CHAMPAIGN, Ill. — The Earned Income Tax Credit aids millions of Americans each year, lifting many out of poverty – but spacing it out in multiple payments could significantly reduce recipients’ dependence on payday loans and borrowing from friends and family, suggests a recent University of Illinois study of a pilot program in Chicago.
Study participants who took half their estimated EITC in four periodic payments between May and December cut their number of payday loans roughly in half by the end of the study in spring 2015. And though their monthly borrowing from friends and family rose early in the study, it also declined by about half from that peak to the end of the study.
“When it comes to making ends meet, there are times when things come up and people on limited budgets need access to cash,” said Ruby Mendenhall, the study’s lead author and a U. of I. professor of sociology and of African American studies. The study suggested that with extra money in hand at points throughout the year, these participants were better able to meet those needs, Mendenhall said.
They also reduced those types of borrowing in relation to other study participants in a control group, who were eligible for the EITC but did not receive periodic payments. Those in the control group steadily increased both types of borrowing through the course of the study, and the trend lines for the two groups crossed. At the end of the study, participants receiving periodic payments were at roughly half the rate of the control group in both types of borrowing.
Researchers also found other significant benefits for those receiving periodic payments, Mendenhall said. On average, they had a higher capacity to afford child care and education expenses, a lower likelihood of missing rent or utility payments, lower food insecurity, fewer late fees and lower financial stress. Some of the differences were modest and others more dramatic.
For those and other reasons, 90 percent of those who received the periodic payments and finished the study said they preferred the new system, even after walking away with only half their lump-sum EITC payment after filing their tax returns.
“We talk a lot in America about what we can do about poverty, how we can support low- and moderate-income families,” Mendenhall said. “These findings show there are policy levers that we can use that can help these families make ends meet and decrease the stress.”
The subject of the study was the Chicago EITC Periodic Payment Pilot, initiated through a partnership between the Office of the Mayor, the Chicago Housing Authority, CHA service providers and the nonprofit Center for Economic Progress – with the CHA and the Office of the Mayor providing financial support. Mendenhall answered a request for proposals and was chosen by an advisory board to study the pilot’s feasibility.
The study participants who received periodic payments, otherwise known as the treatment group, received half their expected lump-sum credit in four equal payments in May/June, August, October and December 2014, all through no-cost loans administered by the CEP. The payments ranged from $80 to $500, depending on the participant. They were expected to repay those loans from their lump-sum credit after filing their 2014 tax returns.
Participants in the control group received only the traditional lump-sum credit after filing their 2014 returns.
The EITC evaluation team included nine faculty members and about a dozen undergraduate and graduate students. They collected data in four waves: at the time participants enrolled, after the first payment, after the third payment, and after the final lump-sum payment, allowing time for participants to spend it.
For each wave, the researchers surveyed all participants. They also, for each wave, chose 10 participants each from the treatment and control groups to be part of focus groups, and also interviewed up to 10 individuals each from the treatment and control groups.
This type of mixed-method research can be very labor-intensive, Mendenhall said, but she felt it was important to do it this way. “With this population, often their voices are not heard in terms of policy decisions,” Mendenhall said. “Having their stories and their voices is really important in terms of understanding the numbers and understanding the impact.”
The sample group for the pilot included 505 participants, but a significant number did not complete all four waves of data collection or did not pay back their loans, Mendenhall said. The report’s analysis of survey data includes only the 293 participants who did both (217 in the treatment group and 76 in the control group).
Mendenhall thinks that makes the 90-percent endorsement of those in the treatment group at the end even more significant. “They wanted it, they experienced it, they paid it back, and then they said they really liked it, that it was helpful to them.”
Given that more than a third of those in the original treatment group did not repay their loans, another system of administering payments may need to be found – perhaps through the IRS – to make periodic payments a more-widespread and viable option, Mendenhall said.
Figuring that out, however, may be worth it for improving on the beneficial effects of the EITC, an anti-poverty program that historically has had bipartisan support in Congress, Mendenhall said. “For a lot of families trying to manage very limited budgets, these periodic payments can make a difference.”