Military Loans and Military Readiness | Is There a Connection?

Study Makes Case, But Authors Discount Variables

Do military loans put personnel on a collision course with financial catastrophe? (Photo:

Do military loans put personnel on a collision course with financial catastrophe? (Photo:

Payday loans come in a variety of packages for consumers, and that includes those who are active members of the military. They’re called military loans in that instance, and they can be quite useful to military personnel who have had difficulty obtaining loans from banks and credit unions. While a variety of underwriting decisions could factor into such rejection, the fact that many military members who borrow are young and do not have established credit histories would appear to be the most obvious.

Military Loans are Highly Regulated

In October of 2007, the Department of Defense imposed a 36 percent APR cap on military loans to personnel and their family members. Considering that young military families must pick up and move frequently and are often on the lower end of the military pay scale, financial shocks do occur. Spending habits are clearly an important factor in whether a military family faces financial calamity, a factor that can lead to a need for military loans should the family budget fail to stretch between paychecks.

Do Military Loans Hamper Military Readiness?

That’s the question the study “In Harm’s Way? Payday Loan Access and Military Personnel Performance” by Scott Carrell of UC Davis and Jonathan Zinman of Dartmouth College and the Federal Reserve Bank of Philadelphia poses. Their study was conducted before the implementation of the 36 percent APR cap, between 1996 and 2007. U.S. Air Force airmen were the focus, but the authors claim there is no obvious reason to suggest that conditions would be appreciably different for other service men and women.

The authors suggest that the availability of military loans before the 36 percent cap correlated to a decline in military readiness of personnel, but it seems to this reviewer that the number of variables is much too great to affix the blame solely upon military loan businesses. There are so many possible psychological and educational variables in play that the mere presence of legitimate businesses within a military community (or online) couldn’t possibly be the sole cause of financial distress.

Access to High-Interest Debt: “Inconclusive” Affect on Borrower Behavior

Carrell and Zinman preface their work with that admission. So does that mean that we should take their conclusions as mere speculation? I can speculate regarding whether the presence of ice cream in a community contributes to dairy allergies, but that doesn’t mean it is unequivocally true.

In fact, analysis exists which indicates that the presence of military loans and related payday loans has a positive impact upon military personnel and their families.  On average, says Adair Morse in his 2007 study “Payday Lenders: Heroes or Villains?” and Bart Wilson, et al in the 2008 study “An Experimental Analysis of the Demand for Payday Loans,” military loans help personnel handle financial shocks. Dean Karlan and Jonathan Zinman found in 2008 with “Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts” that access to payday loans contributes to job retention. And it should also be noted that the 2008 Federal Reserve Study “Payday Holiday: How Households Fare After Payday Credit Bans” by Donald Morgan and Michael Strain indicates that families (military or otherwise) who experienced financial distress were able to obtain greater budget liquidity to alleviate the distress thanks to military loans and payday loans.

So Where’s the Connection Between Military Loans and Lack of Military Readiness?

Carrell and Zinman claim to have found “significant average declines in overall job performance and retention and significant increases in severely poor readiness,” which they attribute to military loans. Yet they say that “the welfare implications for military members are less clear-cut,” which indicates to me that this is more speculation than solid scientific research.

The study authors reference the Pentagon’s belief that military loans “cause financial distress and related distractions.” At the same time, however, they admit that another possible effect of access to military loans is that personnel and families will experience greater financial liquidity, which in theory enables them to invest in outside areas (greater opportunity in the private sector) that could make re-enlistment less necessary for personnel. That could then be a technically positive factor that skews the results of Carrell and Zinman’s rather negative study.

But Here are Their Findings

The authors suggest that airmen become “significantly” less eligible to re-enlist (by 1.1 percent). They find that military loans also contribute to poor readiness (more unfavorable information files present for personnel in areas where military payday loans are available). But they undercut their findings with the admission (once again) that “our data do not permit sharp tests of the welfare implications for military members.”

It seems likely that the youth and inexperience (as well as the transitory lifestyle) young airmen and their families are forced to live would have a greater effect on the financial burdens they face and their spending habits. Using military loans could simply be a means to an end for dealing with the shocks. As the military provides financial education to their members and their families – particularly since the 36 percent APR cap – using military loans irresponsibly should be a less likely occurrence.

We Aren’t Talking About Large Loans Here

A standard military loan amounts to anywhere from $100 to $300 in the authors’ study. The market rate was $15 per $100 loaned (a common rate found now), so the final cost would range from $115 to $345. Higher rates are charged at some lenders, however. But the more expensive substitute – overdraft protection, according to multiple sources – can prove to be an even greater financial burden. The APR charged can be hundreds of percentage points higher, depending upon the bank.

Military Loans and Being Fat

I found this interesting. One of the factors Carrell and Zinman found could appear on an airman’s profile that indicates lack of military readiness is weight problems. According to the U.S. Air Force, personnel must be physically fit enough to perform their duties. Among their military loan sample, the authors found that as much as 3.3 percent were enrolled in a Weight Management Program (WMP). This varies depending upon the length of service for personnel (first, second or third term; 3.3 percent came from the second term of enlistment).

Does this mean that military loans make airmen unfit because it makes them fat? I find that to be a laughable assertion. Education about diet and exercise correlate greatly to personal weight in every study I’ve seen. Not having access to more money via military loans or otherwise seems an unlikely correlation. Fast food consumption tends to be greatest among those with less money and overall education, which leads me to believe that education would have a similar impact upon one’s financial decisions (both health and money choices can be impulsive, but education lessens this likelihood).

It’s the State of Their Communities

In general, Carrell and Zinman find that Air Force bases in more distressed areas (where unemployment is greater) tend to be more prone toward dependence upon consumer credit like military loans. Areas with more positive employment numbers show a lesser dependence. This could link toward greater financial experience and education in those areas, which seems obvious to consider. Yet the authors tend to gloss over this potentiality.

Military Loans are a Tool. The User is the One Responsible

It’s impossible to get around the fact that Carrell and Zinman admit that “the social welfare implications of our results are less clear-cut.” They claim they support the Pentagon’s findings that military loans and payday loans damage the quality of life for military members and their families, but factors of education, psychology and the rigors of military life itself deserve greater study. Are these factors more accurate determiners of whether military families face financial distress? It seems that more study in these areas is called for.

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