In honor of Memorial Day, The Motley Fool salutes current and former military personnel and their families with a series of articles addressing common financial issues they face. Check out all of the Fool's Memorial Day articles.
For years, our military has been underpaid. Called upon to fight anywhere and everywhere they are ordered, our military personnel aren't even paid what a civilian would be paid in a similar job -- not to mention the obvious risks involved.
According to government figures, the "pay gap" between the military and civilians is about 4%, and Congress is debating competing spending bills that would raise military pay either 3% or 3.5%. Paying our military enough has been an issue for as long as this country has had an army, and although the gap began to narrow for several years, the disparity has increased during the current war.
For example, a typical Army private earns a little more than $17,000 a year, according to the Army's website, while a staff sergeant with six years of experience makes under $30,000 annually. Compare that to the private contractors hired by the government to work in Iraq who can make as much as $120,000 tax free.
With low pay comes the need to stretch those dollars as far as they can go, a situation with which anyone struggling to make ends meet can sympathize. Our military personnel enjoy some perks that are unavailable to civilians, and rightly so. Yet having your college tuition paid years down the road doesn't translate into food on the table this week. Such perks can't be converted into cash when it's needed, and sometimes there's not enough to go around.
And sometimes the government steps in, ignoring reality, playing politics and removing a valuable -- if imperfect -- financial resource.
Bridging the gap
Military personnel used to be able to turn to payday lenders, which often had branches near military bases. Go in with a post-dated check for the amount of the loan (plus a fee for the service) and you could walk out with cash. That was very useful for many members of the military trying to keep their finances under control.
No more. Last year, Congress got its dander up -- not about underpaying our military, but about how payday lenders provided a service the personnel obviously needed and used.
The Pentagon's own figures show that about 20% of military personnel used payday loans. This raised concerns within the Pentagon that financial worries -- including debt related to the payday loans -- were distracting members of the military, hurting the overall readiness of our armed forces. Congress ended up passing a bill which capped interest rates at 36% on payday loans made to military personnel. Nor can payday lenders require a personal check or the title to a car as collateral.
Protecting them from themselves
Despite sounding reasonable, this bill was a thinly veiled attempt to outlaw military payday loans entirely. In response, Advance America (NYSE: AEA ) , the nation's largest payday lender, simply stopped providing loans to military personnel. This likely left many service members in a bind, closing off one important avenue of getting the financial assistance they need.
We've often said the best thing for people to do -- military or otherwise -- is to live within their means. If you make only $300, don't spend $325. Put aside a little bit of each paycheck for emergencies. Pay yourself first. These are all very Foolish ideas and should be used by everyone. A little fiscal responsibility on our part would negate the need for payday lenders to begin with. Sometimes, though, reality steps in and you have to get your car fixed even though you're not getting paid until next Friday. That's where a payday loan can prove useful.
As usual, legislators have taken the politically expedient route of attacking the symptom rather than one of its causes. Instead of looking to the root of the problem -- underpaying military personnel -- they have chosen instead to focus on the finance companies that offer them a potential solution, even if it may not be the ideal one.
The payday loan industry is under attack on many fronts. Lenders like Cash America (NYSE: CSH ) and EZCORP (Nasdaq: EZPW ) provide a much easier target than facing up to the fact that our military is underpaid. There's no substitute for being fiscally prudent, but as we honor those who serve their country, we needn't make their task even harder by taking away some of their last financial options in lieu of raising their pay.
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Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.