In an effort to offer short-term financial relief to employees (and with the backing of then-Gov. Tim Kaine who was keen on taking on the state’s payday lenders), the state debuted the Virginia State Employee Loan Program (VSELP) -- a partnership between VSEAF and the Virginia Credit Union. The former administers the program, while the latter lends the money.
Under VSELP, employees can borrow between $100 and $500 in increments of $100 without a credit check and without reporting to the credit bureaus. Employees can take out up to two loans each year, but can only have one out at a time. The loans must be paid back over six months, with payments coming straight out of employees’ paychecks and into the credit union.
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The loans are quick to obtain -- averaging three days or less between the start of the application and the deposit of the funds -- and are more affordable than the short-term loans that payday lenders offer. The annual percentage rate (APR) is 24.99 percent with no loan fee. That means, based on the repayment timeframe and method of compounding interest, someone borrowing the maximum would pay under $50 in interest if they repay the loan within six months, whereas someone using a payday lender for a similar loan could expect to pay $112 in interest and fees, for a total APR of 584 percent. Total monthly payments are low -- a $100 loan would result in monthly payments as low as $20 -- and employees can pay off the loan early without penalty.The program’s cost isn’t low just for employees; it’s also low for the state. It takes less than one full-time public worker to run the program, and there’s less than $500 in annual mailing costs, according to Anne Dinterman, the employee programs director for the Department of Human Resource Management. No marketing budget is necessary because all of the program’s promotion happens by word-of-mouth.
The popularity of the program with state employees is indisputable. The state intended it to be a six-month pilot program, but more than 1,300 loans were issued during its first month, and after the second month, the state decided to make it permanent. Dinterman says that as of late October, 8,381 loans have been funded since the program began, with most employees taking the full $500, bringing the total amount given out to more than $9 million.
I spoke with Dinterman to find out more about how the loan program works and how it benefits borrowers. Her edited responses appear below.
What are the requirements for employees to apply for a loan?
Employees have to be nonprobationary, here at least a year, salaried, full-time, a member of the credit union (or they can join the credit union), and cannot have defaulted on any credit union loans. One of the things that makes this program unique is that we require that the employee take a 15 to 20 minute online financial education course and complete a quiz. Employees have to get 80 percent correct --they can retake if they need to -- but the quiz is on checking and money management.
Is there any data to show that the education portion is useful?
We’ve done a couple of surveys of people who have had loans and paid them back and probably 50 percent thought it was helpful. There’s probably about 20 percent that said this is just another hoop to jump through to get the loan, and the other 20 percent said they already knew these things.
Which types of employees are the most frequent borrowers?
We do an assessment of borrowers by pay bands (there are six in Virginia), with the lower being paid lower. Most employees are in pay bands one through three, and that reflects the number of borrowers.
How do you cater to these employees?
We did design forms that would fit our target market, making sure there weren’t a lot of legal or financial terms. We haven’t had very many complaints at all from people who don’t understand the system. The biggest complaint is they don’t have a printer or Adobe.
How do you ensure employees repay their loans?
Employees had to set up a direct deposit from payroll into their credit union account. They sign an agreement to pay it back each pay period. The agreement also states that if they separate from the state, we will take the remaining balance from their paycheck -- this helps keep the write-offs down. We do have some people who know how to game the system -- they get the loan, two days later declare bankruptcy, and since the loan isn’t protected, we have to write that off. That’s a very small percentage of people, but there are some who try to make off with the money and not pay it back. About one percent we have to do some write-offs on.
What reasons have employees given for taking out the short-term loans?
A lot of it is for medical bills, copayments that aren’t covered by insurance, expenses associated with a child going to college or a private school, car and home repairs, and things that aren’t covered by the emergency grant program.
Is there a certain time of year when you see borrowing increase?
Recently, we’ve been trending up, and we usually do this time of year. Holiday expenses exacerbate the need to borrow.
Do you have repeat borrowers?
Between July 2009 and January 2012, we’ve had more than 1,500 people take out one loan, 1,054 take out two loans, 926 with three loans, 875 with four loans, 667 with five loans, 141 with six loans and 16 with seven loans, which means those people received a loan twice a year every year since the program started. We also found that some repeat borrowers do so because they have no other plan for saving money -- they don’t know how to do it. If they put it in savings, they take it right back out to pay a bill. This spreads out some of their debt. It’s a bit of a budget balancer for them. They don’t have the discipline in paying something off.
Does the state offer any programs to assist these frequent borrowers with money management?
One of our state benefits is through ValueOptions, and they do credit and financial counseling for free, so we frequently have referred constant borrowers to that program. The credit union itself does money management seminars for us in different parts of the state. Our group does not do the financial counseling. We’re not the experts on that.
Are there any plans to increase the amount that employees are able to borrow?
We did a survey probably a couple of months ago, and about 40 percent thought the amount was just right; some thought it should go up to $1,000; and some wanted it higher than that. We think if we increased it, our write-off rates would be higher because some people wouldn’t be able to manage with that much coming out of their paychecks.
What lessons have you learned running the program so far?
You need a strong financial partner and good IT resources. We used an established employee database so it automatically checks to make sure you’re eligible for a loan, and if you don’t meet that criteria, your loan request is automatically rejected. We did develop a web-based application with help screens and documentation because we have a lot of employees with limited PC experience. You also need to have a strong relationship with payroll officers, adequate staffing, and you need to know the laws and guidelines in your state for loan collection.
Is there any evidence that the program helps boost employee morale?
Virginia state employees haven’t had a raise in three years, so that dampens morale. We have people say all the time that these loans help them get by. They’d rather have a raise, but this will do in the meantime.
Are any other states running or considering similar programs?
This was the first program of its kind in the country that we could find. Apparently other state governments don’t have a strong financial partner. No one is doing it yet with the exception of states that loan money to employees for education-related expenses. But to have a loan under the guidelines that we have, it just doesn’t exist anywhere else.
