Do Payday Loans Cause Bankruptcy?

Payday loans offer convenience and easy access, but in return, consumers pay a large premium in the form of extremely high service fees and interest rates, with average APRs around 460 percent. Consumer advocates argue that these short-term loans often trap borrowers in a long-term cycle of debt, with loan balances quickly escalating beyond a borrower’s ability to repay. If this is the case, do payday loans cause bankruptcy?

Using administrative data from a large payday lending company and publicly available personal bankruptcy data, Paige Marta Skiba and Jeremy Tobacman compared borrowers with relatively similar credit profiles and found that payday loan access increases the probability of filing for bankruptcy. Specifically, they examined first time payday loan applicants who were either above or below the minimum credit score threshold required to qualify for a loan (within a narrow margin), allowing them to effectively compare borrowers with similar credit profiles based on whether they had access to payday loans or not. Skiba and Tobacman showed that approval of a first payday loan results in a pattern of subsequent borrowing from the payday lender and interest on the payday loan balance accounts for a sizeable share of the borrowers’ total debt interest burden at the time of bankruptcy filing. Specifically, for first-time applicants near the bottom quintile of the credit-score distribution, access to payday loans caused the risk of Chapter 13 bankruptcy filings over the next two years to double.

These findings suggest that payday loan approval could tip applicants, who are already financially stressed, into bankruptcy. The results can help to inform the ongoing policy debate over reforming predatory lending practices and suggest that safer, more responsible small dollar loan products may be necessary.

Skiba, Paige Marta and Jeremy Tobacman. (2009). “Do Payday Loans Cause Bankruptcy?”

Hospitals and Workforce Development

Unemployment continues to be a challenge in low- and moderate-income communities, particularly as the recession has caused entire industry sectors to fold, displacing thousands of workers in the process. High growth economic sectors, such as healthcare, can provide new employment opportunities to those looking for work, but do certain industries hold more potential for lifting low- to middle-skilled, low-income workers out of poverty?

Marla Nelson and Laura Wolf-Powers use data from the Bureau of Labor Statistics to conduct a “chain-wise” analysis that allows them to answer the following question: does the creation of new jobs in certain industries lead to vacancies higher up the career ladder, leading some workers to move up into more stable, well-paying jobs? They estimate the total number of job vacancies that would be created through the creation of new jobs in four industries: hospitals, accommodations, legal services, and securities and commodities. The model allows them to estimate not only who gets the newly created jobs, but also who moves up to better positions through the newly created vacancies. They find that job growth in the accommodations sector creates job vacancies that have the greatest immediate impact on a region’s unemployed and discouraged workers, but most of the vacancies in the industry are in the lowest paid positions. In contrast, job growth in the legal services and securities and commodities sectors have significant upward mobility effects, but these opportunities are limited to those with extensive education and training. However, growth in hospital employment has the greatest potential to improve the well-being of low-income workers, as vacancies initiated by employment growth in hospitals have a substantive impact on unemployed and discouraged workers, and create work in the middle of the wage scale, in middleskilled, moderately paid positions as well.

The authors suggest that economic development investments in health care must be combined with strategies to promote skills attainment and upward movement for low-paid health care workers.

Nelson, Marla and Laura Wolf-Powers. (2010). Chains and Ladders: Exploring the Opportunities for Workforce Development and Poverty Reduction in the Hospital Sector. Economic Development Quarterly, 24(1), 33–44.

The Effect of Shared Housing on Formerly Homeless People

Living with a roommate is generally much more cost efficient than living alone, as expenses such as rent and utilities can be shared across occupants. However, many federal assistance programs targeting homelessness impose a substantial implicit tax on shared housing. For example, Supplemental Security Income reduces the payments an eligible person receives if he lives with an ineligible person. Such policies would be understandable if shared housing (which is different from a group home) somehow adversely affected its users, but does a shared living arrangement negatively affect residents? Based on an analysis of the Access to Community Care and Effective Services and Supports data set, which provides detailed longitudinal data for over 6,000 formerly homeless participants, Yinghua He, Brendan O’Flaherty, and Robert Rosenheck found that shared housing does not adversely affect residents. The analysis followed shared housing participants over the course of a year, and collected various indicators on their well-being, including quality of life, mental health, depression, drug and alcohol abuse, personal safety and social support. Comparing baseline results to outcomes after three months, and then again after one year, the study found no statistically significant indication that living alone is associated with better outcomes than shared living among formerly homeless people. In some cases, sharing actually improved outcomes—sharing was associated with reductions in symptoms of psychosis.

While the study suggests that shared living produces similar outcomes to living alone, the authors do not suggest shared living as a preferred policy prescription. Rather, they argue that federal housing assistance, food, and income maintenance programs should be reformed to provide greater consumer choice, which includes shared living as an equal option.

He, Yinghua, Brendan O’Flaherty, and Robert A. Rosenheck. (2010). Is shared housing a way to reduce homelessness? The effect of household arrangements on formerly homeless people. Journal of Housing Economics, 19 (2010) 1–12.

The Impact of Low Income Housing Tax Credits on Local Schools

The Low Income Housing Tax Credit (LIHTC) program produces more affordable housing units for low-and moderate-income households than any other government program. While the production of below-market rate units is desirable from a community development perspective, existing homeowners may exhibit NIMBYism (“not in my backyard”), citing concerns about potential changes in neighborhood characteristics or perceptions of decreases in public services. One oft-cited concern is that an influx of children from low-income families will lead to overcrowding in classrooms and potential negative peer-effects, thus reducing the quality of local schools. But does the LIHTC program actually have an impact on local schools?

Analyzing data on LIHTC properties and accountability ratings and other characteristics of impacted schools in Texas, Wenhua Di and James Murdoch found little evidence to suggest that LIHTC units have a negative effect on local schools. Overall, there was no systematic correlation between changes in school demographics and the developments of LIHTC projects in the neighborhood. In fact, Di and Murdoch found that an increase in the number of nearby LIHTC units was associated with an increase in the probability that the nearest school moved upward in its accountability rating. However, the potential effects were likely to differ across neighborhoods with different characteristics. LIHTC projects were more likely to have positive effects on schools in higher income areas but negative effects on schools in higher minority areas.

These findings may alleviate some of the concerns of residents in higher income areas around LIHTC projects. However, the evidence that LIHTC units had a negative influence on higher minority areas may suggest that neighborhoods of concentrated poverty may limit the advancement opportunities for children.

Di, Wenhua and James Murdoch. (2010). The Impact of LIHTC Program on Local Schools. Working paper presented at the American Economics Association 2010 Annual Meeting. April, 2010.