Credit Unions Help Strapped State Employees

As state employees across the country are being hammered by layoffs, pay cuts and forced unpaid days off, some state employees’ credit unions are stepping in to help workers get through these tough times. Services include a variety of loan programs and even one Web site for recession and job-related tips.

The Virginia State Employee Loan Program allows state workers, regardless of their credit history, to borrow up to $500 twice a year. Since Gov. Tim Kaine (D) announced the pilot’s launch July 13, more than 1,620 employees have received loans.

“The good news is that we have a loan for this. The bad news is that they need it,” said Sara Wilson, the chairwoman of the Commonwealth of Virginia Campaign (CVC), a group that coordinates charitable giving by state workers. The CVC operates the program jointly with the Virginia Credit Union .

The loans have a 24.99 annual percentage rate. So for a loan of $100, the worker pays back ; a $500 loan would cost $540. An employee must have an account with the credit union to receive a loan, and a portion of the money is deducted from a worker’s account until the loan is paid back in six months.

The loans are meant to prevent state workers with poor credit histories from turning to pred atory payday lenders, who might charge an interest rate of 300 percent or higher and pile on late fees, which the program doesn’t do.

“This program will allow our state employees to receive small loans without having to go to predatory lenders,” Kaine said in a statement. “If the Commonwealth can offer this kind of program, other large employers may consider similar initiatives of their own.”

Some have complained that a 24.99 percent interest rate – about equal to higher rates charged by some credit cards – isn’t a deal. “Some people say ‘24.99 percent, I can get it better somewhere else,'” Wilson said. “And I say, by all means you should. This program isn’t for everyone. This is for people who don’t have many other options.”

The loan idea evolved from another CVC program that gives grants to state employees in emergency situations, such as a fire or unexpected death in the family. Many people who applied for the grant didn’t qualify for it, but still had pressing reasons why they needed the money, such as car repairs, mortgage payments, insurance co-pays, or a spouse losing a job.

Virginia’s pilot is unique because state employees applying for a loan must first pass an online course on financial literacy. The course discusses budgeting, tracking spending, saving money, and more. At the end of the course, employees have to pass a quiz with multiple-choice questions such as, “You can eliminate waste from a budget by…”

Some people have taken the class more than once before qualifying for the loan, Wilson said.

LaTonya Reed, a policy analyst at the Virginia Interfaith Center for Public Policy>, a faith-based advocacy group, said the financial literacy aspect of the loan is crucial. “The loan may help with the short term, but financial education will help them with managing their finances and crisis situations for years to come,” she said.

The North Carolina State Employees’ Credit Union has had a similar program in place since 2001. Members can borrow up to $500 at a 12 percent interest rate, and the entire amount, plus interest – $5 on a $500 loan – must be paid back from the next paycheck. Since 2001, more than 111,800 people have borrowed $1.5 billion. With a default rate of just .002 percent, the Salary Advance Loan program is the credit union’s most profitable.

Also, 5 percent of every loan must be deposited in a savings account, with a provision that encourages employees to leave that money alone: If there is a savings withdrawal, the employee can’t borrow again for six months.

“The whole premise is to get them out of that cycle of payday lending,” said Leigh Brady, the credit union’s senior vice president for education services. “Some folks have $1,500 or $2,000 in their savings account and they’re still using the Salary Advance Loan program, because now they’re viewing it as savings, which is something they’ve never had before.”

Currently, members have more than $17 million in savings from the loan program.

Other states’ credit unions have stepped up to help workers weather the financial crisis. When Pennsylvania state employees received incomplete paychecks because lawmakers are at an impasse over the state budget, more than 20 credit unions gave credit-worthy employees temporary low-interest or zero-interest loans. Some state workers were so grateful they dropped off thank-you cards at one of the credit union offices.

The Hawaii State Federal Credit Union is allowing members who have been furloughed or who have seen their income reduced to borrow up to $5,000 at a discounted interest rate. In April, the Arizona State Credit Union launched a Web site, HelpingAZ.com, to give its members, many of whom work for the state’s government or public universities, a place to discuss the recession, including posting job openings and tips on how food banks work and where to tap into free wireless computer service.