How are states working to promote asset building among their residents? A recent paper I wrote for The New America Foundation, “An Assets Agenda for the States,” highlights state asset building trends during 2012 in four policy areas: (1) promoting savings; (2) increasing access to the mainstream financial system; (3) consumer protection; and (4) financial education.
Promoting Savings. States are promoting savings in several ways. First and foremost is through the elimination of asset limits in public benefit programs. Currently, six states have removed asset limits in their state’s Temporary Assistance for Needy Families (TANF) programs, 25 states have removed them from their Medicaid programs, and over 40 states have removed them from their Supplemental Nutrition Assistance Programs (SNAP). The Illinois General Assembly, for example, recently passed a bill that will eliminate asset limits in Illinois’s TANF program.
A second way states are promoting savings is by providing families with mechanisms to effectively build college savings accounts. All 50 states have some type of 529 college savings plan; however, since only 9% of existing 529 account holders earn less than $50,000 per year, it is clear that such plans are not being used by low-income people. Some states have begun collecting data on 529 plan participants in an effort to demonstrate the necessity for program changes. For instance, after Texas began gathering 529 college participation data, it found that only 17% of participants in its 529 prepaid tuition plan during 2008-09 were African-American or Hispanic, even though together these populations represent a majority of Texans under age 18. Moreover, only 5.4% of such accountholders had incomes below $50,000, even though 41.4 percent of Texas families earn less than $50,000 per year. RAISE Texas, a prominent Texas asset building coalition, used this information to develop suggestions for making the state’s 529 program more accessible to these populations, which lead to the recent launch of the Texas Match the Promise Foundation, which will supply matching scholarships to participants in the state’s prepaid tuition fund.
Similar to 529 programs, states are also considering policy proposals such as children’s savings accounts (CSAs). Under most CSA proposals, children would be given savings accounts that would be seeded with an initial deposit from the government, often with supplemental amounts available for low-income families, and states would also offer matching funds, up to a cap, for contributions made by family, friends and children themselves. Numerous pilot studies of CSA plans over the last decade have demonstrated such accounts’ usefulness and in 2012 San Francisco expanded its Kindergarten to College pilot program to all San Francisco elementary schools. Under the program children are provided with an initial deposit of $50, matching funds of up to $100 for the first year, and children receiving free or reduced lunch receive an extra $50. Additional incentives include a $100 bonus when families sign up for auto-deposit of a minimum of $10 every month for six months.
Another way states are promoting savings is by expanding access to retirement savings opportunities. Currently only about 50% of all workers have access to employer-sponsored retirement savings accounts. In 2012, California passed the first comprehensive state bill to address this issue. The bill lays the groundwork for establishing an automatic enrollment IRA program for employees in California. Illinois has also introduced legislation to create an Illinois automatic IRA program, though the bill has to yet to make it out of committee.
Finally, incentivizing savings accounts through programs like D2D’s prized-link savings have also started to gain traction in states. In prize-linked savings programs, consumers are given lottery ticket equivalents for each deposit they make. The opportunity to win prizes encourages them to continue to save money. Results from initial pilot studies in Michigan have been very promising.
Increasing Access to Mainstream Financial Services. Asset building advocates’ efforts to increase access to mainstream financial services continue to focus on programs that help bank the unbanked. According to the Federal Deposit Insurance Corporation (FDIC), approximately 8.2% of U.S. households are unbanked. This represents 1 in 12 households in the nation, or nearly 17 million adults. Low-income households, with incomes of $30,000 or less, constitute nearly 82% of unbanked and nearly 41% of underbanked households, and minorities are more likely to be un/underbanked—nearly 63% of unbanked and 40% of underbanked households are African American or Hispanic. Bank On programs, which began in San Francisco in 2006, are collaborations between governmental agencies (e.g., cities or states), financial institutions, and community groups, wherein the financial institutions offer low-cost basic transaction accounts to unbanked individuals. Since Bank On programs are low-cost initiatives, states can still implement such programs despite existing budget crisis. The Bank On model has been replicated in more than 30 cities, 4 states, and two regions, with dozens more programs in development.
Another way to provide access to mainstream financial services that states are exploring is alternative data reporting. An estimated 50 to 70 million Americans do not have a credit score. They are considered “thin file” meaning that the “big three” U.S. credit bureaus (TransUnion, Experian, and Equifax) do not have enough information about these individuals' finances to assign them a credit score, whether good or bad. Without a credit history, it is difficult, if not impossible, to qualify for a mortgage, obtain a credit card, buy a car, or finance a small business. Increasingly, even employment, rental housing, and real property insurance decisions hinge on credit information. Whether the inclusion of such nontraditional credit information will be helpful or harmful to those with thin files or no score at all is controversial. Although research has shown that using alternative credit data reporting increases the number of people able to be scored, it is not clear what such scores will be. Thus, more research is needed to determine the effect of alternative credit reporting. In the meantime, states seem to be focusing on other problems within the credit reporting system. As of December 2011, legislation had been introduced in 26 states, up from 16 states in 2009, regarding insurance scoring and other aspects of the credit industry, such as preventing the use of credit scores in employment decisions. Given that credit, for good or ill, is a fundamental part of our country’s economic DNA and an essential part of asset building, such efforts should be encouraged.
Protecting Consumers Against Predatory Financial Products. Usurious payday and auto-title loans perpetuate a cycle of debt for low-income Americans. With interest rates as high as 400%, 12 million Americans are caught in a long-term debt cycle created by payday loans each year. Additionally, banks have entered the short-term, high-cost loan market by offering so called “deposit advance loan products,” which are basically payday loans with another name. Yet, currently only 19 states ban payday loans or cap interest rates. On the federal level, it appears that we may be closer than ever in obtaining more comprehensive federal payday and auto-title regulation as the Consumer Financial Protection Bureau (CFPB) continues to study the issue and publish guidance, such as its Short-Term, Small Dollar Lending Procedures guide, a field guide that CFPB examiners will use to ensure that payday lenders are compliant with federal consumer protection laws. In the meantime, states continue to introduce legislation to cap payday and auto-title loan interest rates, particularly at the municipal level, as well as encourage mainstream financial institutions to provide affordable and safe small dollar loans as alternatives to payday and other predatory loans.
State asset building advocates are also looking to increase consumer protections on prepaid cards and other payment products used by the low-income and asset poor populations. A growing number of unbanked Americans, instead of using checking account debit cards or credit cards, which have consumer protections provided under the Electronic Fund Transfer Act and Regulation E, are using prepaid cards instead. Prepaid cards are fraught with higher and less transparent fees than traditional credit and debit cards, frequently resulting in consumers spending more for such products than they should or can afford to. As a result, state asset building groups are paying close attention to the marketing of these products and looking for ways to ensure that consumers do not wind up in a cycle of debt.
Improving and Increasing Financial Education. Arguably nothing is more important than improving financial education. Currently, 44 states include personal finance in their education standards, up from 40 states in 2007 and 21 states in 1998. While, 13 states require high schoolers to take a personal finance course in order to graduate, the majority of states do not have such a requirement. Thus, state asset building advocates continue to encourage more states and school boards to adopt curricula that include comprehensive financial education.
To learn the current status of all of these and other asset building policies in each states read my report, “An Asset Agenda for the States,” recently published by New America. The paper, which includes a comprehensive appendix that provides charts which outlay the status of each asset building policy by state, is a very useful tool for organizations trying to get a sense of what is happening around the country when it comes to asset building.