Americans are paying more than ever in fees, which are tacked on to the price of everything from utility bills to concert tickets. This money-making mechanism is used widely by both the private and public sector because fees are often far outside the regulatory domain. But Devin Fergus, a professor of history, black studies and public affairs at the University of Missouri, warns that fees are quietly draining the wallets of middle-class Americans who can do little about it.
Fergus notes that hidden fees represent a massive wealth transfer whose dimensions are mind-boggling. Subprime mortgages, payday lending, student loans and urban auto insurance now “collectively [cost] working- and middle-class consumers more than roughly $1.46 trillion each year,” he writes in his new book, Land of the Fee: Hidden Costs and the Decline of the American Middle Class. “That eye-popping sum is greater than the revenue budgets of the United Kingdom and France, and nearly equal to that of Germany.” Fergus writes that if the cost of these financial products could be cut just 1%, it would generate some $14 billion a year in new spending power that families could use to “reduce household debt, increase their savings, or invest in retirement or income-generating assets.”
Fergus recently joined the Knowledge at Wharton show on SiriusXM to discuss his book, which traces the history of fees and explains their cumulative effect on income inequality.
An edited transcript of the conversation follows.
Knowledge at Wharton: There are fees when you travel by plane, fees on a ticket to a concert or a ball game — they seem endless at this point.
Devin Fergus: Absolutely, they’re endless. The analogy I use is that like ingredients in a cake, they’re impossible to sift out. At any college campus, there are these things called tuition and fees. You can’t opt out of those fees. At the university where I teach, if a student tries to opt out of the fees, he will not have a seat in the classroom. These fees at some level might seem optional, but they’re really required. My research looks at primarily the ways in which these fees function and operate within spheres of upper mobility in America.
Knowledge at Wharton: Fees have been around for a long time, but have they increased significantly in the last 10 years or so?
Fergus: Yes. In the last 30 years, there has been a loosening of federal oversight of fees. I would say in the 10 years leading up to the Great Recession, we saw an explosion of fees. These fees are tied to increasing deregulatory policy, which is the decrease of oversight of financial institutions and how they interact and behave with consumers. That partly explains the rise of fees.
As one former Fed governor said, it’s kind of like removing the police off the beat. When you take the police off the beat, you often find examples of predatory behavior, and that predatory behavior can be between a financial institution and an individual, or between someone who’s acting on the margins of society and some citizen passing by.
Knowledge at Wharton: How are fees affecting the middle class?
Fergus: The clearest example is the impact of the rise of student loans and the fees associated with student loans. What you find in court decisions since the 1980s is that companies play a shell game. When it’s in their favor, they want to define these fees as fees. They want to define them as fees and not as interest rates because they believe that fees often go outside of regulatory oversight. There’s a thing known as usury, and usury often gets caught up under both state and federal oversight in ways in which fees often don’t.
“My research looks at primarily the ways in which these fees function and operate within spheres of upper mobility in America.”
You find that student loans are often associated with a rising cost of fees. Interest rates often get conflated with fees, meaning that the fees plus these charges often now outstrip the actual principal of a student loan. What you find is that individuals pay three and four times the cost of an actual student loan because of interest and fees.
You think of college as a space of great social leveling, and in reality these colleges are increasingly sites of greater and greater inequality. I’ve worked with several think tanks around the country, and one of the things that they’ve noticed is that for working-class Americans, the biggest debt complaint that they have is not a payday lender or high interest rates for car loans or even a mortgage loan, it is predatory student lenders, primarily in the for-profit sector. I think that really stands out because higher education is this site of upward mobility for Americans, ostensibly, and it’s decreasingly been that way.
Knowledge at Wharton: What needs to change?
Fergus: I think we’re drifting back toward loosening regulation. I’m a historian by training, and I think of the famous analogy that President Franklin Roosevelt used in the aftermath of the Great Depression, where he tells the story of a man who falls into the water. A person goes in to save him from drowning. The man thanks him profusely on the spot, but then a few years later comes back and berates him for not saving his hat.
Now, FDR’s point is about the short-term memory of individuals. In the aftermath of the Great Recession, tax-paying citizens, through the federal government, saved industry and saved business. But now we see a re-shifting and aggressive behavior towards pushing back and rolling back consumer protection policy, most notably with the Dodd-Frank Act. People have forgotten what happened in the run up to the Great Recession.
How do you rein this back in? I think one way is by more shared responsibility in terms of costs, particularly with higher education. One concrete example of that could be a graduation tax or graduate tax where you tax individuals not for coming to college through the rise of student loans, but you actually tax those individuals who graduate from college. That would be a much fairer practice rather than taxing individuals via student loans who come into college.
Knowledge at Wharton: So, the financial sector, including banks, investment firms and credit card companies, benefits greatly from fees.
Fergus: For me it is difficult to decouple this argument about the rise of fees from the growing influence of the donor class on policies. The example would be the rise of mortgage lending fees, which got codified in the early 1980s. It didn’t really take off for various reasons until the late 1990s, early 2000s. But it got codified nationally in the early 1980s through a couple of pieces of legislation. One was known as the Garn-St. Germain Depository Institutions Act, which enabled lenders to charge higher interest rates and do things like charge prepayment penalties, charge balloon payments and charge the adjustable-rate mortgages.
These things existed, but they weren’t codified nationally until the passage of the act. And they got codified because the financial sector, the financial industry, these lobbies were actually giving major kickbacks to the architects of the bill: a senator from Utah named Jake Garn and a Congressman from Rhode Island named Fernand St. Germain. They were receiving kickbacks in order to fund the bill that the lobbyists wanted, and that bill did not benefit the consumer. It [benefited] the financial industry, and it was the origin of the rise of subprime mortgages.
Knowledge at Wharton: How much wealth has been lost by middle-class Americans because of fees?
Fergus: Over the life of these fees and charges in payments, [fees have] extracted over $1 trillion of wealth from the pocketbooks of Americans. I’m going to go back to the student loan because I think it’s so important and so critical because it’s considered to be the passport for upper mobility in contemporary America. The student loan has all kinds of hidden costs.
“For me, it is difficult to decouple this argument about the rise of fees from the growing influence of the donor class on policies.”
I’ll give you an example. You take out a student loan for over four years for $80,000. That increases one’s debt-to-income ratio, which lowers one’s credit score. By lowering one’s credit score, it means you also are going to be charged higher interest rates and fees for other consumer loan products — for example, a mortgage. So, it’s really a false argument to just look at a student loan as a 10-year investment because it carries throughout the life of the borrower, throughout the whole mortgage loan, throughout an auto loan. It saddles the consumer with hidden costs that are well beyond what’s visible at that moment you’re signing the dotted line or filling out that form.
Knowledge at Wharton: How did fees become part of the retail sector in terms of tickets, travel, hotel occupancy, etc.?
Fergus: One reason is a sort of sleight of hand by industry. There’s a desire to keep the base price low. By simply saying “This is the base price for a particular product,” you think that’s what you’re getting. It’s almost like a teaser rate, so it’s a way to keep the base price low and add on costs later.
I’d say a second reason is that it’s a way the industry can also claim disclosure. Disclosure has been used as a way to say, “We’re providing the consumer with transparency and detailed information. We’re making them make the choice and make the decision at some level.” It’s a way in which an industry or a business can claim financial disclosure of information, even though it hits the consumer with more cost and a higher price.
That’s the private sector. In the public sector, it functions the same way. It helps to generate and raise revenue. Research suggests that, in the last generation or so, at least 75% of all revenue has been generated not through taxes but through the rising of fees and fines. It’s a way in which the public sector can raise revenue without claiming to raise taxes.
Knowledge at Wharton: But realistically, it is a tax in many cases.
Fergus: Absolutely. And not only is it a tax, it’s also a tax on those who are not in a position to opt out of the charge. You think about the George Bush election where he said, “No new taxes.” Then what does he do? He increases taxes and loses the election in 1992 to Bill Clinton. We see the fallout of saying, “I’m going to increase your taxes.” But there’s no real fallout from saying, “I’m going to increase your fees.” No one takes that on.
Knowledge at Wharton: What does the future hold for entities that charge fees?
Fergus: The future seems bright, I would argue. It seems bright because there’s a lack of political will to regulate the industries and businesses that are increasingly charging consumers with fees. Until you have a greater political will to rein in these fees and these costs, the future is bright.
There are trade reports, for instance, that talk about the payday lending industry, which is notorious for having more revenue generated by fees than by principal. Industry reports suggest that if the regulatory bar is low, the payday lending industry is going to make an incredible amount of profit. We live in a climate now, a gilded age of deregulation. We can only expect that these fees will increase and go even higher and go unchecked.