report: the credit trap

8/10/2019 Report: The Credit Trap

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From Opportunity to Burden:

Profiles of Low-Income Households Caught in the Credit Trap

Jennifer Lowe, PhDRuth J. Liberman, MPA

Charlotte Benishek

A publication of Crittenton Womens Union in collaboration withAsian American Civic Association, City of Bostons Earned Income Tax Credit Coalition,

Heading Home, Jewish Family & Childrens Service, Lawrence CommunityWorks,Jewish Vocational Service Boston, and Rosies Place


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From Opportunity to Burden: Profiles of Low Income Households Caught in the Credit Trap

Terms Defined:

check cashers: an alternative financial institution

that will allow people without a bank account to

perform financial transactions such as cash checks

and pay bills, charging a fee for each transaction.

consumer debt:debt incurred through the

consumption of goods that do not appreciate in

value, including credit card debt, educational debt,and medical debt.

credit report:a summary of an individuals past

credit activity, including payment history, defaults

or bankruptcies, and credit availability and use.

Often used by financial service companies, service

providers, and landlords to determine a persons

creditworthiness and assign a loans interest rate.

debt collection agency:a third party company that

specializes in collecting loans in default. The company

buys the loan from a creditor at a discounted rate

and attempts to collect all or part of the debt bypersistently contacting the consumer for repayment.

debt consolidation:the process of taking out a single

large loan with a relatively low interest rate to pay

a collection of smaller individual loans with higher

interest rates.

debt settlement company:a company (usually

for-profit) that negotiates a legal settlement to

resolve unsecured debt with creditors. Usually the

settlement is a lump sum payment smaller than the

original debt, and the company charges the consume

a fee that is a percentage of the amount by which

the original debt was reduced. These companies have

been prohibited in Massachusetts since 1971.

default:failure to pay interest or principal of a debt

when it is due, usually triggering a debt collection

process.

payday lenders: for-profit lenders that provide

unsecured small, high-rate, short-term loans. The

consumer grants the lender direct access to their

bank account so lender can collect on the entire loan

directly. Operations are restricted in Massachusetts

because the functional interest rate of payday loans

usually exceeds the states legal maximum of 23%

APR.

subprime credit score:a credit score that is low

enough that there is serious concern that the

borrower will not be able to repay the loan.

unsecured loans:a loan that is approved solely on

the basis of a borrowers credit worthiness rather

than a form of collateral.


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2 Crittenton Womens Union

Executive Summary

This school loan has reallyimpacted my ability to think aboutfurthering my education becauseI am afraid that when I apply forfinancial aid that they will turn medown. Martin, 55

Crittenton Womens Union (CWU), in partnership

with an Advisory Group comprised of colleagues

representing over twenty social service

organizations and advocacy groups, set out to gaina comprehensive understanding of the prevalence

of consumer debt among low-income adults in

Massachusetts. In particular, the goal was to

understand how debt impacts their efforts to achieve

economic self-sufficiency and to determine whether,

and which, policy recommendations can alleviate

barriers. Through a truly collaborative process,

CWU convened the Advisory Group to design the

project, drawing from group members experiences

and expertise in consumer debt and low-income

populations. Guided by input and advice gathered

from Advisory Group members, CWU designed a

consumer debt survey, which was administered

through nine social service providers in the Greater

Boston region. In order to further illuminate the

subject, CWU researchers interviewed a subset

of survey respondents about their experiences.

Statements from these interviews are included

throughout the report, providing personal examples

of the acute barriers consumer debt presents on the

journey to self-sufficiency.

An analysis of the survey results revealed that:

1) limited income, 2) costly financial services, 3) health

expenses, and 4) education expenses contributed

most significantly to the debts of low-incomeindividuals. Aside from the direct consequence

of rendering some people unable to afford basicnecessities, the consequences of debt affect diverse

areas of peoples lives, ranging from degrading

physical and mental health, to preventing some from

accessing post-secondary education, to acting as a

barrier to securing employment. Some respondents

with debt and limited financial education also fell

victim to harassment by debt collectors, solicitation

by predatory for-profit debt settlement companies,

and were driven to seek costly alternatives such as

check cashers and payday lenders all of which may

further damage their already blemished credit history

or even cause them to accumulate more debt.

Given the acute and pervasive negative

consequences of consumer debt among low-income

households, we urge multiple policy changes to

counteract the downward financial spiral that debt

creates. The following policy recommendations are

designed to encourage a more equitable system for

dealing with consumer debt, especially for low-

income individuals.

CWU and its partners offer the following four

recommendations to help Massachusetts residents

combat the negative effects of consumer debt:

1. Support legislation to limit the use of employmentcredit checks for hiring purposes,

2. Support legislation to protect consumers from

credit collection and debt settlement industry

abuses,

3. Support legislation to limit health care debt,

4. Support efforts to increase the financial capability

of consumers by helping them build the knowledge

and skills to manage resources effectively.


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From Opportunity to Burden: Profiles of Low-Income Households Caught in the Credit Trap

I. Introduction

Read the fine print. Dont trust asmile and a quick hand. If they keepthrowing papers at you to sign, notgood Youre going to be in debtfor the rest of your life.- Donna, 34Donna is a single mother living in Boston. Several

years ago, after seeing persuasive advertisements

by a for-profit college that guaranteed she would

have a job upon completing its medical billing

program, she enrolled. The admissions counselor

instructed Donna to sign papers she was told would

give her money for school. She earned an associatesdegree, but no job placement from her school,

which ultimately closed its Boston campus. Only

after graduating did Donna realize that she had

taken out more than $25,000 in student loans with

interest and fees she did not expect to mount so

quickly. With no clear prospects for employment, a

child to care for, and interest and penalties rapidly

accruing on her student debt, she began to use

credit cards to pay for basic needs. Donna feels

her poor credit from defaulting on student loans

presented a barrier to securing employment, as many

employers increasingly require credit checks. She also

attributes her employment struggles to employers

lack of regard for her degree from a for-profit school

with a dubious history. Today, Donna struggles to

maintain her physical and emotional well-being, and

is stretched to pay for even the most basic personal

care items such as toilet paper. She reports that her

growing debt situation severely impacts her mental

health sometimes being stressed to the point of not

sleeping for consecutive days.

Donnas story illustrates a few of the many ways that

consumer debt presents seemingly insurmountable

barriers for low-income adults striving to achieve

economic self-sufficiency. Crittenton WomensUnion (CWU), in partnership with an Advisory Group

comprised of colleagues representing over twenty

social service organizations and advocacy groups,

set out to gain a comprehensive understanding of

the prevalence of consumer debt among low-income

adults in Massachusetts. This partnership sought to

understand how debt impacts the efforts of low-

income adults to achieve economic self-sufficiency,

and to discern how policy changes could help people

like Donna, for whom overwhelming debt is a barrier

to achieving economic self-sufficiency. Surveys

administered by nine social service organizations1

and interviews conducted by CWU have revealed that

debt can present a direct barrier to employment andpost-secondary education. Debt can also contribute

to stress and diminished well-being, cause familial

strain and embarrassment, and severely restrict ones

ability to meet basic needs such as obtaining food,

shelter, and medical care.

While survey respondents targeted for this research

were low-income, with an average annual household

income of $19,380, which falls $710 below the federal

poverty level for a family of three, consumer debt

and the barriers it creates are not limited to those

in poverty. These problems affect an economically

diverse population including many middle income

households. In fact, 48% of Massachusetts residentshave subprime credit scores (Corporation for

Enterprise Development 2014). This is more than four

times the percentage of Massachusetts residents

(11%) living below the federal poverty level (U.S.

Census Bureau 2013), illustrating the broad impact of

credit and debt issues. Such widespread credit trouble

is significant as debt negatively impacts peoples

well-being, educational opportunities, employment

prospects, and access to basic mainstream financial

services. The research findings presented in this brief

reveal how the cycle of debt presents a distinctive

and significant obstacle for people living in poverty

as they make attempts to achieve economic self-

sufficiency.

This brief describes the research design and

presents analysis from survey data and interviews.

The findings provide insight into the factors that

contribute most significantly to consumer debt in

Massachusetts, and demonstrate debts impact on

peoples well-being and economic opportunities. Also

presented are strategies currently being deployed

to address the problem and additional innovative

approaches are highlighted. Lastly, the brief

concludes by providing four policy recommendations

to alleviate the acute challenges of consumer debtfacing Massachusetts residents.

1 Asian American Civic Association, Bunker Hill Community College,City of Bostons Earned Income Tax Credit Coalition, Crit tentonWomens Union, Heading Home, Jewish Family & Childrens Service,Jewish Vocational Service Boston, Lawrence CommunityWorks, andRosies Place.

Surveysadministeredby ninesocial serviceorganizations

and interviewsconductedby CWU haverevealed thatdebt can presenta direct barrier toemployment andpost-secondaryeducation.


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II. Project Design

Given the complex nature of consumer debt, thisproject was designed to be collaborative, so that

the learning, methods, tools, and analysis could

be formed and shaped by many local experts, all

of whom contributed unique perspectives and

knowledge of debt issues. The project launched in

the summer of 2013 by assembling an Advisory Group

comprised of colleagues representing nonprofit

organizations serving low-income households in the

Greater Boston area as well as local and national

policy experts. CWU convened group members to get

their initial thoughts on consumer debt issues and to

identify emerging trends. The group considered the

following questions: Which consumer debt issues are direct service

providers seeing in their work with low- income

households?

Which aspects of consumer debt are most

concerning?

Are new trends emerging in the issues people face

with their debt?

What policy work is already being done in this

area? Where do gaps in policy and practice exist?

Which areas/topics related to consumer debt

require further exploration?

Using emerging themes gathered at these meetings

and a review of relevant research and literature,

CWU, with guidance from Advisory Group members,

drafted a survey2. The survey was administered

by nine nonprofit service providers located in the

Greater Boston region between October 2013 and

June 2014. Each provider administered surveys to

program participants in a way that worked best

for the organization. Some handed surveys out to

workshop attendees, distributed surveys at individua

case management meetings, or made them available

in their lobbies for people to complete as theywaited for services. The surveys were voluntary and

confidential and did not impact whether services

were provided.

This collaborative effort resulted in the completion

of 127 surveys, with the majority of respondents

from Boston and Lawrence (see illustration).

Additionally, CWU reached out to survey respondents

who indicated interest in a follow-up interview

and conducted semi-structured interviews with

ten individuals. The interviews were designed

to gain a better understanding of the specific

debt issues low-income individuals face, to learnwhether and how consumer debt serves as a barrier

to achieving self-sufficiency goals, and to solicit

their recommendations for policy changes to help

remedy the situation. Given the limited sample

size, we cannot make generalizations about the

debt experiences of all low-income households

in Massachusetts, however, the analysis and data

presented highlight concerning trends.

2 Survey was available in English and Spanish


CWU convenedgroup membersto get theirinitial thoughtson consumer

debt issuesand to identifyemerging trends.

Survey Respondents Demographics

28%

48%

44%have earnea collegedegree

parent orguardianof a childunder 18

72%

36averageage

female

English is not their

first language

Note: three surveys were collected outside of Greater Boston


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Difference

$46,500

$65,880


III. Factors That

Contribute to Debt

While debt may originate with the initial purchase

of goods and services, there are many reasons why

people become debt burdened. Research has already

uncovered that basic expenses such as food, rent,

and insurance are the greatest contributor to credit

card debt for nearly half of those who hold long-term

credit card balances (Traub and Ruetschlin 2012).

One of the primary objectives of this study was to

discern whether, in addition to debt origin, there

are other factors or circumstances that lead to the

accumulation of burdensome debt. The findings

demonstrate that the most frequently reportedfactors are: 1) limited income, 2) costly financial

services, 3) health-related debt, and 4) student loans.

Each factor is reviewed in more detail below.

1. LIMITED INCOME

My income has been reallyinconsistent because Ive beensubstitute teaching. And you dontget paid when you take days off.

And Im a single mom, so when mydaughter gets sick or I get sick thenI dont get paid for sick days it justwas inconsistent, so that was partof the reason why I accrued some[credit card] debt. Sabrina, 33Respondents reported that limited income, whether

due to job loss/reduction in hours (71%) or low

wages (64%), was the most frequently cited factor

contributing to their debt. This may be reflective of

a larger national trend as the majority of workers inthe United States have experienced wage stagnation

for more than a decade, and between 2007-2012,

wages actually fell for the bottom 70 percent of

wage distribution (Mishel and Shierholz 2013).

Only recently, in May 2014, has employment in

Massachusetts recovered to its pre-recession levels

(Federal Reserve Bank of Boston 2014). Yet many

well-paying jobs in the region remain out of reach

for under-skilled or undereducated workers (Dennett

and Modestino 2011).

On average, survey respondents reported an annual

household income of $19,380 for a household

comprised of three people. As illustrated in the

graph above, for a family of three, this amount falls

just below the 2014 Federal Poverty Level and falls

significantly below the Massachusetts Economic

Independence Index3

- a basic needs budget ofwhat it costs to live in Massachusetts without

public support, such as housing subsidies and food

assistance. Meaning, there is a $46,500 difference

between respondents average household income

and what they actually need to earn to be self-

sufficient in Massachusetts.

This gap is often filled through a variety of survival

strategies, including turning to friends and family

members for material support, accessing public

subsidies, settling for lower cost substandard

products and services, and relying on alternative

forms of borrowing such as high cost payday loans,

or using credit cards to makes ends meet. In fact, a

2012 study by Demos found that 45% of households

earning less than $50,000 use credit cards to pay

basic monthly expenses because they didnt have

enough money to cover them (Traub and Ruetschlin

2012).

3 CWUs 2013 Massachusetts Economic Index is a basic needs budgetcalculated for various household compositions based on theirunique basic needs costs for each county in Massachusetts. For moreinformation and to access the Economic Independence Calculator,visit www.liveworkthrive.org.

One of theprimaryobjectives

of this studywas to discernwhether, inaddition to debtorigin, there areother factors orcircumstancesthat lead to theaccumulation

of burdensomedebt.

Survey respondents

average annual

income

$19,380

Mass. Index Wage

for a family of three


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Employment credit checks, conducted by almost

half of all employers (Society for Human Resource

Management 2012), are an obstacle for low-income

adults seeking employment. According to a 2013Demos report, one out of seven respondents who

have poor credit stated that they were not hired

because of their credit history. Donna, a single

mother who had been facing chronic unemployment,

found herself acutely affected by credit checks

performed by hiring managers as part of the

employment screening process, saying, I think [poor

credit] is a barrier for me in life period its like a

circle. I want the job to pay the [student] loans. I cant

get the job because I have the loans. So, it makes no

sense, you checking my credit, and its all screwed

up, but you wont give me the job so I can fix it.Like

Donna, people need reliable income to pay off debts.Yet, poor credit itself can be a barrier to securing a job

and increasing income an essential step in resolving

debt and achieving economic self-sufficiency.

Nationally, one in four unemployed individuals with

credit card debt reported that a potential employer

requested their permission to check their credit

report (Traub 2013). However, credit reports wereneither designed nor originally intended to serve as

hiring criteria. Credit reports are not only unreliable,

since they are prone to inaccuracies, they are also

invalid predictors of job performance (Wu 2010).

Furthermore, there is no evidence of a connection

between subprime credit history and poor conduct

on the job (Palmer and Koppes 2003).

2. COSTLY FINANCIAL SERVICES

They allow me to pay [a minimum

payment of] $50, $50 every month I am losing big time Its like Impaying interest, interest, interest,interest, interest. I could never getcloser. Martin, 55Thirty nine percent of survey respondents indicated

that costly financial services, such as fees and high

interest rates, were contributing factors to their

debt. Unable to keep up with their loan payments

or credit card balances, respondents debt quickly

rose as fees and interest added to the principal.

Catherine, a parent living in a suburb of Boston, canrelate. She shared,[My debt] goes up and up every

month. Probably 50% of whats on the bill, 50% is

really not mine; its all of the fees.Another woman,

Katrina, shared how she fell behind on her student

loan payments after a disabling medical crisis, I had

school loans that with interest and penalties, because

I got behind in payments, grew to $111,000. Of course,

[this is] way out of whack from what I actually spent

on my education, and working in [social services] I

was never going to be able to make much.For those

unable to pay their balance in full or unable to keep

up with monthly minimum payments, snowballing

debt eventually feels insurmountable, with fees andinterest sometimes surpassing the principal balance.

One costly consequence of excessive consumer debt

is isolation from the mainstream financial system.

Banks may deny an application for a checking ac-

count based on a single past incident of overdrawing

a checking account (Silver-Greenberg 2013). For a

while unless it was a credit union, I couldnt get an

account,reported Nancy, a full time working mothe

who faced this situation. Nancy was fortunate to

How Debt Impedes Opportunity

of respondentsindicated that theirability to secure a jobis impacted by theirdebt.

44%

Promising Practice: Regulating Useof Credit Reports by Employers

A growing number of states across the country

have passed laws to regulate and limit employer

consideration of an applicants credit history in the

hiring process. For example, Colorados Employ-

ment Opportunity Act (SB13-018) which took

effect on July 1, 2013, prohibits an employers useof consumer credit information for employment

purposes if the information is unrelated to the

job, and requires an employer to disclose when

consumer credit information is being used to take

adverse action against an employee or applicant.

Massachusetts Senator Michael Barrett has filed a

similar bill, S.80 An act regulating the use of cred-

it reports by employers in Massachusetts that has

not been passed into law.

Unable to keepup with theirloan paymentsor credit cardbalances,

respondentsdebt quicklyrose as fees andinterest addedto the principal.



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of respondentsindicated that theirability to open a bankaccount is impactedby debt.

26%

be able to access financial products and services

through a credit union. However, others who are

denied access or who are distrustful of mainstream

banking services often turn to costly alternativessuch as check cashers and payday lenders. These

businesses typically charge hefty fees and relatively

high interest rates compared to traditional banks. A

recent Consumer Financial Protection Bureau study

found that the average annual percentage rate (APR)

for payday loans is 322% (2013).

To protect consumers in the Commonwealth,

Massachusetts is among 15 states that either prohibit

payday lending or eliminate the practice by placing

limits on rates and fees charged for small loans

(Massachusetts General Laws Chapter 140, Section

96). An additional nine states currently regulate the

terms of payday loans. The Pew Charitable Trustsestimate that as a result of this legislation, just 2% of

Massachusetts residents have accessed a payday loan

(Pew Safe Small-Dollar Loans Research Project 2012) .

Promising Practice: Credit Counselors

Since 1971, for-profit debt settlement companies have been banned from operating in Massachusetts.

These companies typically require that the consumer stops paying the creditor, at which point the company

negotiates a lump sum payment with creditors that is less than what is owed. The consumer pays the

debt settlement company a fee that is a percentage of the difference between the original debt and the

negotiated sum. This process is risky since ceasing payment altogether often results in late-fees, penalty

fees, and may cause a company to intensify their debt collection efforts. It also negatively impacts creditscores. Furthermore, any debt that is forgiven by creditors as a result of debt settlement companies efforts

will be considered taxable income, likely increasing the consumers tax burden. By contrast, non-profit credit

counselors, legal in Massachusetts, do not require people to stop paying their creditor. Credit counselors

negotiate with the objective of lowering monthly payments rather than decreasing the amount owed. The

consumer submits monthly payments, as well as a small fee, to the credit counselor, who in turn submits them

to the creditor. Credit counseling services also ensure that the creditor will cease collection efforts while the

consumer is following the debt management plan. Debt settlement companies make no such assurances.

Most importantly, credit counselors also provide financial education to the consumer to help prevent him or

her from accumulating debt in the future.

3.HEALTH-RELATED DEBT: CO-PAYS

AN D D ED UCTIBLES

No, [insurance doesnt] cover overthe counter medications. Thosearent covered, and my co-pays formy actual prescriptions, because Itake a lot of prescriptions, the co-pays are quite a bit. To me, theyrequite a bit. - Jack and Katrina,married couple with medicaldisabilitiesJada, a single mother in her twenties with a young

son, has private health insurance, but she still facesunmanageable co-pays and deductibles, causing her

to accumulate medical debt, and ultimately to put

off essential care for her son and herself. Jada shared

during an interview, I wouldnt go to emergency

rooms. I would try to wait it out sometimes if my son

was sick to bring him to the hospital the next day.

The prohibitive cost of co-payments and deductibles

that Jada experienced was also a source of debt

for 35% of survey respondents. For those who are

financially unstable, an illness, health crisis, or even

preventative care can push a family living on the

edge into financial crisis.

When an illness or health crisis occurs for individuals

or others in their household, such as children, a

spouse, or elder parents, they may need to take time



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off, reduce hours, or stop working altogether. This

reduction of income combined with the medical

expenses further erodes economic stability. Jack, a

married 60 year-old disabled man, highlighted the

difficulty of covering basic expenses when falling

into the debt cycle started by illness, explaining,

Because of the medical issues, I got behind [on

paying] the gas, and I got behind on the electricity,I got behind on the phone.Jack had to leave the

workforce because of his health issues, and as his

medical expenses rose, he fell behind on other

financial obligations as well.

Massachusetts led the nation in ensuring that

residents of the Commonwealth are better able to

access medical care through mandated universal

health coverage. Yet, as the survey findings indicate,

residents still face health-related expenses that

contribute to debt. As Jack shared, I have a lot of

medical debt. I might end up paying some, depending

on my financial circumstances in the next year. Icant possibly pay it all.While insurance coverage

is critical, some insured families, like Jack and his

wife, still find themselves incurring relatively large

amounts of debt to pay for medication, healthcare

visits, and medical procedures.

These findings, that healthcare costs present a

financial burden even for those who are insured,

are not limited to low-income households. In fact,

a 2012 survey conducted by the Blue Cross Blue

Shield Foundation discovered that while 94 .6%


of respondentsindicated that gettingneeded medicalattention is impactedby debt.

20%

of respondents

indicated that theirability to live healthylives is impacted bydebt.

49%

of Massachusetts residents are covered by health

insurance, many still grapple with high health care

costs. According to the report, 42.5% of non-elderly

adults found it challenging to afford health care.

Furthermore, 27% reported that the previous years

health care costs caused them financial difficulties.

Many of these health care costs can be attributed

to underinsurance4. The Blue Cross Blue Shield

Foundation survey found that 13.4% of non-elderly

adults with insurance were underinsured, a group

that is disproportionately low income (Urban

Institute 2014).

Debt and health are inextricably linked. Costly health

issues can contribute to debt, and debt can impact

ones health and well-being. The correlation between

stress and decreased physical and emotional well-

being has been documented, demonstrating thatsustained and severe stress can deteriorate both

physical and mental health and money is the

top source of stress for Americans (Anderson et al.

2013). In the case of financial stress, this relationship

manifests itself directly through sleep loss, and

indirectly by not being able to afford healthy food,

exercise, or health care.

Another finding from this study is that debt is a

stressor for almost all of the low-income households

surveyed, as 91% of respondents stated that their

debt causes them stress. Further, 53% of respondents

reported feeling acute stress levels related to theirdebt and finances. During an interview with Donna,

a single mother seeking employment, she shared

her struggles with financial stress, I had to get help

from my doctor because one time I didnt sleep for

three days my mind was so all over the place What

am I going to do? How am I going to take care of

my family? How am I going to take care of my bills?

I just want to live comfortable. I just want to be

able to afford me.Such intense stress can result in

decreasing physical and emotional health, which may

ultimately present a barrier to employment and the

pursuit of other economic mobility goals.

4 Underinsurance is defined as having high out-of-pocket health carecosts while being covered by health insurance all year.

Costly healthissues cancontribute todebt, and debtcan impact

ones health andwell-being.



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4. STUDENT LOANS

[T]hey just had me signing all

I didnt even know what I wassigning. I didnt know the differencebetween a loan and a grant. Thepeople at the [for-profit] school,they really were like sneaky usedcar sales people. Thats what itwas. Now that I think back, Im like,Wow, they really, really reeled mein on this one. Nancy, 45

Reeled in is how Nancy, the interviewee quotedabove, recalled her experience financing her

education for an associates degree at a Boston area

for-profit college. Another interviewee, Martin,

an immigrant who had also attended a for-profit

college, shared how he similarly felt deceived

in the student loan process, I had no idea and I

think [the for-profit college] took advantage of my

nationality because I was just new to the system

and that got me, now I owe more than $35,000.

Many consider post-secondary education a wise

investment given the increased earnings that come

with higher levels of education (Pew Research Center

2014). While the desired return on this investmentis an increase in income and employer sponsored

benefits, too often the reality that many students

face is seemingly insurmountable student loan debt.

27% of respondents5 in the survey conducted by

CWU indicated that educational expenses were a

contributing factor toward their debt.

While educational debt is a growing concern

for students from all socio-economic strata, for

economically disadvantaged students with limited

resources, the negative consequences of such debt

are greater, as their debt is proportionally larger.

One study found that the average student loan

debt carried by households in the bottom fif th of

the income distribution represented 24% of their

household income, whereas for households in the

60th to 80th income percentiles, student debt

only represented 7% of their household income

(Fry 2012) . Further, a 2013 study found that 14% of

students from low-income families had debts that

exceeded $30,500, whereas only 9% of students from

families with incomes over $100,000 graduated with

similar levels of debt (Hiltonsmith 2013).

For-profit schools are particularly guilty of fuelingthis debt epidemic. Consider the average annual

loans taken out by student parents at for-profit

colleges are more than ten times greater than those

taken by student parents at community colleges

(Institute for Womens Policy Research 2012). Jada,

a 29 year-old mother of a young son, recalled her

experience of feeling pressured by financial aid

staff at a for-profit school, saying, Nothing was

explained. It was all fine print. And its like, This is the

only way you can go to school, so sign it.Thats how

I felt. Jadas experience is not unique. Prospective

students, unfamiliar with the financing system for

post-secondary education, may accrue unreasonableamounts of debt.

The experiences shared throughout the interviews

illustrate the complicated aspects of student loan

debt. Some students expressed they were unaware

of the full amount they were obligated to repay.

Some students felt deceived in the loan process. And

some students found themselves financially crushed

by the principal and accumulating interest and fees

- unable to keep up with payments. When asked

what advice she would have for prospective students

considering taking out a loan to finance a college

degree, one interviewee, Nancy, shared, Before youdo [go to college] research and get information, and

dont just sign up with just anybody. Honestly, for

every commercial you see about, Go back to school!

Go to this school! there should be another commercial

right after it saying, You know what? Before you

sign up with this school, why dont you check in with

this organization thats going to tell you whether it s

a good choice or not.6Nancys advice, to counter

advertising with a public service campaign or

information on where to get financial guidance, could

help develop a more informed consumer society.

Education is one key to attaining economic self-

sufficiency, and debt prevents prospective students

from pursuing or completing higher education. If

students federally-sponsored loans go into default,

they are unable to access additional federally

sponsored student loans until their outstanding loans

6 CWU, the Federal Reserve Bank, and the Massachusetts Office ofConsumer Affairs and Business Regulation have partnered to produceHigher Education in Massachusetts: Smart Choices, Great Futures, aninformative brochure that helps students make more knowledgeabledecisions about post-secondary education. For more information andto access the brochure, visit www.liveworkthrive.org

While thedesiredreturn on thisinvestmentis an increase

in incomeand employersponsoredbenefits, toooften the realitythat manystudents faceis seeminglyinsurmountable

student loandebt.

5 Since not al l survey respondents attended post-secondary school,we suspect this percentage underrepresents the impact of studentloan debt for students and graduates.

From Opportunity to Burden: Profiles of Low-Income Households Caught in the Credit Trap 9


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of respondentsindicated that theirability to pursueschool is impactedby debt.

21%

Promising Practice:Financial Coaching

When survey respondents were asked whichservices and programs they would recommend

to others to address a similar debt situation, the

most recommended - at 63% - was the practice

of individual one-on-one counseling. Individual

counseling, as opposed to a group workshop or

educational material, can specifically address the

unique circumstances of an individuals often

complex debt situation.

Financial coaching can be found through

a variety of nonprofit organizations in

Massachusetts below are a few examples:

The Midas Collaboratives Financial Confidence

and Coaching Campaign accessed through

MassSaves.org.

A growing network of United Way Financial

Stability Centers, several in collaboration with

LISC, are found throughout Greater Boston

communities, including Chelsea CONNECT,

Lawrence Community Works, and through

Lynn Housing Authority and Neighborhood

Development.

Crittenton Womens Unions Mobility

Mentoring Programs serving Greater Boston

and Worcester communities.

Jewish Vocational Service and the Asian

American Civic Association, both located

in Boston, integrate financial coaching into

workforce development programs.

are in good standing. For most low-income students,

attending even the most inexpensive college

without financial aid is impossible. This experience

is described by Julie, who recalled her effort to finish

a degree at a community college, When I went to

sign up for school, thats when they said, You owe us

money. You cant get financial aid because you have

an outstanding student loan.Alternatively, students

might try to obtain loans from private lenders,

but often poor credit caused by their prior default

causes the loans to be denied. In addition, after

negative experiences with prior educational loans,

many prospective students are now wary of loans

altogether. Another interviewee, Donna, expressed

how her prior negative experience with student loans

has become a barrier for her today, saying, Yeah, Iwanted to [go back to school] , but I cant because I

dont trust getting loans again. Its like it traumatized

me, it scared meWhen debt or negative

experiences with student loans become an obstacle

in the pursuit of higher education, opportunities to

access or advance in the labor market are restricted.

When debtor negativeexperienceswith studentloans become

an obstaclein the pursuitof highereducation,opportunitiesto access oradvance in thelabor market arerestricted.


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IV. Additional Obstacles

While carrying large amounts of debt is financially

burdensome, the results of this study reveal

additional concerns related to debt and credit that

negatively impact peoples ability to move forward.

Three of the most significant issues are: errors on

credit reports, identity theft, and debt collection

practices.

1.ERRORS ON CREDIT REPORTS

CWUs survey found that 39% of respondents had

seen a copy of their credit report within the last

year, which is comparable to the state average of38% (Financial Industry Regulatory Authority 2012).

Of this group, 28% reported that their credit report

contained incorrect information. One respondent

explained, A loan that was paid off [showed up].

Another shared that, [The report showed that I

was] late on two accounts, but I was never late.

Similarly, a Federal Trade Commission study of the

American public found that 21% of people had at

least one confirmed error that could potentially

affect the credit score on at least one of their credit

reports (2012). If someone reports an error to a

credit reporting agency, the agency is required to

investigate it within 30 days and correct it if it isfound to be inaccurate or unverifiable. However, if a

person has not seen their credit report, or is unaware

of their rights or the process, errors remaining on

credit reports can result in denied loans or being

required to pay higher interest than their accurate

credit score would dictate.

2. IDENTITY THEFT

Someone opened an accountunder my name ... and overdrew,- Martin, 55Similar to Martins experience (above), 15% of survey

respondents indicated that someone else opened a

line of credit in their name without their knowledge

or permission. False debt and its potential negative

consequences can wreak financial havoc. Debt

collectors will pursue payment on fraudulent

accounts, and incorrect information can linger on

credit reports impacting ones ability to obtain

competitive interest rates on loans or accessing

financial products.

3. DEBT COLLECTION PRACTICES

They call me everywhere. They callmy cell phone 24 hours a day, onSunday, it doesnt matter The samenumber [calls] 4,5,6 times a day. Idont answer my phone. If I dontknow whose number is calling me, Idont answer the phone, Julie, 53

Massachusetts already has in place an array of laws

designed to protect consumers from harassment by

debt collection agencies (Massachusetts Attorney

General Regulations 940 CMR 7.00). Yet, the majority

of respondents who had been contacted by a debt

collection agency or bill collector reported feeling

harassed, intimidated, and pressured. The graph above

illustrates the frequency of various negative experiences

survey respondents encountered with debt collection

agencies.

Despite existing laws, people still experience

intimidating debt collection practices, as Jada described,

[Dealing with collection companies] was one of my

most traumatic experiences because the person who

was calling was saying, What kind of person are you?

and just saying mean, mean things to me. I remember

crying. This intimidation and harassment pressuredJada to provide her debt collectors access to withdraw

funds directly from her bank account with negative

consequences as Jada explains, They [bill collectors] said

theyll go in my bank account so I dont have nothing;

they will empty it out. I even tried to work out a payment

plan with them and I gave them access, being so scared,

access to my account, to take out money monthly, and

they took out more money than what I told them. So

I had to fight with them through my bank. In Jadas

situation, the existing laws did not prevent harassment.

Characterization of Debt Collection PracticesAlways or Most of the time

High Pressure

Intimidation

Harassing

53%

40%

51%


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V. Policy

Recommmendations

Given the acute and pervasive negative

consequences of consumer debt among low-

income individuals, we urge multiple policy

changes to counteract the negative financial spiral

that consumer debt creates. The following policy

recommendations are designed to encourage a more

equitable system for dealing with consumer debt,

especially for low-income families.

CWU and its partners offer the following

recommendations to help Massachusetts

adults combat the negative effects of consumer

debt:

1. SUPPORT LEGISLATION TO LIMIT THE USE

OF EMPLOYMENT CREDIT CHECKS FOR HIRING

PURPOSES

As of 2013, 10 states have passed legislation limiting

employers ability to use credit history as a criterion

for employment; a practice which places undue

hardship on low-income job seekers yet which

is not a proven indicator for future job success.

Massachusetts Senator Barrett filed a bill limiting this

practice but it did not pass during the last legislative

session.

We support the filing of a new bill to limit the use of

employment credit checks for hiring in January 2015.

We believe the state should be required to inform

employers that the practice is illegal and that it is

not a valid predictor of job performance.

2. SUPPORT LEGISLATION TO PROTECT

CONSUMERS FROM CREDIT, COLLECTION, AND

DEBT SETTLEMENT INDUSTRY ABUSES

While Massachusetts consumers benefit from some

of the strongest consumer financial protection

measures in the country, many individuals still

face hardships ranging from harassment by debt

collectors to being brought to court for erroneous

amounts of debt or debt that is no longer actionable.

Sometimes the organizations that individuals go to

for help with their debt make their problems worse

by deploying risky strategies that backfire and

increase rather than decrease debt.

We encourage support for legislation that will

be filed in 2015 to protect consumers from the

most common abuses in the credit and collections

industries, restoring balance to an increasingly

lopsided system of justice. The bill will:

Ensure that consumers receive basic protections

from creditors who pursue legal action.

Modernize protections related to shielding personal

and residential property- including personal income

for low-income individuals- from debt collectors,

allowing families a chance to get back on their feet

after a period of financial hardship.

Protect consumers from unscrupulous practices of

for-profit debt settlement/management companies

3. SUPPORT LEGISLATION TO LIMIT HEALTH

CARE DEBT

In a state where 95% of the population is insured and

which led the nation in requiring health coverage, it

is surprising to learn how many families are burdened

by health care debt particularly from co-payments

and deductibles. Two bills that were filed in the last

legislative session would not only help limit this kind

of debt but would also lead to improved health care

access and outcomes for low-income patients.

We support the filing of a new bill that would

eliminate cost-sharing (like co-pays and deductibles)

for high-value and cost-effective medical services,

treatments and prescription drugs under all health

plans.

We also support the refiling of Representative

Sanchezs bill that would prevent hospitals from

setting higher charges for uninsured versus insured

patients, provide greater consumer protection to

low-income patients, and offer more transparency

about services offered that are not in-network

and thus cost more.


Given the acuteand pervasivenegativeconsequencesof consumer

debt amonglow-incomeindividuals, weurge multiplepolicy changesto counteractthe negativefinancial spiralthat consumer

debt creates.


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VI. Resource Section

American Consumer Credit CounselingProvides credit, bankruptcy, and housing counseling,

as well as debt management and financial education

information.

Visit: http://www.consumercredit.com

American Student Assistance

National, Boston-based nonprofit that provides

education about student loans, information about

repayment strategies, and general support for

consumers with student loans.

Visit: http://www.asa.org

Attorney General Martha Coakleys Guide to

Consumer Credit (2010)

Summarizes Massachusetts laws concerning

consumer credit, lending, billing, credit reports and

debt collection.

Visit: http://www.mass.gov/ago/docs/consumer/

consumer-credit-050510.pdf

Beyond Financial Aid: 2010 Guide to Extra Help for

Low-Income Adult Students

This is a CWU publication done in collaboration

with the Massachusetts Law Reform. It provides a

comprehensive review of family supports that may

be available to students attending college or in

vocational training programs.

Visit: http://www.liveworkthrive.org

The Boston Home Centers CreditSmart Class

Provides free six-hour course to learn everything you

need to know about establishing and maintaining a

record of good credit, and how to avoid credit traps.Call the Boston Home Center: 617-635-4663

Visit: http://www.cityofboston.gov/dnd/bhc/

credit_smart.asp

The Consumer Financial Protection BureauA good place to find information, file a complaint,

or tell your story about mortgages, school loans,

or other financial products. They aim to make the

financial marketplace safer for consumers so we

dont suffer another economic meltdown, and their

site is easy to use in English or Spanish.

Visit: http://www.consumerfinance.gov

Federal Reserve Consumer Help

Provides information about how to file a complaint

with federal regulators about a bank or collectionagency that has violated federal law.

Visit: www.federalreserveconsumerhelp.gov

Health Care For All

Runs a free hotline to connect Massachusetts

residents with insurance and answer questions about

health insurance.

Visit: https://www.hcfama.org

Identity Theft Resource Center

Provides free assistance to identity theft victims and

educates consumers about identity theft detection,

reduction and mitigation.

Visit: http://www.idtheftcenter.org/index.php

Mass Saves Financial Coaching Program

A general resource for financial education, including

free personal training. The hotline provided on the

MassSaves website is an excellent starting point

for anyone looking to gain control of their financial

health.

Visit: www.MassSaves.org



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VII. References

An Act Regulating the Use of Credit Reports by Employer. 2013. Bill S.80. 188th General Court of the

Commonwealth of Massachusetts.

An Act Relative to the Licensing and Supervision of Debt Management Services. 2013. Bill H.3569. 188th

General Court of the Commonwealth of Massachusetts.

Anderson, Norman B., Cynthia D. Belar, Steven J. Breckler, Katherine C. Nordal, David W. Ballard, Lyn F. Bufka,

Luana Bossolo et al. 2013. Stress in America: Missing the Health Care Connection.Washington, DC: American

Psychological Association.

Better Business Bureau. 2010. Complaints to BBB Against Debt Settlement Companies On the Rise. April 29.

http://www.bbb.org/us/article/complaints-to-bbb-against-debt-settlement-companies-on-the-rise-19186.

Bureau of Labor Statistics. 2014. Earnings and Unemployment Rates by Educational Attainment. Available

online at http://www.bls.gov/emp/ep_table_001.htm.

Burhouse, Susan and Yazmin Osaki. 2012. National Survey of Banked and Underbanked Households.

Washington, DC: Federal Deposit Insurance Corporation.

Consumer Financial Protection Bureau. 2013. Payday Loans and Deposit Advance Products.Washington, DC:

Consumer Financial Protection Bureau.

Corporation for Enterprise Development. 2014. Assets and Opportunities Scorecard: Massachusetts.

Washington, DC: Corporation for Enterprise Development.

Dennett, Julia and Alicia Sasser Modestino. 2011. The Middle-Skills Gap: Ensuring an Adequate Supply of

Skilled Labor in Northern and Southern New England. Boston: New England Public Policy Center at theFederal Reserve Bank of Boston.

Financial Industry Regulatory Authority. 2012. U.S. Financial Capability Study Massachusetts. Washington,

DC: Financial Industry Regulatory Authority, Investor Education Foundation.

Fry, Richard. 2012.A Record One-in-Five Households Now Owe Student Loan Debt. Washington, DC: Pew

Research Center.

Hiltonsmith, Robert. 2013.At What Cost? How Student Debt Reduces Lifetime Wealth. New York: Demos.

Hobbs, Robert J., and Chi Chi Wu. 2013. Model Family Protection Act. Boston, MA: National Consumer

Law Center.

Institute for Womens Policy Research. 2012. Single Student Parents Face Financial Difficulties, Debt, Without

Adequate Aid. IWPR#C394 Fact Sheet, April 2012.

Javelin Strategy & Research. 2012. 2012 Child Identity Fraud Survey.Washington, DC: Identity Theft Assistance

Center.

Langton, Lynn. 2010. Identity Theft Reported by Households, 2005 2010. Washington, DC: U.S. Department

of Justice, Office of Justice Programs.



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Leibowitz, Jon, J. Thomas Rosch, Edith Ramirez, Julie Brill, and Maureen Ohlhausen. 2012. Report to Congress

Under Section 319 of the Fair and Accurate Credit Transactions Act of 2003.Washington, DC: Federal Trade

Commission.

Massachusetts Attorney General Regulations. 940 CMR 7.00. Debt Collection Regulations.

Mishel, Lawrence and Heidi Shierholz. 2013. A Decade of Flat Wages: The Key Barrier to Shared Prosperity and

a Rising Middle Class. Washington, DC: Economic Policy Institute.

Morton, Heather. 2013. Use of Credit Information in Employment 2013 Legislation. Denver: National

Conference of State Legislatures.

New England Public Policy Center. 2014. New England Economic Indicators. Boston: Federal Reserve Bank

of Boston.

Palmer, Jerry K. and Laura L . Koppes. 2003. Further Investigation of Credit History as a Predictor of Employee

Turnover. Presentation to the American Psychological Society, 2003.

Pew Research Center. 2014. The Rising Cost of Not Going to College.Washington, DC: Pew Research Center.

Pew Safe Small-Dollar Loans Research Project. 2012. State Payday Loan Regulations and Usage Rates.

Washington, DC: The Pew Charitable Trusts.

Silver-Greenberg, Jessica. 2013. Over a Million Are Denied Bank Accounts for Past Errors. The New York Times,

July 31.

Society for Human Resource Management. 2012. Background Checking the Use of Credit Background Check

in Hiring Decisions. Available online at http://www.shrm.org/research.

Traub, Amy and Catherine Ruetschlin. 2012. The Plastic Safety Net: Findings from the 2012 National Survey onCredit Card Debt of Low- and Middle- Income Households.New York: Demos.

Traub, Amy. 2013. Discredited: How Employment Credit Checks Keep Qualified Workers Out of a Job. New York:

Demos.

Urban Institute. 2014. Health Insurance Coverage and Health Care Access, Use, and Affordability in

Massachusetts: An Update as of Fall 2012. Boston: Blue Cross Blue Shield Foundation of Massachusetts.

U.S. Census Bureau. 2014. State and County QuickFacts.

Wu, Chi Chi. 2010. Testimony before U.S. House Committee on Financial Services Subcommittee on Financial

Institutions and Consumer Credit. Use of Credit Information beyond Lending: Issues and Reform Proposals.

111th Cong., 2nd sess., May 12. Boston: National Consumer Law Center.



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Crittenton Womens Union

One Washington Mall

Boston, MA 02108

Tel: 617.259.2900

www.liveworkthrive.org

report: the credit trap

Documents