Instead of attacking payday loans, which hardly any consumers are complaining about, policymakers should focus on the true debt crisis in America: Student loans. Why do policymakers ignore student debt and focus on payday lending? It’s politics: Payday lending offers easy soundbites about interest rates and vulnerable consumers; student loans sound like they serve a noble purpose for upwardly mobile youth.
A payday loan is a small-dollar loan ranging from $50 to $1,000. Borrowers pay back the loan in full, plus the interest rate, usually within 14 days. These types of loans are usually taken out by individuals who need money for an expense before their next paycheck—individuals who, without this credit, would otherwise be unable to afford an unexpected expense. Four in 10 Americans lack the savings to cover an emergency expense of $400, according the Federal Reserve Bank.
Some policymakers claim that payday lenders are predatory. Yet much of the time, the only financial help people can get is from a payday lender. In fact, 42% of people have non-prime credit scores and thus often rely on alternative forms of credit. Payday loans provide privacy, speed, convenience, and flexibility.
Payday lending often serves as a vehicle for people with non-prime credit scores to establish or raise their credit scores—a benefit that provides longer-term dignity and goes beyond the short-term need to pay the bills.
Moreover, this is debt that consumers take on with eyes wide open, as grown adults—payday borrowers understand very clearly what they are taking on for a short, foreseeable period. Thus, they should be capable of making their own informed decisions based on their specific needs, without government limiting their credit options.
By contrast, the student loan market serves consumers who often take on loans blindly, have no experience with debt, and are arguably the most ignorant group of consumers. Being a student myself, I can attest to this.
Although interest rates for payday loans seem high, it actually doesn’t add up to whole lot, as the interest is accumulated over only a matter of weeks. Over the many years of a student loan’s term, the total interest for an undergraduate is typically well over 100% and can often be as high as 300%.
Student loan debt is now at $1.6 trillion, according to CNBC, and 44 million Americans are burdened by it. By contrast, 15 million Americans use small-dollar loans, with a total debt load that is dwarfed by student loan debt.
The keys to good consumer financial policy are inclusion, access, innovation, and strong regulation—not restrictions.
Policymakers should ensure access to all types of loans, including payday loans, and shift some energy towards alleviating the student debt crisis.
Erickson is a digital content contributor for the Minnesota Republic at the University of Minnesota, mnrepublic.com.
This letter does not necessarily reflect the opinion of The Forum’s editorial board nor Forum ownership.