Helping working poor families with low-interest loans

Helping working poor families with low-interest loans

Raschick, Michael

Creative approaches are needed to help asset-deprived, working poor families. The author evaluates the effectiveness of one such program, the Duluth (MN) Lutheran Social Service Loan Fund Program, which provides lowinterest loans to low-income families to help them confront transitional financial crises that prevent them from either continuing their education or maintaining their job. As a result of a partnership between a local human service agency and a community bank, loan recipients are able to build their credit ratings with the bank through timely repayment of their loans. This study shows that the loan fund increased recipients’ long-range financial stability and that recipients were highly satisfied with the program.

Working poor families are often neglected in antipoverty strategies, despite the fact that they represent perhaps one-half of all poor families and are either chronically dependent upon welfare or chronically at risk of such dependence (Chilman 1991; Danziger, 1989; Zimmerman & Chilman, 1988). Part of the problem is that these families lack savings or other assets to help them through financial crises such as job loss or major car repairs. In addition, they have not had the resources to invest in long-term financial security-savings that would enable them to cope temporarily with a loss of employment income while they are going to school. As Sherraden (1991) observes,

working poor families have little cushion to protect them from poverty when a job loss, divorce, major illness, or other life crisis strikes. It is members of this group, without assets, who slip into hardship and public assistance, then work their way out again, accounting for the -dynamic nature of welfare recipiency in the United States. Without assets, children in these families are less likely to plan for the future and less likely to undertake a college education, perpetuating lower incomes and intergenerational finances removed from asset accumulation. (p. 8)

Although various strategies have been proposed to help the working poor, only a few have focused on providing them with assets as opposed to subsistence income (see Chilman, 1991; Danziger, 1989; Jencks, 1992; Levitan & Shapiro, 1987). One innovative approach to help provide poor families with adequate assets is the creation of individual development accounts (IDAs), which are comparable to individual retirement accounts (Edwards & Sherraden, 1994; Sherraden, 1991). However, although IDAs would be expected to stimulate long-term savings, they aren’t well-suited to help provide working poor families with the financial cushion they need to cope with unexpected financial crises such as needed automobile repairs.

Some “community development credit unions” and “community development loan funds” accomplish the latter (Kretzmann & McKnight, 1993). For example, the Minneapolis Single-Parent Program, which is discussed later in this article, is a community-based loan program coordinated by a social service agency. Research shows that it is effective in financially stabilizing low-income single-parent families (Jones & Wattenberg, 1991).

What has generally been lacking in these emergency, asset-focused loan programs for low-income families is an organizational partnership with established banking institutions, whereby low-income applicants (and recipients) are treated like all other bank clients. Such an approach would have several potential advantages. It would facilitate a business-like, nonstigmatizing atmosphere for low-income banking clients, which is key to successful human service provision (see Golden, 1991; Schorr, 1989). Related to this, low-income loan recipients working directly with banks would be in a position to gain the financial knowledge and socioeconomic and institutional connections to help integrate them into respected community roles (see Sherraden, 1991). In addition, low-income recipients could have the opportunity to build up their credit ratings through timely repayments of their loans. Not only would this likely improve their long-term financial security, it would potentially integrate them further into respected community roles.

Of course, this kind of privatesector loan faces challenges. One challenge involves ensuring that the lending bank is provided with sufficient human service expertise to make equitable judgments about the needs of loan applicants as well as their potential to repay their loan. Banks have traditionally not done well in assessing “human capital,” that is, the motivation and potential ability of loan applicants to earn enough money to repay the loan. Instead they have tended to focus exclusively on “financial capital” at hand at the time of the loan application. As explained by Sherraden (1991),

Capital markets (credit markets) have imperfect information about borrowers and may refuse to lend even when borrowers are good risks. Another way of looking at this is that capital markets function much less perfectly in evaluating human capital than in evaluating financial capital. Even though someone may have the educational background and skills required to earn a solid income, capital markets may not accurately value this human capital (pp.149-150).

Even when low-income families are theoretically eligible for bank loans, the interest rates have often been excessively high in order to cover the inaccurately perceived risks of loan recipients defaulting (Sherraden, 1991). Another important reason banks need to have adequate human service expertise is to ensure that they can service minority populations fairly. In this respect, evidence shows that African Americans have had inequitable access to home loans (Sherraden, 1991).

A related challenge in privatesector-based loan programs for lowincome individuals is the creation of organizational mechanisms through which to coordinate the respective expertise of banks and human service organizations. Finally, even though banks have probably overestimated the credit risks of poor people, the very fact that they are poor, coupled with their probable inexperience in repaying loans, might lead to unacceptably low repayment rates.

Studying the Duluth (Minnesota) Lutheran Social Service (LSS) Loan Fund allows us to evaluate the advantages and liabilities of a lowinterest-banking loan program for working poor families. The LSS program, established in 1990, is a replication of the Family Loan Program originated by The McKnight Foundation for implementation in the Twin Cities in 1984.1 Since 1994, the McKnight Foundation has been the sole source of foundation support for the LSS program. The loan fund was designed to help “working poor” householders gain long-term economic stability. The loan fund is based on the dual premises that working poor families periodically encounter financial emergencies that can potentially lead to their becoming chronically dependent and that relatively small amounts of money can enable these families to overcome many of these crises.

A Comparison of Programs

The loan fund was modeled after the Minneapolis Single-Parent Loan Program (SPLP), which has been evaluated as quite successful (Jones & Wattenberg, 1991). Both programs provide low-interest loans to low-income families to deter emergency expenses related to recipients’ ability to continue their jobs and/or their educations. The programs are different in that SPLP serves metropolitan and suburban populations; the LSS loan fund, in contrast, has a much less urban clientele (Jones & Wattenberg, 1991; “LSS Loan Fund Program Description,” 1992). Perhaps more significantly, in comparison with SPLP, the loan fund has established a very close human service-privatesector business partnership. Members of the loan fund’s loan-review committee include community human service professionals, advocates for low-income families and former loan recipients, and representatives from local businesses, including at least one member of Norwest Bank, which co-administers the loans with LSS. The SPLP’s loan-review committee, on the other hand, consists primarily of human service staff and board members and former program clients-all of whom are selected on the basis of their “extensive knowledge of the circumstances of low-wage-earning single parents and their communities” (Jones & Wattenberg, 1991, p. 147). Furthermore, the human service agency coalition that handles initial screening of applicants in Minneapolis also administers approved loans, with no banking institution involved. Other differences between the two programs include SPLP loans being generally granted for work or housing-related expenses, whereas loan fund loans are almost equally divided between working and education needs. Also, the SPLP loans are generally limited to $500 (although in some cases $800 or higher loans can be used for purchases) compared with loan fund maximum loans allowing up to $750 for auto repairs and $2,000 for car purchase (Jones & Wattenberg, 1991; “LSS Loan Fund Program Description,” 1992).

Administrative Characteristics of the Loan Fund

Recipient households either currently have a working head or, in the case of students, hold the prospect of a head becoming employed in the foreseeable future. Car-repair or car-purchase loans are common. Seventy-five percent of the loans are for car purchases, and another 17% are for car repairs (personal communication, J. Shreffler, August 9, 1993). “Personal expense loans” are offered primarily to meet short-term, work-related expenses such as purchasing a uniform, clothes, tools, or other personal items necessary for employment; for temporary child-care expenses relating to parents’ employment or educational needs; and to cover miscellaneous expenses for other vocationor education-related needs.

The loans amount to a maximum of $500 for personal loans, $7S0 for auto repairs, and $2,000 for car purchase. The repayment interest rate is 8% annually. Monthly payments are generally $50 to $75 (the latter for car-purchase loans). Repayment must not exceed 30 months; the period is shorter for all loans other than car-purchase loans.

Applicants are screened initially by an LSS loan counselor who gathers extensive information about the family’s monthly income and expenses. Loan applicants must be parents with children in their household. Although single-parent households are given priority, twoparent units are also eligible for loans. Applicants need to have been either employed three months or longer at their current job or to be postsecondary students who have completed one-third or more of their educational curriculum. Their low-income status must not exceed 185% of the federal poverty guideline and they must have disposable incomes sufficient to make the modest monthly loan repayments. If the applicant has not established a credit rating, as is commonly the case, rent and utility-payment histories are gathered. The primary responsibility of the LSS loan counselor at this point is to gather specific data about the family’s financial circumstances. However, in certain circumstances he or she may refer them to a credit counselor within the agency.

If the LSS screening shows that an applicant meets the basic program requirements, the application is reviewed by a loan-review committee. As indicated, the loanreview committee includes human service professionals, advocates for low-income families and former loan recipients, and representatives from local businesses, including at least one representative from Norwest Bank, which co-administers the loan with LSS. Decisions are typically made through consensus. The focus of committee discussions is generally on evaluating the detailed budgetary data gathered by the loan counselor. However, the loan counselor may discuss extenuating circumstances, such as financial instability accompanying recent family disruptions, that may not be reflected in these data. Because the loan-review committee meets every other week, two weeks is the maximum time applicants have to wait for a determination on their loan request. The period can be as short as one day. Applicants are able to obtain the loan immediately after it is approved by the committee. After a family is approved for a loan, many recipients seek the LSS loan counselor’s advice about how to use the money most efficiently, especially how best to shop for a used car or select an automobile mechanic.

Norwest Bank in effect purchases the loan from the loan fund under an agreement by which LSS guarantees the loan with matching funds they deposit at Norwest. From that point on, the loan is handled like a regular bank loan. The only exception occurs when a loan becomes overdue, in which case LSS in essence “buys back” the loan from Norwest Bank (“LSS Loan Fund Program Description,” 1992). This seldom happens. In the rare cases in which a family has been delinquent with payments, in addition to the bank’s notifying them of the delinquency, the LSS loan counselor writes to encourage the family to come in for a meeting to discuss the factors leading to delinquency. Sometimes this results in working out alternative payment arrangements, for example, offering a 30day repayment extension for families with extenuating circumstances. Budget counseling may also be recommended.

With the loan being treated like any other bank loan, clients have the opportunity to develop a good credit rating if they fulfill their repayment contract. The human service-banking partnership is a unique feature of the loan program. Loan recipients are treated as banking “customers” and not as human service “clients.”

Between its August 1990 inception and June 1993, 761 loan applications were processed, 204 of which were approved. Approximately $332,000 have been loaned (“LSS Loan Fund Quarterly Reports,” 1993; personal communication, J. Shreffler, August 16, 1993).

Research Issues and Methods

The current study was designed to evaluate the effectiveness of the LSS Loan Fund Program in two primary areas: determining respondents’ level of satisfaction with the program and evaluating the impact that loans have on the recipients’ household financial stability. A sampling of loan recipients was randomly selected and interviewed by telephone or in person. Their opinions with respect to both research issues were elicited. To discover possible changes in their financial stability, various objective financial data were also gathered.

Respondents were chosen from a list of all 112 households that had been approved for the loan from the program’s inception in August 1990 through April 1992, six months before the study began. Sampling was stratified according to time elapsed from initial loan application, with an equal number of potential study participants being selected from the list of recipients who applied before August 7,1991, and those who applied after this date. The primary reason for stratifying according to time was to determine whether families’ finances were stabilized temporarily or over the long term. August 7, 1991, was selected as the cut-off point because minor procedural changes in the program were implemented at that time. Fifteen loan recipients were chosen from the 53 pre-August 1991 population and 15 from the 59 individuals approved for their loans after that date.

Household heads of 20 of the 30 households were interviewed. Six were excluded because they could not be located; two because it was found (after the interviews were under way) that they never accepted a loan despite having been approved; and two because they refused to be interviewed. One of the latter indicated that he was “very satisfied” with the program but that illness precluded a full interview.

The final 20-person sample consisted of 7 individuals approved for their loans IS months or longer before the interviews began and 13 who were approved for their loans after this time. Interviews took place between November 6,1992, and January 11, 1993. The interview instrument included closedended questions that measured respondents’ overall satisfaction with the loan program, their evaluation of the loan’s helpfulness in increasing their family’s overall financial stability, their opinion about whether they would still be working or going to school (whichever was applicable) if they had not received the loan, their feelings about whether the loan fund was helping people who most needed help, and whether they had referred anyone else to the program.

Another part of the instrument was the LSS Loan Budget Form, which gathered a detailed breakdown of monthly household income/assistance and expenses (e.g., income and assistance from AFDC checks, food stamps, child support, and fuel assistance versus expenses for transportation, personal needs, telephone, food, and clothing). Because respondents also completed this form at the time of their initial loan application, pre- and postloan comparisons were ultimately possible. Perhaps attributable to the keen budgeting skills low-income families need in order to survive, people did not seem to have difficulty providing this detailed information. Respondents were also asked to detail their preloan employment and educational histories and to describe any significant changes in their family’s financial or educational circumstances that were not reflected by these histories.

The budget data were analyzed though t-tests to determine whether significant changes in financial stability had occurred between the time of loan application and the study. T-tests were also run on various subpopulations, that is, interviewees who had applied for the loan before and after August 1991, respectively, and those who had received student loans compared with those receiving employment loans.

The instrument provided respondents with a number of opportunities to express their feelings about the program in an openended fashion. Responses to selected open-ended questions were qualitatively analyzed. Seven response categories were developed from this analysis and used to classify all relevant responses. These classifications reflected “duplicate counting” in that multiple responses from the same person were placed in different response categories.

Finally, secondary data analysis was performed on the 204 families who had received a loan between the program’s inception in 1990 through June 1993 in order to determine the loan program’s overall repayment rate.


Responses to Closed-Ended Questions

All 20 respondents were “very satisfied” with the loan program. Fifteen of the 20 felt that the loan had been “very helpful” in increasing their family’s overall financial stability, and four believed that it had been “somewhat helpful” (one person did not respond). In response to the question about whether they would have been able to continue working or attending school if it had not been for the loan, 11 responded “no,” 4 “maybe,” and 5 “yes.” Fifteen respondents indicated that they had referred someone else to the program.

Changes in Employment Income

Twelve of the 20 respondents reported increases in total household work income since they initially applied for the loan; only three had experienced decreases (five incomes had remained the same). The average increase was $295.30 per household per month. Table 1 summarizes data on work income, including breakdowns according to whether the loan approval occurred before or after August 7, 1991.

The sample population as a whole showed a statistically significant difference in average incomes between the initial loan application and the interview. The differences in incomes between the two subsampies were not statistically sigaificant at the .OS level either at the time of application or during the interview, and changes between income at application and income at the time of the survey were not significant for either subsample.

The number of respondents receiving AFDC decreased from 11 at application to 7 at the time of the survey. Considering only those who applied before August 7,1991, none of the four receiving AFDC at application was still on the program.

Comparisons were also made between students (i.e., recipients who were currently attending a postsecondary institution and who had completed at least one-third of their graduation requirements) and employees who were not also students. As shown in Table 2, the only statistically significant difference was between work income of the two groups at the time of application. No significant differences were found between student and worker incomes at the time of the interview, nor were significant changes found in either student or worker incomes between application and interview.

Of the 10 recipients who were students at the time of application, 3 had graduated and 7 were still attending school.

Responses to Open-Ended Questions

Open-ended questions elicited information such as the ways the loan had been helpful in increasing respondents’ overall financial stability (if they had previously indicated that it had increased their financial stability) and ways that the loan fund could be improved.

Seven response categories emerged from content analysis of all responses. The loan fund allowed low-income applicants (a) to obtain loans despite their not having established credit ratings and (b) to obtain loans at interest rates low enough for them to afford repayments. The loans ultimately enabled recipients to (c) continue working or going to school, (d) become independent of AFDC or otherwise improve their overall financial stability, (e) reduce their overall levels of emotional stress, and (f) develop good credit ratings through the opportunity to repay their loans on schedule. The seventh response category involved recommendations respondents had for improving the program.

In responding to the question why they believed that the loan fund “is helping people who most need it,” five loan recipients emphasized that their poor credit rating prevented them from securing a loan elsewhere. For instance, one respondent stressed that “you can’t get a loan if you don’t have credit or a lot of collateral.” Three respondents similarly indicated that they could not have afforded repayment if not for the loan fund’s uniquely low interest rates.

I was laid off at the time and we really needed the money. My wife needed the car for her paper route and the car needed a clutch…. When you’re laid-off you can’t afford high interest rates. Another respondent related, “Interest rates are so high [on regular bank loans] you couldn’t afford payments at the $4.SO an hour I was earning then.”

Fifteen respondents indicated that the loan was a crucial factor in enabling them either to continue to go to school or to maintain their employment. Their statements uniformly supported the loan fund.

I got a car with it and went to school and now I’m working. If it weren’t for the car, I wouldn’t have been able to finish school and if / hadn’t finished school I couldn’t have gotten a job.

I’ve got a loan from the Farmers Home Administration and am going to buy a home in a couple of months! It’s a very nice homea $50,000 home that I’m getting for $770-$780 per-month payments. Without the LSS loan I wouldn’t have had the guts or anything to try for a loan-I had no credit. The nice people at LSS are absolutely wonderfull They treated me so nice! I was ready to drop out of school before I got the loan.

Another respondent explained, “Without the car I wouldn’t have been able to go to work because I started work at 4:30 A.M. and buses weren’t running and I couldn’t walk since it was a two- to three-hour walk.” Similarly one person said, “I had a delivery job and needed the car for work [and buses don’t run when I get off work].”

Six respondents emphasized that the loan enabled them to escape AFDC or otherwise improved their overall financial stability. One respondent said that she had referred “three or four single women like myself [who are] trying to struggle to get through school and get off AFDC…. I really want to be independent of AFDC someday.”

Another explained that her family’s auto-repair loan alleviated the stresses of other household bills: “Having a reliable car means less in car repairs. And [loan] payments are low enough to allow me to take care of other expenses.” One respondent stressed the long-term financial stability the loan afforded her family: “It hasn’t increased [my overall financial stability] yet since I’m still going to nursing school, but it will greatly increase when I graduate in May.”

Three people talked about how the loan had reduced their overall levels of emotional stress. One said that before receiving the loan she was using an old car I got from my parents that wasn’t at all reliable. For instance, it wouldn’t start in the morning…. This really led to lots of stresses, so part of getting the loan was improving my whole emotional outlook-leaving me with much less stress.

Four respondents emphasized that their timely repayment of the loan had either already enabled them to establish a good credit rating or that they fully expected this to happen. One respondent explained that she had gotten two subsequent bank loans after paying the loan-fund obligation. Another respondent was anticipating getting a good credit rating because she had been timely in making payments. Although it was not specifically elicited in the interviews, 3 of the 20 respondents volunteered that they had received non-LSS bank loans since becoming involved in the program, and two others, who were renters at the time of application, mentioned that they currently owned a home.

Eight people made recommendations about how to improve the loan fund program. Three suggested that less paperwork should be involved. One respondent said the paperwork was intrusive:

There was some -red tape” in giving information about your income and assets. If elt something like I was applying for welfare when I had to go through my whole life history and things. But the girl getting the information was real nice. / just wasn’t used to things like this.

Two other respondents felt that the maximum loan limits were insufficient:

After I got the $2,000 loan, I had another $600 in needed repairslike body work. And extra money was hard to come up with in one lump sum…. Maybe it’s hard to get a car at that low a price that’s reliable.

The amount of money-you can’t get much for $2,000. It would really help to raise this a little, even to $3,000 would make a big difference.

This respondent went on to explain that her current car, purchased through the loan, was in such bad shape that it was not drivable and that she didn’t have money for the extensive repairs it would require and thus was being forced to sell it. She added that she was planning to seek another LSS loan to buy another car.

Two people emphasized the need for LSS to advertise the program better so that more people like themselves would be aware of it, and one person thought that budget counseling should be included as part of the program.

Secondary Data Analysis

Since the program’s inception in 1990, recipients’ mean repayment rate has been 99%. Of $332,000 loaned, only $4,600 was written off (only 5 of 204 loans defaulted; “LSS Loan Fund Quarterly Reports,” 1993; personal communication, J. Shreffler, January 17, 1995). The Minneapolis SPLP has had a 46% repayment rate (Jones & Wattenberg, 1991).


The LSS loan fund has achieved considerable success along several important dimensions. Most significantly, it has contributed to the recipients’ financial self-sufficiency. In this study, except for a single nonrespondent, everyone felt that the loan had been helpful in increasing his or her family’s overall financial stability, and most felt that it had been “very helpful.” Furthermore, most recipients who were students when initially receiving the loan were either still attending school or had graduated at the time they were interviewed, and some respondents had gotten off AFDC. Also, respondents’ average work income had increased significantly since their loan application.

Respondents’ qualitative evaluations were also supportive of the loan fund. Respondents were almost without exception extremely positive about the program. Many respondents identified the loan as a crucial factor in enabling them to continue working or attending school; others indicated that the loan had enabled them significantly to build up their credit rating, which in some cases allowed them ultimately to secure non-LSS bank loans. The loan fund has also had an extraordinarily high repayment rate-nearly 100% since its inception.

Both the quantitative and qualitative results of this study suggest the importance of loans being targeted specifically on pivotal, transitional, financial crises that poor families sometimes encounter in their struggles to achieve financial independence, especially relating to transportation needs vital to continued employment or education. Relatively small loans, generally for automobile purchases or repairs, have often been enough to enable loan recipients to stabilize their job or education. Certainly, many working poor families require much greater sums of money to attain long-range financial stability, and a need exists for larger, more universal programs like the individual development accounts suggested by Sherraden and others (Friedman, 1988; Sherraden, 1991). However, this study suggests that many working poor families can benefit from “booster shots” that allow them to cope with smaller financial setbacks such as car breakdowns.

Another key to the loan program’s success is the close managerial partnership between Duluth Lutheran Social Service and Norwest Bank. In this partnership, the bank is involved directly in providing services to human service clients instead of assuming the more traditional private-sector role of human service consultant (see Schnall, 1989). The resulting businesslike atmosphere of applying for the loan minimizes the stigma associated with many human service programs. Furthermore, the fact that recipients are treated similarly to other loan applicants, including having the opportunity to build their credit ratings, integrates them into the respected community role of “bank client.” The importance of equalizing power between human service workers and their clients has been suggested by many scholars (Austin, 1981; Hasenfeld, 1992; Mumma, 1989; Schorr, 1989). Furthermore, the creation of a more businesslike relationship between the two groups is consistent with the concept of empowering the beneficiaries of government services to become true consumers with meaningful market choices (Osborne & Caebler, 1993). Finally, Sherraden (1991) discusses the importance of providing poor families with not only “tangible assets,” but also “intangible assets” such as cultural capital, in the form of knowledge of culturally significant subjects and cues, ability to cope with social situations and formal bureaucracies, including vocabulary, accent dress, and appearance, with earnings in the form of acceptance into rewarding patterns of organization [and formal social capital, or organizational capital, which refers to the structure and techniques of formal organization applied to tangible capital. (pp.103-104)

Finally, it’s possible that Duluth, as a nonmetropolitan midwestern city, has a sense of community that encompasses low-income families. This, in turn, may increase these families’ overall optimism about becoming more financially independent as well as their sense of obligation in repaying loans. In contrast, low-income groups may feel somewhat alienated from banks and other community institutions in many large metropolitan areas (see Sherraden, 1991).

The loan program’s successes warrant its replication elsewhere. Further quantitative and qualitative research is also needed. An important focus of further research would be to try to isolate specific structural variables that contribute to the success of loan programs, looking at factors such as how to screen applicants most effectively and how best to target loans (e.g., comparing the long-term impact of auto loans versus home-repair loans). Contextual factors contributing to loan programs successes, especially the impact of overall community cohesion that includes low-income families, also need to be explored. The latter research might point toward the need for different strategies in large metropolitan areas, perhaps including efforts in building accepting, trusting relationships between lending institutions and poor families before initiating loan programs.

1. The loan fund has added significance with Family Service America’s decision to introduce the Minnesota loan model-upon which the loan fund and the Minneapolis Single Parent Loan Program are based-to its member agencies. Family Service America will initially pilot the program in several U.S. cities with the help of a grant from the McKnight Foundation (Inskip, 1995).


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Michael Raschick Is assistant professor, Department of Social Work University of MinnesotaDuluth, Duluth, Minnesota.

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