The persistence of burdensome debt after a recovery underscores systemic problems. Jobs still fly to other countries amid the rosy numbers. College still gets more expensive and student debt accelerates. In some ways, prosperity can even guarantee a worsening debt crisis when, for example, neighborhoods gentrify and resident populations of homeowners and small businesses cannot keep up.
Such dynamics may help explain recent data from The Center for Microeconomic Data. Earlier this year, the CMD, an arm of the Federal Reserve Bank of New York that centralizes the collection and analysis of microeconomic data, found a 0.9% increase in total household debt, reaching a historic high of $12.84 trillion. While the percentage increase may seem modest, serious credit card delinquencies rose for the third straight quarter, a trend that has not been seen since 2009 – which, as you’ll recall, was right after an economic collapse.
The CMD findings are in synch with a Harris poll conducted in April for the National Foundation for Credit Counseling (NFCC). The NFCC 2017 Consumer Financial Literacy Survey found significantly more consumers carrying credit card debt from month to month, while nearly 20% of these respondents are rolling over $2,500 or more. At the same time, in a complete reversal of a trend that began with the 2009 recovery, U.S. consumers are spending less than the previous years.
Never mind the toll in human terms. It’s also disquieting from a strictly economic perspective as no one benefits when people owe more without spending more.
There seems to be only one obvious solution, which is to help people manage or eliminate their debt. There are two alternatives, for-profit debt settlement service providers and not-for-profit credit counselors of which the NFCC, founded in 1951, is the nation’s first and largest dedicated to improving people’s financial well-being. (Full disclosure: I am a past NFCC Board Trustee.)
Let’s compare the two options and think about where we, as a nation, want to focus our support.
NFCC member agencies provide financial education to millions of consumers in person, over the phone, or online. They take a holistic approach and complete a full financial review and personal financial action plan for each client aligned with their goals. NFCC Certified Counselors address the full gamut, from credit card debt and bankruptcy counseling to first-time home buyers, from student debt to comprehensive financial education. It’s noteworthy too that one-third of NFCC’s members are multi-service agencies that participate in youth mentoring, substance abuse programs, etc.
“We know from many years of experience that the most powerful way to solve debt problems is to empower consumers with the knowledge and experience they need to map a solid plan of action and to develop the perseverance to follow through with that plan,” says Debbie Bianucci, NFCC Board Chair and President and CEO of BAI , a 90-year-old firm serving financial services companies. “At BAI, we consider the NFCC to be a critical player in the industry because of its impact on consumers and the high-quality information and services provided by the nationwide network of agencies. They take the time to listen and understand the consumer’s situation without judgment or profit motives.”
The numbers confirm Bianucci’s prognosis. Last spring, the NFCC released an independent report conducted by researchers at The Ohio State University that measured the impact of its “Sharpen Your Financial Focus” program on clients. Among the findings based on credit report outcomes, there was a $17,000 average decrease in total personal debt, an $8,000 average decrease in total revolving debt, and a 50-point average increase in credit scores. What’s especially impressive is that these are long-term results tracked over a six-quarter period.
Clients also feel better about their own prospects. While 73% of respondents reported after three months that they pay their debts more consistently, 70% say they’re more financially confident and 67% believe they’re now better money managers.
Not all debt relief options are backed by the same reassuring data, which makes it more important than ever for consumers to understand the differences and make informed choices about what is best suited for their needs. For some, debt settlement is considered an attractive alternative based on the promise of partial debt forgiveness. Past outcomes for some who put their faith in for-profit debt settlement offer a cautionary tale.
“Although the NFCC supports the concept of a less than full-balance solution for some consumers, we are concerned that people often do not achieve the results they expected from for-profit debt settlement offers,” says Jeff Faulkner, the NFCC’s Acting President and Chief Executive Officer. “As revealed in the industry’s own data submitted to the Federal Trade Commission, we know that, three years after enrolling in a third-party debt settlement plan, two-thirds of consumers were still unsuccessful in settling a significant portion of their original debt.”
Disinterested sources reveal even lower success rates among the for-profits. For example, a report from the Colorado State Attorney General cited in a GAO study disclosed that only 10% of residents enrolled in for-profit debt settlement programs achieved success between 2008 and 2010. Just this month, the Maryland AG settled a case against five California companies that allegedly failed to settle most debts but still charged full fees. Outright scams are common. As of this writing, the FTC is continuing to work with eleven states in a crackdown on phony student loan debt relief companies. In one Florida case earlier this year, companies were even accused by the state and the FTC of claiming nonprofit status.
“Unfortunately, the for-profit counseling agencies have not always put consumers first,” says Catherine A. Allen, Chairman and CEO of The Santa Fe Group, which focuses on cybersecurity and risk management. “As nonprofit organizations, the NFCC members have a mandate to provide financial education as a part of their debt management programs and other services. Their effectiveness is based on a comprehensive counselor certification training program, a rigorous independent accreditation process for member agencies, and a strong set of member standards that ensure they put the needs of their clients before all else.”
What then is the “mandate” for the rest of us? A good place to start is with the banks and financial institutions that support organizations like the NFCC. Again, let’s think not just about human but economic factors as well. When banks make commitments to nonprofit financial advocates like NFCC member agencies, they take a billion dollars or more out of aged receivables. In 2016 alone, the NFCC was responsible for $1.2 billion in total debt paid back to creditors, according to the organization’s own numbers.
In turn, consumers face significantly less danger of having to cover bad debts via usurious interest rates. Seems pretty obvious, but banks are often oddly penny-wise and inexplicably pound-foolish. More need to join this win-win game. As a matter of both public responsibility and self-interest, they need to do more than provide referrals or list debt counselors on their websites. They need to invest in the nonprofits that so heavily invest in them.
“I am passionate about financial education and the mission of the NFCC,” says Allen. “My father was a small-town banker who gave advice to people in our town, so I grew up seeing the value of sound financial education.” Allen co-authored a book, The Retirement Boom, about Boomers reinventing themselves in retirement – “some because they wanted to, others because they hadn’t saved enough or lost what they had in the recession,” she says. “Much of what motivated me to write the book was from what I learned by talking to NFCC counselors.”
It is imperative to build on the demonstrable gains made by the nonprofits; our support must be unstinted. Among the critical action points going forward, Bianucci emphasizes three: continued expansion of services with a focus on expanding innovative first-time home buying programs and student loan counseling; less dependence on face-to-face interaction along with more advanced use of digital delivery; and a better funding model that includes some services for which consumers are willing to pay a fee.
In the last analysis, debt settlements alone only temporarily extinguish symptoms of the debt problem. Our economy demands that we treat the problem itself.
Richard Levick, Esq., @richardlevick, is Chairman and CEO of LEVICK. He is a frequent television, radio, online, and print commentator. Richard is also a past member of the NFCC Board of Trustees.