Asset Building News Week, January 26 – January 29

article | January 30, 2015

The Asset Building News Week is a weekly Friday feature on The Ladder, the Asset Building Program blog, designed to help readers keep up with news and developments in the asset building field. This week's topics include college savings plans, black wealth, and consumer protection.

College Savings Plans

In a Slate piece this week, the Asset Building Program’s own Justin King challenged recent media coverage of President Obama’s plan to roll back the tax advantages of 529 College Savings Accounts. Rejecting erroneous claims that 529 plans are widely used by the middle-class, King pointed out that a mere “3 percent of American households own a 529, and 70 percent of Americans don’t know that 529s are a college savings account.” While disagreeing with arguments that 529s are popular savings vehicles for middle-class families, King argued that it’s a bad time to get rid of the tax benefit altogether. Many local and state governments are developing innovative ways to help all parents, even those with low incomes, save for college in 529s. He called for a more “inclusive and progressive college savings system” that helps children of all economic backgrounds pay for and graduate from college.

David Wessel of the Brookings Institution also wrote about the uproar over Obama’s 529 plan. “The loud opposition misses the rationale for changing the way the government encourages saving for college,” Wessel wrote. He acknowledged that the plan would meet its objective of moving tax benefits for college savings down the economic ladder, but wrestled with the idea that tax benefits encourage saving among people who wouldn’t already save. According to Wessel, a better way of encourage saving would be to automatically enroll workers in savings programs.

Black Wealth

This week The Washington Post ran Dreams Dashed, a three-part series on the plight of the African American middle-class in the wake of the housing crisis. The series took an in-depth look at the financial challenges facing residents of the nation’s highest-income majority-black county, Prince George’s County, Maryland. Michael A. Fletcher set the scene in Part 1: A Shattered Foundation: “African Americans for decades flocked to Prince George’s County to be part of a phenomenon that has been rare in American history: a community that grew more upscale as it became more black.”

The housing crisis marked a reversal of fortunes for residents of Prince George’s County; for many, their greatest financial asset – their home – became their greatest financial burden. While surrounding white counties recouped much of their wealth in the recovery, Prince George’s economic turmoil has been more intractable because there is less demand by people of all races to live in predominantly black communities. Kimbriell Kelly, John Sullivan, and Steven Rich explored the effect of subprime lending on residents of Fairwood, a Prince George’s County neighborhood, in Part 2: Broken by the bubble. “Half of the loans on newly constructed homes in [Fairwood] during the housing boom in 2006 and 2007 wound up in foreclosure…” Meanwhile, the company responsible for many of Fairwood’s subprime loans “agreed to pay out $35 million to settle claims that the bank charged higher fees to black and Hispanic borrowers than similarly creditworthy white borrowers.” Kelly described how easy credit and the mortgage crisis impacted the Boateng family, who face more than $1 million in debt, in Part 3: Swamped by an Underwater Home.

Consumer Protection

Jonnelle Marte for The Washington Post covered a report by CFED that found the majority of consumers now have subprime credit scores, reducing their borrowing options. A spike in poor credit among low- and middle-income families is predictable in the wake of an economic downturn. What’s less intuitive is how banks looking for high-yield investments have clamored to provide these consumers with financial products that they cannot afford. In The New York Times, Michael Corkery and Jessica Silver-Greenberg wrote on the influx of subprime auto loans for used vehicles that target low-income consumers. They described the process as "a kind of alchemy that Wall Street has previously performed with mortgages[:] thousands of subprime auto loans are bundled together and sold as securities to investors, including mutual funds, insurance companies and hedge funds.”

Darrell Delamaide and Dan Caplinger reported on weakness in retirement plan regulations that drain workers of savings. According to Delamaide, the White House is poised to support a new rule that would require financial advisers for retirement accounts to put their clients’ interests first. Current estimates project that conflicts of interest in the financial advisor industry cost savers between $8 billion and $17 billion a year. Caplinger detailed a Government Accountability Office (GAO) Report that found employers may force out ex-employees’ 401(k)s, causing their assets to wither under high fees.

Quick Hits:

CFED released its 2015 Assets & Opportunity Scorecard, providing state-level data on household financial security and policy solutions.

Dionne Searcey and Robert Gebeloff wrote in The New York Times about the shrinking middle class. While this trend used to be a result of people entering higher income brackets, the opposite has been true in recent years.