poorest children as for other children.

Young children warrant particular attention. They have higher poverty rates than older children or adults, and the evidence that increased family incomes yield long-term benefits for children is particularly strong for those up to age 6.

Poorest working families get little or no Child Tax Credit

Unfortunately, the Child Tax Credit doesn’t do enough to help the children who are most in need (and stand to benefit the most, too).

The CTC is worth up to $1,000 per child under age 17. However, working families with earnings below $3,000 are ineligible for the tax credit. Once a family’s earnings reach $3,000 the credit phases in slowly, at a rate of 15 cents for each added dollar of earnings until reaching the $1,000-per-child maximum. As a result, families with two children don’t receive the full credit until their earnings reach $16,333. Roughly 8 million working families received only a partial CTC or none at all in 2014 (the latest year for which data are available).

What Congress can do

The CTC’s current design means that children in the poorest working families get no benefit and many other children in deep poverty—those with incomes below half of the poverty line, or less than about $10,000 for a family of three—get only a partial tax credit. This needs to change. Children shouldn’t be denied the credit’s full benefits because their parents have fallen into desperate times and have little or no earnings.

By making the full $1,000 CTC available to all low-income children—in tax parlance, making the credit “fully refundable”—Congress could boost young children’s potential to succeed in life, starting even before their first day of school.



7 Steps to Make Sure Unemployment Insurance Is There When You Need It

Unemployment can be devastating—just ask the millions of workers who lost a job during the Great Recession. But it’s a commonplace experience: At some point during our working years, two-thirds of us will experience at least a year of unemployment firsthand (either ourselves, or for our household’s primary breadwinner).

The United States already has an effective program that protects workers from falling into poverty or losing their homes when they are laid-off, by temporarily replacing some of their earnings while they look for a new job. Unemployment Insurance (UI) isn’t exactly a household name, but the program’s benefits have provided stability and protection to working families for eight decades.

In 2014, just 1 in 4 jobless workers received UI benefits.

Unfortunately, the program isn’t reaching everyone who needs it—in 2014, just 1 in 4 jobless workers received UI benefits. In large part, that’s because policymakers have failed to update UI to keep pace with dramatic changes in the American workforce and overall economy. But in some states, lawmakers have done even more damage by cutting program benefits and tightening already-strict eligibility rules. This leaves workers—particularly low-wage workers, women, and people of color—without a safeguard if they lose their jobs.

Cutting UI also jeopardizes our entire economy, because it is our first line of defense against recession: it creates demand by boosting the spending power of struggling families, which helps to stabilize the economy during downturns. We’re currently enjoying our seventh year of economic expansion, but we’ve never had an expansion last longer than ten years—so lawmakers should be preparing for the next recession before it arrives.

Here are seven steps that would put the UI program on firm footing before the next economic downturn:

1. Give people enough time to find new jobs

Finding a new job takes time—in 2015, it took an average of 29 weeks. For that reason, UI was designed to replace about half of a typical worker’s wages for up to 26 weeks while she searches for work. But states have been slashing benefits so that they replace far less than half a worker’s wages, and nine states now offer fewer than 26 weeks of support (with Florida and North Carolina cutting off benefits after just half that time).

States are shortchanging workers on a protection they’ve earned.

Since UI is an earned benefit—workers contribute to the program through payroll taxes, just like Social Security—these states are shortchanging workers on a protection they’ve earned. It’s time for Congress to set standards guaranteeing all qualifying workers 26 weeks of protection, and replacing at least half of wages for low- and middle-income workers.

2. Keep workers in the jobs they already have

UI includes a provision that can actually prevent layoffs from happening in the first place. Work sharing  gives employers the option to temporarily reduce their employees’ work hours—rather than laying them off—while UI steps in to replace part of workers’ lost wages.

It’s a win-win—workers keep their jobs and businesses retain experienced employees—but 21 states still haven’t established work sharing programs. Policymakers should ensure work programs exist in all 50 states and the District of Columbia, so that employers and workers have an alternative to layoffs during the next recession.

3. Train unemployed workers for new careers

Many workers whose jobs fall prey to globalization and technological change will need to retrain for work in a different sector. Our nation’s workforce development system—and UI’s reemployment services, in particular—is highly effective, but it is woefully underfunded. As a result, the system doesn’t reach nearly enough workers. Worker retraining actually has bipartisanship support—the only hold-up is Congress’s failure to put more money where its mouth is.

4. Include low-paid workers

It’s bad enough that workers today can legally be paid a poverty wage. But leaving low-wage workers without assistance during unemployment because they were underpaid—even when they have typically contributed the same amount in unemployment tax as higher earners—is downright absurd. Yet because most states use an earnings threshold to determine who is eligible for UI, low-wage workers are only one-third as likely to get UI as higher earners (despite being twice as likely to be laid off).

To avoid punishing low-wage workers, UI eligibility should be based on the number of hours worked—not the amount of money earned. Once someone has worked 300 hours at the state’s minimum wage over the course of two calendar quarters, they should automatically qualify.

5. Protect more women in the workplace

Women are now primary breadwinners in 40% of American households, but UI hasn’t adapted to keep pace with this reality. Women are twice as likely as men to be part-time workers, but since part-time workers are excluded from UI in one-third of states, many women are being unfairly disadvantaged. Women are also more likely to have to leave the workforce to care for an ill relative or for personal reasons such as escaping domestic violence, and some states don’t allow them to receive UI when they search for new work.

All states should extend UI coverage to part-time workers, as well as workers who must quit for so-called “good causes.”

6. Make sure all workers pay their fair share

UI is funded through two modest payroll taxes. Nearly every worker—whether they are making millions of dollars or minimum wage—contributes the same $42 per year in federal UI tax. This is because workers only pay federal taxes on the first $7,000 of their wages every year. This hasn’t been adjusted in 33 years, and each year the tax gets more regressive. Congress should fix this by broadening the taxable wage base—for example, by applying UI taxes to earnings up to $59,000 (about half of the Social Security wage base). This would allow us to lower tax rates while still collecting the same amount of revenue.

7. Build the emergency exits before the next fire.

Jobs are scarce during recessions, so laid-off workers need longer on average to find new work. For that reason, UI has a program called Extended Benefits (EB), which is supposed to automatically activate when a recession approaches. It’s a great idea, but the triggers that turn on the EB program don’t respond quickly enough when unemployment rises, so the assistance EB provides is often too little and too late. To trigger EB now, more than 5% of the workforce would need to be receiving UI benefits—but since so few workers are eligible for UI, that’s a tall order.

Policymakers should fix these triggers so that the UI system is not caught unprepared when the next downturn arrives.

In the longer term, policymakers should give unemployment protections a big-picture update to match the modern economy.

Even if UI were fully updated, a substantial share of unemployed jobseekers today would remain ineligible for UI. This includes new college graduates and caregivers returning to work, as well as gig economy workers such as Uber drivers and TaskRabbit workers. To assist these workers, we should create a Jobseeker’s Allowance—a modest short-term stipend to support job hunting and training. Many countries—such as the United Kingdom and Germany—already have similar programs that help workers connect to job opportunities and improve their work-related skills.

Economic expansions don’t last forever—and experts are increasingly calling on Congress to prepare the nation for the next recession. By taking concrete steps today to fix the cracks in our nation’s unemployment protections, policymakers can protect more working families against the hardship of job loss.