Furthermore, Consumer Reports found through looking into sixteen prepaid cards that they, despite being advertised by banks as credit builders, are actually an expensive and exaggerated option of building credit. Once again check-cashers and money orders, despite the hassle and additional costs they may have, appear to be the better option for low-income individuals.
Banks, despite their image to the contrary, lack the stability that alternative financial services offer to low and moderate income individuals. Payday loans, money-lenders, and check-cashers oddly enough offer a level of stability and trust to low-income individuals that banks simply do not. In addition to undisclosed costs that pile onto banking services, there is a lack of personal service that for the wealthy may not be necessary but for the poor, makes all the difference.
Professor Lisa J. Servon found in her field research working as a teller at a check cashing business in the South Bronx that the personalized and community based service played an important role in the livelihood of those in the community. She noted a particular incident where a woman who cashed a bad check was able to repay the check cashing service in small increments that did not lead to financial ruin.
The check cashing service allowed her leeway in avoiding paying those costs during months where unexpected expenses came up. The strong personal ties alternative financial services have to the people and the communities they serve create a sense of trust and security among low income individuals and communities that use these services.
This is something banks simply do not have. This is yet another reason why people continue to use these alternative financial services instead of banks. With all of this in mind, it is still important to offer low income individuals a viable door into the financial mainstream.
Banks currently offer many services and conveniences that, if implemented and designed to serve the poor, could help low income individuals plan for the future and build financial stability. However, in the status quo, that is simply not the case. Until financial institutions reform their practices and services and offer the transparency, lower costs, and personalized service to low income individuals, alternative financial services will continue to be increasingly popular. These services can be predatory and do not offer opportunities for low and moderate income individuals and households to save money, develop their credit, or create financial stability for themselves, which is something that banks could do if designed to serve these individuals and households better.
Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty, or the University of California, Berkeley in general.
The proliferation of fast-growing microlenders had made it easy for poor men and women to get in over their heads in hundreds of dollars of debt. Not all were wise enough to avoid the trap. These bubbles may be the first in history fed more by charity than by greed. Almost all the large-scale financing for microcredit has come from private donors, socially minded investors, public aid agencies and, in India, private banks complying with legal quotas for lending to the poor and minorities.
Ironically, almost all were motivated by the idea that microcredit was a sure-fire aid to the poor. The zeal for microcredit may have undermined the power of the larger microfinance movement, which involves the creation of financial services, beyond just loans, that are available to the poor.
Financial services are like clean water and electricity — they are essential to leading a better life. Poor people need such services more than anyone, because in developing countries, poverty does not just mean low income, it means volatile income. The poor need to set aside money in times of plenty and draw it out in lean times.
Financial services allow you to save for wedding expenses, borrow for funeral costs or insure for health care. The industry should move away from its long-standing focus on credit, and experience shows that it can. Mature microfinance institutions in Indonesia, Bangladesh and Bolivia are doing at least as much deposit-taking as loan-making — good news for the poor, since it is much harder to get in trouble by saving too much than by borrowing too much.
And in Kenya, the mobile-phone-based money-transfer system M-Pesa now does more transactions then Western Union. But the funding flows into microfinance are, if anything, impeding such initiatives by heavily favoring credit. One wonders when the next bubble will pop. The best approach is not to pour more money into microlending. It is to put less in — and target it for start-up investments and training that can build durable financial institutions that deliver a variety of services to the poor.
This approach would cut the costs of microfinance for donors while increasing the benefits. It might not transform the lives of the poor, but it would improve them.
By Pioneer Press news pioneerpress. More in Opinion. When it comes to for-profit colleges, the story gets even worse. These institutions often target prospective students who are low-income while falsely assuring positive job and economic prospects upon graduating. Many students do end up dropping out, and even those who do graduate do not always receive a quality education that leaves them prepared for success—or with an income that matches up with their monthly loan payments.
Their degrees too often cannot compete in the job market, leaving many of these students jobless. This confluence of factors explains why borrowers who owe the least tend to be lower-income, and are the most likely to fall behind or default on their monthly payments. As the Mapping Student Debt project has found , people with more debt are less likely to default on their loan payments because they have the most access to wealth, whether through family money or financial assets or educational degrees.
The Department of Education estimated that 7 percent of graduate borrowers default, versus 22 percent of those who only borrow for undergraduate studies. Default can actually lead to an increase in student loan debt because of late fees and interest, as well as a major decline in credit, ineligibility for additional student aid, and even wage garnishment at the request of the federal government. Fortunately, there are solutions already in place that can help borrowers get out of default and back on their feet.
And some low-income borrowers might even qualify to pay nothing at all if they fall beneath certain income levels. IDR is especially helpful for borrowers with smaller balances because it reduces the monthly burden while keeping more money in pockets to cover expenses for food, housing, and other basic needs that borrowers must choose between in the face of overwhelming monthly payments.
Fully 51 percent of student loan borrowers nationwide are eligible for these programs but only 15 percent are enrolled. With federal IDR programs, the process of paying back any amount of student debt can be much less draining of an obligation, especially for our most vulnerable citizens.
According to the latest estimates, more than 5 million children in this country have had a parent in prison or jail at some point. In fact, parents represent well over half of the individuals serving time in state and federal prisons. The absence of their parents is just one of the losses these children face—losses that can affect them well beyond childhood. They lose security and stability in every sense of the word, as their remaining parent or other relatives struggle to make ends meet.
And when parents return from prison, their criminal history comes home with them, thwarting their efforts to find a job and safe, affordable housing so they can support their families and fully contribute to their communities. While a much-needed national debate on reforming our criminal justice system continues to unfold, parents serving time and reentering families today require immediate, practical solutions.
State and local policymakers, courts, correctional systems, and community agencies can act right now to enable more parents to succeed as providers for their families and contributors to their communities, giving their children the stability, support, and opportunities they need to thrive.
First, parents need to see and stay connected with their kids during incarceration, a near impossibility when hundreds of miles separate them. State policymakers and judges can make prison-location assignments that allow families to maintain contact as much as possible, and prisons can develop visitation policies and spaces that create environments more suitable for family visits. Second, parents need a steady job that pays well so they can properly support their children upon reentry.
Having a criminal record reduces their odds of landing a good job, or even puts them out of the running entirely. In a new report on parental incarceration, the Annie E. Casey Foundation where I serve as president and CEO recommends various ways that states, communities, and correctional facilities, among others, can connect incarcerated and returning individuals with economic opportunities, including jobs.
Prisons, for example, can offer training programs for jobs in high-demand sectors, such as information technology. And community-based employment and training programs can look beyond the more typical construction or manufacturing jobs and help parents develop the entrepreneurial skills needed to start a small business. About 20 states and hundreds of jurisdictions and businesses—including Georgia, most recently—have moved in this direction; more should follow suit.
Yet parents with a criminal record can encounter landlords and public housing restrictions that can prevent them from moving forward with their families. More state and local jurisdictions should foster family reunification, when appropriate, by requiring landlords to consider the person—including references for good conduct and type of criminal history—rather than discriminating based on his or her record.
Such requirements are already in place in Newark, New Jersey, and Oregon. Their children, families, and neighborhoods bear heavy burdens in their absence—burdens that persist even after they return. They are hobbled not only by restrictive rules, laws and policies relating to their criminal histories, but also by debts that limit their available resources to successfully reenter society.
One of my clients, Mr. Smith, is trying to expunge his conviction for petty theft. He cannot pay this hefty sum because he is unemployed—in part because of his criminal history.
In reviewing his expungement petition, the judge notes the outstanding restitution and costs, and denies the petition. Criminal justice debts are a growing national trend, but the problem is especially acute in Los Angeles. Due to a strained economy, Los Angeles courts are relying on court fees to revitalize their coffers. These fees go towards state funds for court construction and court operations, as well as locally, to salaries, benefits, and public agency retirement contributions for judges.
Though the fees are small in isolation, the accumulated criminal justice debt can total hundreds or even thousands of dollars for a single person, an overwhelming amount for most people reentering society, 90 percent of whom are poor and a disproportionate percentage of whom are people of color. These debts are part and parcel of a system that creates permanent debtors out of people with conviction histories. In California, various clean slate remedies allow for expungement of criminal records, providing individuals a better chance to secure jobs, housing, and benefits.
However, many financially disadvantaged people are unable to take advantage of these remedies because full payment of fines and fees is a prerequisite. This debt therefore has a damaging effect on housing and employment prospects.
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