SINGAPORE (July 1): For Madam Rose (not her real name), 2015 was not a good year. She was in the midst of a divorce and worried about obtaining custody of her three children. She had no income and was saddled with debt incurred by her former husband. He needed money for lawyers’ fees in a criminal case and, on the promise that he would pay it back, she took out a $4,000 loan from a friend’s friend. But he did not pay up, the interest accrued and she was faced with a $6,000 debt and no way to pay it off.
The debt was always on the back of her mind. It compounded her mental stress that was already brought on by sorting out details related to the divorce, looking for a job and childcare for her three-year-old, as well as moving into a $400-a-month rental flat.
“It was very stressful for me. I don’t like having debt. I have a habit of paying off the full amount or even paying more. But my ex-husband is different. He will tell me not to pay bills in full,” says Madam Rose, 46, who now works in passenger assistance at Changi Airport.
According to recently released research, the negative effects of chronic debt on a person’s cognitive functioning are “large” — equivalent to one day of sleep deprivation. This means the person is slower to react and more likely to make errors.
Relieving chronic debt can reduce stress. In this study of 196 participants of a debt relief programme in 2015, the number of people exhibiting generalised anxiety disorder fell from 78% to 53% after receiving debt relief.
This study, titled “Reducing debt improves psychological functioning and changes decision-making in the poor”, was published in April and compared participants before and after they received debt relief in a programme by the Methodist Welfare Services (MWS) called Getting Out Of Debt.
The programme helped 619 low-income families clear $1.6 million in chronic debt so they could have a clean slate and start saving for their families’ futures. The families received an average of $2,584 in debt relief; funds were disbursed according to the size of their debts, with a cap of $5,000.
The research was conducted by Ong Qiyan, deputy director of research at the Social Service Research Centre at the National University of Singapore; economist Walter Theseira from the Singapore University of Social Sciences; and Irene Ng, director of the Social Service Research Centre at NUS.
The study’s participants had varying amounts of debt held under varying numbers of debt accounts. But what the research found was that clearing one debt account improves cognitive functioning by about one-quarter of a standard deviation. It also reduces the likelihood of exhibiting anxiety by 11% and of present bias — when an earlier smaller payoff is preferred to a larger, later payoff — by 10%.
Theseira says: “We found that a lot of the relief is related to how many debt accounts you can clear, and not so much related to the amounts. That’s useful because it suggests there are some policy changes that could achieve positive impact.”
Modern society, adds Ong, has a bandwidth tax that is difficult for the poor to overcome. “In the ancient days, when you needed money, you borrowed from the village head, so there was only one debt account. Suppose we bring that model to modern day. Maybe people can function a little better.”
Today, people have to juggle multiple payments or, effectively, debt accounts: mortgages, phone bills, service and conservancy charges, insurance premiums. On top of that, those in debt may owe money to friends, family and licensed as well as unlicensed lenders. Their income also comes from multiple sources — their job or jobs, financial assistance and rebates from the government, food donations or cash from charities — which may pay out at different times.
Ng points out that Singaporeans who are not poor have many of these accounts automated through direct debits from their bank accounts, such as GIRO.
But it takes more effort for low-income Singaporeans to keep their finances in order. “Their subsidies have to be reviewed. [They need to] talk to the officer and assess situations again. They have to [be proactive] to keep on with their life compared with higher-income people,” she says.
She understands that institutions have to be accountable, but the researchers say it is worth looking into whether government accounts can be consolidated. What is needed is for payments, particularly for public services, and debt to be streamlined.
Theseira says: “It may be worth thinking about how attention is a limited resource. Please don’t give people more things to keep track of and more different sources to seek help from if it is not necessary to split and replicate it.”
Gerard Ee, veteran social worker and executive director of Beyond Social Services, says: “You keep putting on the pressure, people just get more desperate and end up making poorer decisions. We have to try and help people have some form of stability,”
Ee thinks it is possible to have a middleman, or agency, underwrite the debts and restructure them into one account so there is less cognitive impairment on the debtor.
Calling the 2015 debt relief programme “progressive”, he says it is also possible to just pay off people’s debts if they are in small amounts, such as what was done in the study, where the average and median debt amounted to $6,257 and $3,574 respectively.
However, this does require broader society to understand why such programmes are helpful.
Ee thinks the greatest barrier is not the dollar amount, but the view that debtors are being let off easy. But there are other ways to hold debtors accountable, he argues. “There can be some sort of co-payment. Maybe they can do some volunteer work and pay back [the debt] with skills that they have. [This will help them] integrate into community and society.”
For Madam Rose, the programme paid off the $959.65 she owed in arrears (the debt relief did not cover personal debts), taking a load off her shoulders. She paid off the rest of her debt with the proceeds from the sale of her marital home.
Building on the programme’s success and learning points, MWS in 2016 launched the Family Development Programme to help families like Madam Rose’s build assets. The programme allows families to contribute up to $100 a month, and matches that at a ratio of 1:2.
Madam Rose has since accumulated $6,000 and is hoping to get to $10,000. She is now looking to buy a three-room flat and start life anew.
“Without their help, I don’t think I could have found a way out,” she says.
For the 196 participants in the study, their average debt fell from $6,257 to $4,265, while median debts fell from $3,574 to $1,128, three months after debt relief. The average number of debt accounts fell from 3.27 to 2.21.
It is unclear how many have stayed out of debt the way Madam Rose has, but Ong says whether the programme sticks is not the main point.
She says: “If it didn’t stick, it is because the financial scarcity problem remains and there is a high propensity to get into debt. Poverty cannot be solved with one programme. It is about increasing income, reducing the stigma of poverty and asking for help, and giving access to opportunities — everything has to work together.”
