Debt reduction strategies to close the gender gap in “burdensome debt”

More women report carrying unmanageable levels of debt than men. Women’s History Month is a great time to explore how employers can help, and why doing so is smart business.

Debt reduction strategies can equip your employees with the tools and resources they need to perform at their best, free from the financial stress that drags on profits, productivity, and health.

More women report carrying unmanageable levels of debt than men, finds “The Gender Gap in Financial Health Identifying Barriers and Opportunities for Improving Women’s Financial Health,” from the Financial Health Network.

Women’s History Month is a great time to explore how employers can help, and why doing so is smart business.

According to the report, men are roughly 1.5 times more likely to be Financially Healthy than women and only one in five women (20%) are Financially Healthy compared to 29% of men.

In fact, unmanageable debt has a material impact on the life trajectories of young women and women of color, with student debt and medical debt weighing particularly heavily:

• More women report carrying unmanageable levels of debt than men (39% versus 31%).
• 51% of Black women report unmanageable debt, compared with 39% of White women.
• Women report high degrees of concern about the ability to pay off student debt. Among those with household student debt, one in three women say they are “very concerned” about their ability to pay off debt, compared with one in five men (33% versus 18%).
• Women are also more likely than men to report that their households have past-due medical bills than men (29% versus 22%).
• 44% of women ages 18–29 say that debt has led them to delay purchasing a home, getting married, having children, or making other life adjustments. This figure contrasts with 34% of men in the same age bracket.
• Almost 2 in 5 Black and Latina women (39% and 36%, respectively) say they have altered their life trajectories due to debt, compared with one-fourth of White women (26%).

These disparities in debt are hurting your organization.

Gender disparities in debt hurt your organization

Employees are spending time at work on personal finance issues and costs accrue to employers in the form of lost productivity and absenteeism, offers Joanne Sammer, in “How Improving Financial Health Boosts Productivity,” writing for the Society for Human Resource Management (SHRM).

Meanwhile, PricewaterhouseCoopers finds that nearly half of employees who are worried about their financial health miss work and are less productive, spending at least three hours of work time on personal financial issues, costing $3.3 million in lost productivity per year, plus $166,000 per year due to financial-related absenteeism.

Helping to close the gender gap in burdensome debt is one, smart, way to reduce absenteeism, increase productivity, and enhance loyalty, motivation, and retention, not to mention to improve mental health.

Given the workplace effects of financial stress, it’s in every employer’s interest to support your employees in creating debt reduction strategies as part of a holistic financial wellness solution and human capital management plan.

The importance of human capital management, the process of hiring the right people, managing workforces effectively and optimizing productivity, has evolved from a mostly administrative function to a critical enabler of business value and employee (financial) health.

These days, if your human capital management plan doesn’t include financial health then you’re falling behind.

Debt reduction strategies to consider

There’s no right way for your workers to pay off debt. It depends on their personal preferences and obligations, finances and goals.

One strategy is the “avalanche” debt reduction strategy. The avalanche strategy prioritizes paying off the debt with the highest interest rate first.

Another strategy, the “snowball” debt reduction strategy prioritizes the debt with the lowest balance. The idea is that they’ll be able to pay it off relatively quickly and build momentum, financially and psychologically, to tackle other debts.

At the end of the day, with all debt reduction strategies, they should figure out how much they can realistically contribute to their debt each month and go from there.

And if they decide that debt reduction strategies on their own aren’t going to work for their budget, then it could be time for them to consider a debt management program.

Our TrustPlus personal financial coaches regularly work with clients on helping to weigh the pros and cons of debt management programs.

Debt management programs, pros and cons

If it’s clear that debt reduction strategies on their own will not lead to freedom from debt, then debt management programs can be an option to put some of your workers on a path to pay off their debts.

With a DMP, several debts are rolled into one monthly payment and creditors reduce your interest rate. In exchange, the borrower agrees to a payment plan that usually runs three to five years, according to NerdWallet.

Here are a few of the considerations:

Pros:

• Cut your interest rate in half (sometimes more).
• Pay off debt faster.
• Consolidate several debts into one payment.

Cons:

• Primarily for credit card debt (not for student loans, medical debt or taxes).
• Timeline can be three to five years, (during which you’re typically not able to access credit or secure new credit lines).
• Missing a payment can derail the plan and end your interest rate cuts.

Debt management programs vs. debt settlement

One important thing to note is that there is a huge difference between debt management programs borrowers arrange with the help of credit counselors (or TrustPlus coaches!) and debt settlement.

Credit counseling organizations are usually non-profit organizations that advise you on managing your money and debts and usually offer free educational materials and workshops. Debt settlement companies offer to arrange settlements of your debts with creditors or debt collectors for a fee.

Credit counseling services to help you deal with debt are different from debt settlement or debt relief companies in a number of important ways according to the Consumer Financial Protection Bureau.

Credit counseling services that assist with debt management programs:

• Usually non-profit organizations.
• Advise you on managing your money and debts and help you budget your payments.
• Reach agreed upon payment plans or agreements with your creditors to ensure that the creditors will not pursue collection efforts or charge late fees while on the plan.
• Usually do not negotiate any reduction in the amounts you owe — instead, they can lower your overall monthly payment.
• Do not advise you to stop paying your debt, but may help negotiate your monthly payments.
• Payment plans do not usually have tax implications.

Debt settlement companies:

• Usually are for-profit companies that charge a fee for their services. Generally, these companies cannot charge you until after they perform services.
• Offer to arrange settlements of your debts with creditors or debt collectors
• Often have no up-front agreements with creditors. Some creditors will not negotiate with debt settlement companies.
• Typically offer to pay off your debts with a lump sum payment that you save up in an independent account that you control.
• Usually advise that you stop paying your creditors until a debt settlement is negotiated with creditors, which may damage your credit and result in your being sued.
• Debt settlement may involve debt forgiveness, which may have tax implications.

At the end of the day:

“Debt settlement may well leave you deeper in debt than you were when you started. Most debt settlement companies will ask you to stop paying your debts in order to get creditors to negotiate and in order to collect the funds required for a settlement. This can have a negative effect on your credit score and may result in the creditor or debt collector filing a lawsuit while you are collecting funds required for a settlement. And if you stop making payments on a credit card, late fees and interest will be added to the debt each month. If you exceed your credit limit, additional fees and charges may apply. This can cause your original debt to increase.”

So, this Women’s History Month, let’s remember, debt management programs can be a good option to help employees reduce debt and its accompanying stress. Especially for your workers who identify as women and suffer from disproportionate levels of burdensome debt.

Note on terms: We use the gender terms as listed in the report in this post.

Schedule a time to speak with TrustPlus about debt reduction strategies and easing employee financial stress to capture the benefits of a financially healthy workforce.