What We're Reading
January 31, 2018
You need a new pair of jeans. How would you pay for it? Many people might say credit card. But what if you didn’t have access to a credit card—what would your strategy be? Would you consider an installment loan?
According to “Would You Take out a Loan for a Pair of Jeans?” by Susie Cagle for the online magazine Racked, installment loans for small-scale purchase are becoming an increasingly popular form of payment. The article examines one company in particular, called Affirm.
The installment loans are presented as a payment option at the point of checkout. If a customer chooses this option, Affirm does a quick credit check. Once approved, the customer is quoted a new price for the product, with interest included. The price is then broken down into a number of equal monthly payments, which can make the product seem cheaper than it actually is.
To illustrate this, the article uses an example of a pair of jeans. An installment loan allows the customer the option to pay off the jeans in monthly installments of $19, which may appear reasonable. However, this option ultimately costs the customer more, as the customer ends up paying $217 for the pair of jeans, when they would have paid $200 had they used cash or a credit or debit card.
Why would vendors offer installment loans as an option for their customers? Per the article, installment loans can increase the amount of sales by 28% on average. It can make purchases seem more manageable to the customer, because the customer doesn’t have to pay the full amount upfront, or even see the full amount of the charge on the credit card. Plus, the credit requirements for an installment loan are less stringent than for a traditional credit card, which means that more people are approved. However, the APR for an installment loan is much higher than for a credit card—the median APR for an installment loan is 19%, which is higher than the median credit card rate.
While these products are less expensive than subprime payday loans that charge interest of over 300%, these products are still designed to make purchases seem cheaper than they actually are. It’s amazing (and frightening!) how financial products are constantly evolving. Sometimes the products that seem easier and cheaper end up costing us much more.
November 07, 2017
What do a casino dealer, a street vendor, a freelance graphic designer, and a tax preparer all have in common? Workers in these industries—and many others—all see significant fluctuations in their incomes from week to week and month to month, making budgeting and planning difficult. Many teachers who receive paychecks for only nine months of the year have a similar issue.
Now imagine participating in a study where you are asked to track your income and spending over a year. The Financial Diaries documented the financial lives of 235 middle- and low-income families over the course of a year to learn how they managed their daily financial lives. From their research, the authors found that though many families appear to be middle class on paper, they experience significant variations in income and expenses over the course of the year, contributing to financial volatility and hardship.
The nature of work is changing as a result of the automation of manufacturing jobs and an increase in service industry and independent contractor work. This has resulted in a shift in power—employers now have more control over who they hire, what benefits they offer, and what hours people work. This has created a less stable job market with shifting hours and pay, leading to income volatility for workers.
Throughout the book the authors explore common issues around earning, spending, smoothing and spiking, saving, borrowing, and sharing through the stories of various families. These stories contradict much of what is presented to youth today. Current financial literacy education and financial advice is derived from the traditional financial life cycle where it is expected that your financial situation follows a set pathway (a part-time job becomes full-time work with promotions and raises following; renting becomes homeownership; single becomes married, becomes married with children, etc.).
According to his traditional lifecycle model, people can achieve financial security by saving early for major expenses. It rests on the assumption that as income rises people will be able to pay down mortgages and save for retirement with the expectation that those committed to this method will overcome financial challenges.
The Financial Diaries shows that for many Americans, this just isn’t the case. Instability and uncertainty in the present and near term compromise long term financial plans and goals. Given these changes, our methods of managing our income and expenses needs to evolve. As developers and teachers of a financial literacy curriculum, the research presented in this book indicates that the way we address earning, spending, saving, borrowing, and sharing needs to evolve as well.
Late Summer 2017
August 23, 2017
According to the “American Dream”, anyone can become successful through hard work and talent, regardless of upbringing. However, in his book Dream Hoarders, economist and Brookings Institute scholar Richard V. Reeves illustrates how this dream is becoming less and less attainable for everyone except the upper middle class. Reeves deliberately focuses on the upper middle class over the more commonly examined top one percent, pointing out that the habits and impacts of the upper middle class are often overlooked. Reeves defines the upper middle class as those whose household incomes are $120,000 or greater, placing them in the top 20% of earners in the United States.
Reeves argues that upper middle class parents construct a “glass floor” for their children, one that rests on unfair or anti-competitive advantages. The glass floor allows the parents to maintain their children’s position in the upper middle class into adulthood, which, by default, keeps children from less privileged backgrounds from moving up the socio-economic ladder. In other words, the upper middle class are “hoarding” opportunities for their children.
Reeves details how unfair mechanisms such as zoning ordinances, college admissions practices, and the awarding of internships provide ways for the upper middle class to hoard opportunities. For example, families in the upper 20% of earners tend to live in affluent communities with excellent schools. These communities are frequently zoned to prohibit “high-density” housing - such as apartment buildings - from being constructed, effectively barring lower-income families from living in these communities and restricting access to top-performing public schools. Similarly, legacy admissions, in which an alumni’s child is given preferential treatment in being accepted to the school, are common practice in the United States, especially at the Ivy League colleges. Internships are also often granted based on a parent’s phone call to a well-placed friend or colleague.
All of these practices deny less-privileged, but equally or more deserving young people access to opportunities that can foster greater educational achievement, career opportunities, and incomes. Reeves, a father of three, clarifies the difference between being an involved parent and being an opportunity hoarder with the example of a child who wants to be a pitcher on a little league team. An involved parent plays catch every day after work; the opportunity-hoarding parent tries to bribe the coach.
In his conclusion, Reeves calls for changes in policies - such as zoning laws and tax advantages - that grant unfair access to opportunity to the upper middle class and deny it to the remaining 80% of the population. More strikingly, however, he also calls for introspection on the part of the upper middle class and a willingness to sacrifice some of their advantages in the interest of making the playing field more equal.
May 12, 2017
When we think of predatory financial products, we typically think of payday loans, currency exchanges, and the like. Rarely do we think of student loans as a predatory product.
A recent (and chilling!) article in the New York Times has helped expose the predatory practices of multi-billion-dollar student loan servicer Navient Solutions, a spinoff of Sallie Mae. It has also got us thinking about the importance and challenges of financial literacy – how do we equip students with the information and skills they need to navigate a financial marketplace that is constantly seeking to entrap them?
In "Loans ‘Designed to Fail’: States Say Navient Preyed on Students," NYT journalists Stacy Cowley and Jessica Silver-Greenberg describe how Navient has made a business practice of extending subprime private student loans in the expectation that students would default. The company intentionally targeted students such as those with poor credit scores, who would likely have had trouble qualifying for other student loans.
For Navient there was a method to the madness. By partnering with for-profit colleges to offer these predatory loan products to students, both the schools and Navient were able to benefit at student expense. By pushing the predatory loans to their students, schools were able to meet Department of Education requirements calling for at least 10% percent of a school’s tuition payments to come from non-federal funding. In exchange for helping schools meet the 10 percent threshold, the schools then allowed Navient to service the federal loans received by their students. As Cowley and Silver-Greenberg explain, the real objective for Navient lay in servicing the federally backed loans which were guaranteed against default. Knowing full well that students were likely to default on the expensive, difficult-to-repay private loans, Navient treated the defaults as a “marketing cost” to gain access to the federally backed student loans.
While Navient could essentially “write-off” the defaults of the private loans as a business expense, tens if not hundreds of thousands of affected students have not been so lucky. They complain of being hounded by lenders and/or debt collectors for repayment, unable under current regulations to file for bankruptcy or have their loans forgiven.
Attorneys general in Illinois and Washington are now suing Sallie Mae for engaging in predatory lending practices. We are following the case closely as we develop the new curriculum. With the marketplace constantly innovating and evolving to offer increasingly predatory new products, the question for us is how we can best empower our students to make smart decisions about their financial futures.
April 17, 2017
Will you go to college? Will you pick a life partner, and if so, who will it be? Are you going to buy a house? How will you care for your health? Will you have children?
These are some of life’s biggest decisions.
We had a chance recently to sit down with Robert Michael and talk about his book, The Five Life Decisions: How Economic Principles and 18 Million Millennials Can Guide Your Thinking. Michael clearly presents the idea that choices matter and that people have more control over their decisions than they might think. An economist at the University of Chicago and former director of the National Opinion Research Center (NORC; one of the largest independent social research organizations in the United States), Michael bases his argument on data from the National Longitudinal Survey of Youth, a sample of 18 million millennials in the United States, tracking more than a decade of young-adult choices and their consequences.
In a book geared toward the younger generation, Michael shows how the pool of decisions made by people born between 1980 and 1984 and their outcomes can help the rest of us be more aware of the variety of paths that lie before us. In this way, Michael offers readers insight into how their own choices may turn out.
Grouped around the five critical decisions most people face – concerning college, career, health, coupling, and children – Michael reveals how using basic economic principles can help people make more reasonable decisions. While there is no formula for making the right choice, Michael aptly guides his readers through the trade-offs associated with making decisions in each of these important life dimensions.
For many high school students struggling with the decision about whether to go to college, Michael offers some intriguing information. Drawing on a dataset on the level of schooling attained by the young people’s fathers, he shows that of those with fathers who did not earn a high school diploma, only 7% graduated from college. Of those whose fathers obtained a bachelor or advanced degree, 54% graduated from college. While the data show that children whose fathers had more schooling received more education themselves, it didn’t always result in them to going to college. Other factors may play a role.
Nevertheless, from the 7% of kids whose fathers didn’t graduate from high school who ended up going to college we know that it is possible to move the dial and choose another path. On the other hand, from the 46% of kids with fathers who went to college but did not end up going themselves, it’s clear that things can also go in the opposite direction. As Michael says, “People have a choice – it’s not predetermined. What you do and what you choose matters – and matters a lot, whatever your father’s schooling level.”
So what will your choices be? In what ways can you move the dial forward? How will you decide what to do when faced with these five life decisions?
March 08, 2017
Brainstorm, the new book by Dan Siegel, challenges three widespread myths:
- Hormones make teenagers crazy;
- Adolescence is a time of immaturity;
- Growing up means moving from complete dependence on adults to complete independence from adult care.
Surprisingly, Siegel says, the source of teen behavior is not hormones. Rather, what most affects young adult decisions and actions is the changing teenage brain. And in fact, in any number of today’s workplaces, certain features of adolescence are especially prized. Novelty seeking, social engagement, passionate intensity, creative adventurousness – all of these behavioral traits are key features of being a teenager. Even simple boundary testing involves creative and innovative thinking.
And it is just these qualities that are most highly coveted in STEM careers! Siegel writes, “Adolescence is the golden age for innovation because it is during this time of growth and change that the brain’s development shifts in the reward center and in the cortex to encourage creative thought and drive adolescents to explore the world in new ways.”
A healthy shift toward adulthood involves moving toward interdependence. Friends become more important during this period than ever before, as teenagers’ relationships with their guardians change. Siegel suggests this is due to the shift from being entirely dependent to being dependent on guardians and other adults in some ways, even while beginning to give more care and assistance to friends.
We found in Brainstorm not only an interesting perspective on teenage development, but a hands-on guide to improve communication, while enhancing social and emotional intelligence.
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What We're Reading
Loans ‘Designed to Fail’: States Say Navient Preyed on Students
By Stacy Cowley and
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