New federal investments in financial coaching would help historically underserved populations recover from the pandemic and at the same time help bridge long-standing gaps in wealth and income. LISC’s Michelle Harati takes a look at three policy efforts that could support scaled up coaching initiatives and long-term, positive impact.
Strengthening the ability of all families to manage their finances and marshal available resources is critical to achieving an equitable recovery from COVID-19.
So, as we close out Financial Capability Month, it’s worth recognizing the pressing need for expanded access to community-based financial education and coaching in this environment. The pandemic’s disproportionate impact on Black, Latino, Indigenous, disabled, and immigrant communities has exacerbated existing inequities, with tens of millions of households still experiencing extreme financial distress, even amid national relief efforts.
Even before the pandemic, 40 percent of Americans could not withstand an emergency expense of $400 or more, according to the Federal Reserve. The lack of savings is especially problematic for the 63 million unbanked and underbanked adults in the United States, which includes close to half of all Black (47 percent) and Latino households (43 percent), and the 45 million people who are considered to be “credit invisible” or have un-scorable credit files. Without access to affordable credit, they may turn to predatory financial products for assistance, which trap borrowers in debt cycles that lower credit scores and make it even more difficult to access traditional banking products.
Expanded federal investments in one-on-one financial coaching would help ensure historically underserved populations move beyond these long-standing challenges. According to an evaluation by the Consumer Financial Protection Bureau (CFPB), financial coaching helps participants improve their financial behaviors, build savings, manage debt, and reduce financial stress. Financial coaching programs also increase banking and public-benefit participation and expand access to responsible lending products. Integrated approaches focused on building credit and savings alongside income increase household economic resiliency by increasing their ability to save for emergencies and long-term financial goals, establish or build a positive credit history, and access affordable lending products.
We urge the Biden administration to build on that success and include financial coaching in its pandemic-recovery plans. It could start by building on the principles outlined in a recent proclamation by dedicating a small portion of the CFPB’s Civil Penalty Fund (the Fund) to support work happening on the ground. The CFPB is authorized by statute to utilize a portion of the Fund, a pool of monies collected as fines from companies that violate federal consumer financial law, to support consumer education and financial capability programs.
Despite this authorization and the evidence supporting these initiatives, CFPB investments directly supporting these activities have been severely limited. As outlined by Credit Builders Alliance and endorsed by 160 organizations, utilizing a small portion of the Fund can help ensure an inclusive recovery while meeting an unprecedented need. The CFPB could competitively contract with nonprofits and community development financial institutions (CDFIs) that have a proven record of delivering impactful financial coaching services. The CFPB has done so successfully in the past and can do so again.
Another opportunity lies in the Family Self-Sufficiency (FSS) program of the U.S. Department of Housing and Urban Development (HUD), which offers a potential vehicle for expanded federal investments in asset-building programs. FSS serves families living in federally subsidized housing. FSS is a voluntary program that combines individual financial coaching with a rent-based matched savings mechanism that incentivizes income gains and wealth accumulation. The program returns $10,000 in increased income and assets at a net cost of only $276 per participant, helping to close racial wealth gaps as the majority of enrollees are Black or Latino. FSS currently serves only a small fraction of the 2.2 million households that are eligible. Scaling it up to reach more people would expand access to equitable income and wealth building opportunities.
Lastly, the Workforce Innovation and Opportunity Act (WIOA) is well known for the critical federal support it provides for workforce development programs through American Job Centers and makes specific references to the role of financial literacy by allowing WIOA to cover these costs. Despite this, many WIOA programs have yet to fully integrate financial coaching in their program designs. Maximizing WIOA requires that we utilize evidence-based approaches to workforce development, highlighting the critical role of financial coaches in helping people overcome barriers to long-term employment—like childcare and transportation--and expanding community-based partnerships with a track record of measurable improvements.
At LISC, we have already seen the value of these types of efforts through our national network of over 110 Financial Opportunity Centers and Bridges to Career Opportunity programs in over 40 cities and towns across the country. These programs, operated by community-based nonprofits and drawing on a wealth of experience and research, leverage the power of integrated services to help people with low-to-moderate incomes reach their financial goals. We’ve seen first-hand how employment and career services, financial coaching and education, and low-cost financial products build credit, savings and wealth. They also support higher job placement and retention rates, as well as higher average earnings.
Those gains are critical right now. The pandemic has laid bare the pervasive income and wealth inequalities that undermine so many American families and communities. With direct federal investments in financial coaching and education, community organizations can scale up the infrastructure for financial inclusion and expand the economic resilience of households across the nation.
Michelle Harati, Senior Policy Officer
Michelle advocates for federal policies to broaden pathways to opportunity, supporting multiple LISC national programs, including: economic development and small business, workforce development and financial capability, creative placemaking, and AmeriCorps. Before joining LISC, she worked with the City of San Diego Economic Development Department as a Community Development Specialist. She was also a Senior Asset Building Coordinator at the International Rescue Committee's (IRC) Financial Opportunity Center in San Diego and served two terms as an AmeriCorps member. Michelle holds a B.A. in Political Science from the University of California, Los Angeles, and a M.P.P. from Georgetown University.
@michelleharati