Expert Advice: Alicia Washington

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Expert Advice: Alicia Washington

Alicia Washington, CPA

Payday loan usage is a perfect example of ‘robbing Peter to pay Paul.’ When individuals have to borrow small amounts of money in order to pay debt obligations, this indicates insufficient income. The problem is not best addressed through payday lending, but rather through creating a plan to position oneself better.

This plan could include obtaining an education which could qualify an individual for a higher paying career. There are need-based grants and scholarships available to lower-income households. Recognizing that everyone does not have an affinity for collegial education, learning a trade is another option for which needs-based funding is available. In the event that needs-based funding is not an option due to outstanding debt for a prior college or trade school attempt, obtaining student loans is an option. The interest rate on a government student loan, which is capped at seven percent, is lower than a payday loan. While a student loan is structured as long-term debt, it is considered to be an investment which is evidenced inasmuch that a student loan is not considered bad debt.

In the short-term, lending institutions should consider offering financial education. This was also suggested by the FDIC in its Affordable Small-Dollar Loan Products Final Guidelines. The premise is that financial education, in conjunction with a savings component, would “reduce [borrowers’] reliance on high-cost, short-term credit.” Ultimately, the desired outcome is for consumers to be empowered through financial education and development of an income-generating skill set.”

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