WFSN in Community Colleges. Innovating new financial products and services to support community college student success

Transcription

1 WFSN in Community Colleges Innovating new financial products and services to support community college student success

2 Panelists Sarah Griffen, Consultant Ashvin Prakash, CFSI Nancy Castillo, CFSI Wendy De La Rosa, Irrational Labs Julian Haynes, Achieving the Dream

3 Agenda Introductions Financial Products/Services in WFSNCC Financial challenges for college students Behavior challenges and product design elements Potential products and services in WFSNCC September 30 th design meeting and Next Steps Q&A

4 The WFSN strategy involves intentionally integrating and sequencing three distinct but related priorities: The WFSN strategy 1. Education and employment advances education, job readiness, training, and placement 2. Income and work supports access to student financial aid, public benefits, tax credits, and free tax assistance 3. Financial services and asset building financial education and coaching linked to affordable products and services to help families build self-sufficiency, stabilize their finances, and become more economically competitive

5 Financial products and services in WFSN Financial services and products is one of the three key WFSN pillars. It can address some of the financial challenges students face while also preparing students for financial stability in their post-college lives. It is a key low-touch strategy that can be scaled, particularly when paired with financial literacy, education and/or coaching. In WFSN community settings, participants have built and repaired credit, established savings, and been able to maintain employment using similar products and services.

6 2014 Center for Financial Services Innovation FINANCIAL CHALLENGES FOR COLLEGE STUDENTS

7 About CFSI 2014 Center for Financial Services Innovation The Center for Financial Services Innovation is the authority on consumer financial health, leading a network of financial services innovators committed to building better consumer products and practices. Using our Compass Principles as a framework for quality, we: Connect Inform Innovate Advise We foster dialogue and collaboration through CFSI events and networking opportunities. We provide deep consumer insights and industry research. We seed and test promising new ideas. We offer consulting services to both for-profit and nonprofit providers.

8 Financial profile of community college students 2014 Center for Financial Services Innovation Community college students represent a significant number of low and moderate income households. 44% of community college students are low income 36% are first generation college students 57% are between 22 and 39 years of age 40% of students have no resources to pay for a college education 2. 22% 19% 83% of community college students have a documented need for financial aid 2 Community college Public 4-year Private 4-year 1) Foundation for California Community Colleges, ) Quick facts about financial aid and community colleges, , TICAS

9 The impact of financial challenges for students 2014 Center for Financial Services Innovation Given the financial vulnerability of community college students as a whole, inability to afford college is the leading cause of dropping out. Reasons students dropped out 1 I needed to go to work and make money 71% I just couldn't afford the tuition and fees 52% 60% Dropouts who did not have financial support from family 1 1) With their whole lives ahead of them, Bill & Melinda Gates Foundation

10 Financial Health what it means 2014 Center for Financial Services Innovation FINANCIAL HEALTH MEANS an individual s DAY-TO-DAY financial system functions well increases the likelihood of LONG-TERM financial resilience and opportunity.

11 Financial Health what it means 2014 Center for Financial Services Innovation DAY-TO-DAY LONG-TERM Day-to-Day Management Resilience Opportunity

12 Financial health for community college students 2014 Center for Financial Services Innovation Improving the financial health of students has the potential to improve their ability to pursue educational attainment and achieve greater success. Elements of Financial Health Day to Day Management Resilience to weather ups and downs Long-term Opportunity Enable students to manage their money effectively, pay bills and conduct transactions easily, and live within their means. Ensure students have access to appropriate savings or financial cushion to deal with unexpected shocks. Provide a pathway to continued financial stability and growth. Students practice better financial behavior and are more financially capable, enabling them to tackle financial challenges that may otherwise hinder their ability to progress through their classes.

13 Barriers to achieving Financial health 2014 Center for Financial Services Innovation In improving the overall financial health of students to increase completion rates, Achieving the Dream will focus on identifying strategies to tackle the following three challenges. Core Financial Challenges Elements of Financial Health Inability to manage cash flow Day to Day Management Lack of a financial cushion Resilience to weather ups and downs Ability to build credit Long-term Opportunity

14 Inability to manage cash flow 2014 Center for Financial Services Innovation Key Insights: High degree of income and expense volatility among US households Limited usage of budgeting tools among US households 38% of people in the U.S report that their families are just getting by financially or struggling to do so 1 Rising cost of living has quickly outpaced growth in wages, impacting minimum wage earners the most 53% of households work multiple jobs over the course of a year 2 64% of households receive variable, nonrecurring incomes 2 63% of households budget only mentally or not at all 2 Having a bill or payment due before a paycheck is a leading cause for usage of costly loan products 3 1) Federal Reserve Board, 2013 Survey of Household Economics and Decision making 2) U.S. Financial Diaries, Spikes and Dips 3) A Complex Portrait: An Examination of Small-Dollar Credit Consumers, CFSI

15 Meet Sarah 2014 Center for Financial Services Innovation When asked about her main financial goal: "I just want to be able to pay the full electric and phone bills that come in, not in bits and pieces. Sarah Age: 38 Occupation: Bookkeeper, athletic assistant, part-time student Income: $4,100-$9,000/month (household) Financial Transactions: Automatic and manual online bill pay, credit cards, mortgage payments, car loan payment, student loans Values: Education, being able to pay full bills on time, homeownership Aspirations: Make repairs on the house, finish a degree in the social sciences Core challenges: Multiple forms of income Inconsistent cash flow Inability to budget effectively Potential solutions: Income/expense smoothening tools Personal financial management (PFM) products Sarah is a mother of three who earns about $1,100 per month as a full-time bookkeeper. Her husband earns about $2,600 per month selling electrical equipment. Both Sarah and her husband also take on part-time jobs to supplement their incomes. Sarah works as an assistant to a high school athletic director, while her husband coaches at a school and works weekends as a receptionist at a wellness center. Sarah and her son also receive tuition grants, as she works towards a bachelor s degree. As a result of part-time jobs and tuition grant disbursements, Sarah and her husband s household income ranges from $4,100 to $9,000 per month, which spikes when Sarah receives her educational assistance. Read their household profile at

16 Lack of a financial cushion Key Insights: Savings were depleted for many households after the recession and they are less resilient against emergency expenses Lack of savings is driving usage of costly small dollar credit products 39% of people in the U.S report that they have a a rainy day fund adequate to cover 3 months of expenses 1 76% of Americans live paycheck to paycheck, with little to no emergency savings 2 48% of Americans could completely cover an emergency without selling something or borrowing money 1 32% of users of costly small dollar credit products borrowed to cover an unexpected expense 3 66% of users of costly small dollar credit products (e.g. payday loans) had no savings 3 62% of households with no emergency savings indicated they would be able to save at least $25 a month 4 1) Federal Reserve Board, 2013 Survey of Household Economics and Decisionmaking 2) Bankrate.com, ) A Complex Portrait An Examination of Small-Dollar Credit Consumers, CFSI, ) New America Foundation, Center for Financial Services Innovation

17 Meet Karla 2014 Center for Financial Services Innovation Every time I think I m beginning to get ahead, sure enough something happens and I m ten steps back from where I started. Karla Age: 28 Occupation: Waitress Income: $28,000, paid bi-weekly Financial Transactions: Receives direct deposit into checking account and uses a mix of cash and debit cards for payments Values: Low-cost and high service. Help building short-term and long-term savings Short-term aspirations: Get out of debt, save up for a vacation Long-term aspirations: Buy a house Core challenges: Limited accumulated savings Limited access to additional capital resources Potential solutions: Emergency credit vehicle Improved opportunities for saving Karla is a single mother who works full-time as a cashier while studying to become a nurse at a local community college. She uses her bank account to pay bills, save money, and to make purchases in-store. Karla struggles to set money aside consistently, as most of her money goes towards bills and rent. As a result, she s had to drop out of classes on more than one occasion and pick up shifts in order to make ends meet.

18 Ability to build credit 2014 Center for Financial Services Innovation Key Insights: 40 million individuals (1 out of 5 people) have very poor credit 1 Damaged profiles can lead to higher fees on credit cards, reliance on costly loan products, and difficulty in securing a home or job 2013 FICO Score Distribution % % % % % % % % 34% of scored consumers have subprime credit scores Lower-income families with less education are more likely to rely on costly and lowquality small dollar credit products 32% of small dollar credit users did not qualify for a credit card 2 34% millennials engaged in 3+ costly credit card behaviors 3 43% of millennials engaged in costly non-bank credit in the past 5 years 3 21% of community college borrowers defaulted on loans within 3 years of entering repayment 4 Damaged credit significant increased costs in the form of higher interest rates on credit cards and mortgages, higher car insurance premiums 1) FICO 2) A Complex Portrait An Examination of Small-Dollar Credit Consumers, CFSI, ) The Financial Capability of Young Adults A Generational View, March ) American Association of Community Colleges. 2014

19 Meet Carlos 2014 Center for Financial Services Innovation How am I supposed to improve my credit when no one will offer me a credit card? Carlos Age: 33 Occupation: retail manager Income: $68,000 Financial Transactions: Direct deposits paycheck into a checking account. Had multiple credit cards in the past and a student loan Values: Financial mobility and security Short-term aspirations: Putting kids through college Long-term aspirations: Ensuring he has enough for retirement Core challenges: Damaged credit profile Limited access to affordable credit options Potential solutions: Pathway to improved credit Affordable credit options Carlos is a father of two and works as a retail manager at a large retailer. A few years ago, Carlos was laid off from his job at a retailer and forced to rely on his savings and credit cards. He also stopped paying his student loans. After 10 months of unemployment, Carlos was finally able to find stable work. During his period of unemployment however, many of his credit cards were frozen due to non-payment, and he suffered significant damage to his credit profile. Now that he has a stable job, Carlos finds it difficult to obtain a fair priced credit card.

20 Behavioral Economics & Financial Decision Making September 2014

21 IRRATIONALLABS Financial health is a critical problem for students

22 IRRATIONALLABS I needed to go to work and make money & I just couldn t afford the tuition and fees are the top self-reported reasons for students dropping out Public Agenda, With Their Whole Lives Ahead of Them

23 IRRATIONALLABS The common approach to solving these problems is to educate students how to save money, without coupling it with behavior interventions

24 IRRATIONALLABS A meta-analysis of 168 papers covering 201 prior studies shows that financial literacy (without behavior based programs) explain just 0.1% of the variance in financial behaviors, with weaker effects in lowincome samples Fernandes, Daniel, John G. Lynch Jr, and Richard G. Netemeyer. "Financial Literacy, Financial Education, and Downstream Financial Behaviors."Management Science (2014).

25 IRRATIONALLABS Financial literacy programs alone, without any behavioral interventions, are not working.

26 IRRATIONALLABS We need behavior based interventions

27 IRRATIONALLABS Psychology of Money Mental Accounting Opportunity Cost Neglect Psychology of Choice 1 2 Hyperbolic Discounting Default Bias Choice Overload 1 2 3

28 IRRATIONALLABS Psychology of Money

29 IRRATIONALLABS Mental Accounting 1 We categorize and treat money differently depending on where it came from and where it is going Tuition Car Food

30 IRRATIONALLABS Opportunity Cost Neglect 2 We fail to recognize what we are giving up when we make spending decisions Buy Do Not Buy Buy Keep Money for Other Purchases

31 IRRATIONALLABS Psychology of Choice

32 IRRATIONALLABS Hyperbolic Discounting 1 We put an unrealistically high value on the here and now and an unrealistically low value on the future $1 today $3 tomorrow $1 in one year $3 in one year and one day

33 IRRATIONALLABS Default Bias 2 We tend to make the easiest choice possible - often by not doing anything

34 IRRATIONALLABS Choice Overload We tend to not act when faced with too many choices 3 6 jams 24 jams

35 IRRATIONALLABS How can we use these principles to help your students?

36 2014 Center for Financial Services Innovation POTENTIAL PRODUCTS AND SERVICES

37 Ability to manage cash 2014 Center for Financial Services Innovation Strategy: Reduce financial shocks caused by large cash inflows/outflows Innovations: Aid Like a Paycheck (MRDC) Center for Economic Progress EITC Advance Loan Pilot Key design features: Even distributions of lumpy cash inflows and outflows

38 Ability to manage cash 2014 Center for Financial Services Innovation Strategy: Provide more clarity on cash inflows/outflows to enable more informed financial decision making Innovations: Product integrated portfolio management tools (Virtual Wallet) Micro budgeting tools (Juntos Finanzas) Key design features: Encourages engagement with budgeting tools to plan ahead

39 Financial cushion 2014 Center for Financial Services Innovation Strategy: Reduce barriers and incentivize savings Innovations: Keep the Change (Bank of America) Save More Tomorrow (UCLA) Doorways to Dreams Save Up Key design features: Default savings mechanisms Reward based savings

40 Financial cushion 2014 Center for Financial Services Innovation Strategy: Increase access to affordable credit Innovations: Emergency small dollar loans Alternative underwriting (Progreso Financiero) Key design features: Ease of access Reduced risk for lender Leverage client touch point to help promote positive financial behavior

41 Ability to build credit 2014 Center for Financial Services Innovation Strategy: Provide opportunities to build credit Innovations: Credit builder loans (LISC Twin Accounts) Secured credit cards (Bank of America, Regions Bank) Key design features: Low balance credit lines or loans that report repayment behavior to bureaus Limited risk for borrower and lenders

42 September 30 th Design Meeting 2014 Center for Financial Services Innovation Purpose: Identify and explore financial products and services for community college students to improve their financial health and completion rates.

43 Next Steps September 30 meeting in Chicago to develop elements of the products and services October release of prototype design frameworks to help colleges design specific products November colleges identify interest in financial products and services; technical assistance to create college-specific designs January-May/June small tests of products and services June onward incorporation of lessons into products and services and wider dissemination us at if you have any questions!