Financial Advice for Low-Income Mothers

Lately I'm sure it's dawned on those of us who have retirement accounts that these are products that have been sold to us. In fact, they're not for everybody. An economist, offering volunteer financial advice at a women's shelter, has a counterintuitive perspective on spending priorities. Some of these principles would make sense for middle-class families as well.

First, though, I was impressed by the fact that she did not presume to make the choices for her clients or even to volunteer for the purpose of "helping".

I said I volunteered because I thought that learning about how these women respond to their extreme financial constraints would be interesting. Everyone else said they thought their experiences would be helpful (most were lawyers or in human resources). I realised I was the only one who did not say I was there to help homeless women. I wondered if that made me a bad person. But (and I may be rationalising here) I found something presumptuous about the idea I could swoop in from my comfortable life and sort out these women’s financial woes. I might know about economics and finance, but I know nothing of what it’s like to be a homeless single mother. I genuinely hope to help these women, but expecting that I can feels naive.

While the lead volunteer stated that cell phones were a luxury, the mothers disagreed for reasons of safety and the need for contact with day care. Instead, the economist suggested using pre-paid plans which are much cheaper than the standard contract plans. There was a lot to unravel with these clients. A young pregnant woman she was helping was maxing out credit cards instead of going on welfare, a recipe for ruin.

IRAs and education funds for college have been marketed to the poor as well which only exacerbate their financial burdens. Her advice to parents on schooling is particularly interesting, which is to put their resources into education while the children are young and to rely on state aid later.

The poor have different saving needs from the rest of us. They do not need to save much (if at all) for retirement because the state provides them with a generous pension relative to their lifetime income. They also have less incentive to save for their children’s education. American universities practice nearly perfect price discrimination: having few assets entitles poor students to more financial aid. Resources are better spent on education while a child is young, ensuring he’s well prepared for university in the future. The women at the shelter have low or no income and children to support. Saving might be a better idea in the future, when they have some income and are less dependent on state benefits.

Debt

In my post yesterday, which was what I like to call comprehensive (i.e., long), I wrote the following:

"Over eight disastrous years it has become all too clear that [the current Administration and many members of Congress] could care less about workers and average homeowners. In their view we are but consumers, programmed to mistake what we want for what we need, the result of which confusion only serves to put more and more money into the pockets of the wealthiest of the wealthy, thus increasing the gap between those who have and those who have not. No longer does anyone worry about savings rates, about putting and keeping our economy on a solid footing, an endeavor in which we all share responsibility. Of course, we bear no small of amount responsibility for this state of affairs. No one can take away our freedom. Hence, we bear responsibility."

Today, I received a Loose Change calendar at work. The quote for December 2009 is by a man named Earl Wilson, who I had never heard of before looking at this calendar. Mr. Wilson writes,
"Today, there are three kinds of people: the have's, the have not's, and the have-not-paid-for-what-they- have's." While I may never have heard of him before today, Mr. Wilson is correct. Too many of us being the last kind of people is what got us into our current economic mess. So, it is a judgment of reason that more of the same kind of consumerism is not going to get us out of it, let alone put us on solid footing either individually or collectively.

The Seizing of the Markets

"At a cardiac arrest, the first procedure is to take your own pulse."
--Samuel Shem, House of God

It's been a wild week plus in Washington and on Wall Street. The level of panic is the highest since 9/11, especially if you watch certain cable finance channels.

What happened? It depends on who you ask. Wall Street greed (when wasn't it about profit?). Deregulation and dangerous innovations in financial instruments. The Democrats with their low-income home loans. Or all of the above. Is the production of fear itself part of the formula? For whatever reason, here we are in a major financial panic.

It seems likely that even after the first failed vote in the House for Paulson's $700B bailout plan, with some modifications, that basic plan will be pushed through Congress. The libertarian models are not palatable to most, and public anger is subsiding as fear and resignation take its place. How much is $700B? For comparison, we have spent $648B to date on the Iraq war.

The free market ideology itself may be the biggest culprit in this disaster, because it places market efficiency over human factors, whether of realism in lending or of responsibility in handling financial instruments which at their worst threaten the entire global web of economic relationships.

The president of the Pontifical Council for Justice and Peace Cardinal Renato Martino stated: "The economic crisis, which is manifested throughout the world, perhaps is a sign that the world is not made up only of bills, money and the economy. […] [The crisis] serves as a reminder that the human person must be put at the center of the whole of world."

The U.S. Bishops also addressed a letter to Secretary Paulson and the Congress offering not technical solutions but moral principles centered on the person in approaching the economy:

• Human and Moral Dimensions: This crisis involves far more than just economic or technical matters, but has enormous human impact and clear ethical dimensions which should be at the center of debate and decisions on how to move forward. Families are losing their homes. Retirement savings are at risk. People are losing jobs and benefits. Economic arrangements, structures and remedies should have as a fundamental purpose safeguarding human life and dignity. The scandalous search for excessive economic rewards even to the point of dangerous speculation that exacerbates the pain and losses of the more vulnerable are egregious examples of an economic ethic that places economic gain above all other values. This ignores the impact of economic decisions on the lives of real people as well as the ethical dimension of the choices we make and the moral responsibility we have for their effect on people.
  
• Responsibility and Accountability: Clearly, effective measures are required which address and alter the behaviors, practices and misjudgments that led to this crisis. Sadly, greed, speculation, exploitation of vulnerable people and dishonest practices helped to bring about this serious situation. Many blameless and vulnerable people have been and will be harmed. Those who directly contributed to this crisis or profited from it should not be rewarded or escape accountability for the harm they have done. Any response of government ought to seek greater responsibility, accountability and transparency in both economic and public life.
  
• Advantages and Limitations of the Market: Pope John Paul II pointed out that "the free market is the most efficient instrument for utilizing resources and effectively responding to needs. But there are many human needs which find no place on the market. It is a strict duty of justice and truth not to allow fundamental human needs to remain unsatisfied." Both public and private institutions have failed in responding to fundamental human needs. A new sense of responsibility on the part of all should include a renewal of instruments of monitoring and correction within economic institutions and the financial industry as well as effective public regulation and protection to the extent this may be clearly necessary.
  
• Solidarity and the Common Good: The principle of solidarity reminds us that we are in this together and warns us that concern for narrow interests alone can make things worse. The principle of solidarity commits us to the pursuit of the common good, not the search for partisan gain or economic advantage. Protection of the vulnerable "workers, business owners, homeowners, renters, and stockholders" must be included in the commitment to protect economic institutions. As Church leaders we ask that you give proper priority to the poor and the most vulnerable.
  
• Subsidiarity: Subsidiarity places a responsibility on the private actors and institutions to accept their own obligations. If they do not do so, then the larger entities, including the government, will have to step in to do what private institutions will have failed to do.

The Financial Risks of College

While the country is focused on home foreclosures and unemployment figures, many young people are entering a financial crisis of their own just as they begin their careers and start their own families. Those who have attended and/or graduated from college are increasingly burdened with debt.

About two-thirds of students borrow money for their education with an average debt load in 2003-4 of $20,000, a figure which has doubled in the last ten years. Some students, especially in the professions, rack up $100,000 or more in student loans. As reported in a New York Times article, Lucia DiPoy, a first-generation Tufts graduate of an immigrant family, has an accumulated debt of $85,000 with monthly payments totaling $900, an obligation which prevented her from volunteering at an overseas refugee camp.

Whereas state colleges once offered an affordable education to residents, tuition rates have increased by 35% over the first five years of the decade thanks to budget cuts. Grants have not tracked the rise in costs, and in some cases aid has decreased. Federal loans have stagnated in availability.

Private loan companies have entered the gap with variable rates as high as 20%, a “Wild West” of lending according to New York State Attorney General Andrew Cuomo. Last year, a scandal emerged linking private loan companies and financial aid executives who received gifts and/or owned shares in the lending company they were promoting. Recently Congress passed regulations to ensure more transparency in college lending though without imposing rate caps.

Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers stated: “When a student signs the paper for these loans, they are basically signing an indenture. We’re indebting these kids for life.”

Contrary to the more sanguine U.S. Department of Education default figure of under 5% tracking only the first two years post-graduation, an in-depth 2006 study by their National Center for Education Statistics department found that 10% of students defaulted on their loans over a ten year period. Minority groups are overrepresented. For students with over $15,000 in debt, the risk of default is around 20%. While federal lenders are more lenient with deferments, private lenders generally do not offer such safeguards.

A law protecting private student loan companies in 2005 makes bankruptcy virtually impossible. On the other hand, once a person goes into default, interest and fees can dramatically increase the total obligation. Alan Collinge, founder of StudentLoanJustice.Org, started with a $38,000 in federal student loans which ballooned to $100,000 in his three years after defaulting.

The presidential candidates are weighing in on the need for college education funding. Barack Obama proposes a $4,000 universal tax credit, which would cover about two-thirds of public college tuition. John McCain prefers to expand the current federal loan and grant programs.

Published at Il Sussidiario.Net