Thursday, April 25, 2013
Good Debt, Bad Debt, Gen Y Debt
A article entitled “Why Gen Y is Losing the Debt Battle,” explores some of the possible reasons that young people (born 1981-1995) are already carrying heavy loads of bad debt so early in life. From my own interactions with young folks at least some of the reasons seem pretty obvious. The article differentiates between “good debt” and “bad debt.” The author considers a mortgage and student loans as good debt since she contends this is debt that builds assets. I disagree. Over the past five years I have been changing my position on student debt. The class of 2011 graduated with an average of $26,660 in student debt. That number is tolerable if the student can find a job in their field that pays somewhat more than $26,660. Unfortunately, “53.6% of workers under the age of 25 who held bachelor’s degrees were jobless or underemployed.” (Associated Press) Personally, I know young folks who racked up over $100,000 in student debt. It isn’t that unusual. That is a mortgage without a house. From my observations six figure debt puts a young person’s life on hold for about ten years. That kind of debt delays marriage, buying a house, and starting a family. Even worse, there are also young people who have incurred student debt without the obtaining their desired degree. A persistent high unemployment rate encouraged many young people to stay in school, hoping that when they graduated with another degree the economy would have improved along with their level of education. It isn’t working; in part because my generation, the baby boom, are holding on to their jobs since they are not financially prepared for retirement; in part for global macroeconomic forces beyond our control; in part because many degrees, particularly in the fine arts and liberal arts, are essentially worthless. There also seems to be a multi-generational trend towards more and more debt. My grandparent’s generation paid cash for just about everything but the farm. My parent’s generation added the car loan and started the credit card revolution. My generation discovered new vices like home equity lines of credit and the first notable use of student loans. We also deeply abused credit cards. A number of authors have noted that Gen X and Gen Y are addicted to debt. They view the accumulation of debt as rite of passage, evidence that they are adults. Too many young folks are running up their credit card balance for no good reason. Many of them are carrying a car note, as well as those student loans. The article observes that, “Results found Generation Yers had an average total debt load of $28,930, including $4,113 in credit cards, $7,358 in lines of credit and $12,410 in car loans on average.” The author does not define lines of credit. My calibrated eyeball notes that the average American (age 25-34) was earning about $32,000 in 2011 according to Census Bureau data. That kind of income can not reasonably support that kind of debt unless the young person is still living in their parents’ home. Finally the article examines the effect of the digital revolution on Gen Y buying patterns, noting that it is just too easy to buy something by hitting a button on a smart phone. Psychologists have observed that parting with our money by paying with cash or a check is a lot harder that using plastic. Now we don’t even need to swipe our card to increase our debt load. Soren Christensen CEO of Advanced Wealth Advisors believes the ability to buy anything; anytime; anywhere; by using the Internet encourages reckless spending. We no longer need to drive the Model-T into town with cash in our wallet to buy a new pair of jeans. Even “good debt” is dangerous. The members of Gen X and Gen Y who purchased homes prior to the 2006 meltdown have learned that lesson all too well. We live in dangerous times. The old model guaranteed a college degree was a passport to a lifetime job with a good company. The old model told us that the price of residential real estate only went up. The old model told us our company and our Government would take care of us in our old age. The old model isn’t working. I am afraid that Gen Y will learn that the borrower is slave to the lender only after the shackles are firmly clamped around their wrist and ankles.