How do you like the stories from Strapped series so far? These stories get better and better. Previous posts in the series are:
Chapter 3 in Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead is Generation Debt. I think we all know what that means. The author says the younger generation can’t get ahead because they have too much debt. Now, the stories:
Lori, a 33-year-old living in Manhattan, still has $40,000 in student loans debt. She earned only $16,000 a year in her first job as a social worker and community organizer in New York. Her income “inched upward” over time but it’s still not enough to pay all her bills and loan payment. So she deferred payments on her student loans.
Ah, living in Manhattan on $16,000 a year. The book doesn’t say what Lori’s current salary is but even double that, at $32,000 a year, it’s still going to be tough living in Manhattan. When I was in New York city a few months ago, I rode in the commuter train on a random workday. It was packed. There was hardly any standing room. I’m sure many of the commuters earn much more than $32,000 a year. I’m guessing they chose to spend a lot of time commuting every day because the living expenses are lower outside of New York city. Between paying off debt and spending less time commuting, Lori chose the latter.
Elaine got her credit card in college and a free T-shirt too. She used her credit card to pay for tuition and living expenses because her parents couldn’t help pay for college. Elaine plays the credit card game well. She transfers balance from one card to another every six months for the low introductory rates. She now owes $40,000 but half of it was racked up after college. She bought a new computer and new furniture because she “wanted to make her apartment look like an adult’s apartment.” She also used credit cards to pay for her wedding and flights for family visits. Elaine has no regrets. She thinks about the things her cards enabled her to do: studying in Scotland, flying to Paris, her perfect wedding.
This is a good story. I want my home to look good too. If I don’t have to pay back the money, I would also like to have a perfect wedding or study in Scotland. Elaine is not afraid of debt. She used debt for “consumption smoothing.” She was able to do things she didn’t have money for. I flash back to my student days. I did many things which looked silly now, like working in the college cafeteria serving nacho and cleaning up, for minimum wage $4.25/hour plus free food. Until today I still have my employee badge with that food service contractor. It serves as a reminder of the days when I was poor. I knew I would earn a much higher salary after I graduated. I had credit cards but somehow carrying a balance simply wasn’t an option for me. I wasn’t as smart as Elaine. My college years would’ve been much more comfortable if I borrowed from my credit cards.
The third story:
David and Lisa, both 31, have Ivy League degrees. They bought their home when they were 28. They earn $86,000 together in Cincinnati but they also have $40,000 in credit card debt. Their credit card debt has grown since they got married. David calls it “unavoidable debt” because the debt came from the cost of traveling around the country for friends’ weddings, holiday trips to visit their families and the cost of clothing and feeding their two children. David acknowledges that going to weddings and visiting family is a major source of their debt but they believe seeing friends and family is more important. They are now trying to move to a larger house with a real backyard and enough bedrooms so each of the boys can have his own room. Seven years after they got married, they are basically treading water because they have as much debt now as seven years ago.
Once again we see David and Lisa made the life style choice between debt and attending friends’ weddings because they think the latter is more important. Although I wouldn’t make the same choice, I don’t want to judge or criticize their choice either. It’s their life. They get to choose how to live it. There’s nothing right or wrong about it. But we can’t say they can’t get ahead. They chose not to.
The author suggested some public policy changes to deal with the consumer debt problem.
- Allow credit card rate increases only on new balances, not on the existing balance. I can see the arguments on either side. Borrowers say it’s unfair to have a higher rate apply to money they already borrowed. Credit card companies say because the loan is revolving, it’s actually renewed month-to-month. If the borrower doesn’t like the new rate, they can transfer the balance to a different card, just like what Elaine in the book did. There is so much competition in credit cards. If a company raises their rate willy-nilly, it risks losing a profitable customer.
- Ban credit card solicitations on college campuses. OK, not a problem, although I’m not sure how effective it’ll be in reducing the debt people have. If we decide that credit cards are a dangerous product and we want to protect our younger generation, we could raise the minimum age for obtaining a credit card to 25, like we have minimum age for smoking and drinking. We could also require a test for debt management and financial responsibility before someone can get a credit card, like we do before a gun license or a driver’s license can be issued. These measures will be much more effective than merely banning on-campus credit card solicitations because college students have plenty of exposure to credit card ads elsewhere: online, on billboards, on TV and in newspapers and magazines.
- End predatory lending in mortgage refinance. Fees, points, and prepayment penalties are too high. Expensive products are everywhere. Let’s protect the consumers and regulate the prices. We should start with weddings, jewelry, furniture, designer apparel, shoes and accessories, and cosmetics and perfumes because their profit margins are too high. These expensive products are draining the wallet of our younger generation. But who gets to decide when something is worth or not worth the price?
Credit card companies make easy targets for the blame game. They are not saint but they are just like other companies working hard for making a profit. The credit card industry is very competitive. The cost of switching is negative (low introductory rates and sign-up bonuses). More laws and regulations are great on the supply side. Let’s not forget the demand side either. Let’s also make a law that caps the debt-to-income ratio or the debt-to-assets ratio for young adults. That’ll guarantee that our younger generation will not have too heavy a debt load dragging them down. As we have seen, self-discipline isn’t working. People willingly take on credit card debt despite the bad press credit card companies receive. We don’t let anyone buy alcohol, tobacco, prescription drugs, or guns at will. Limiting how much our citizens can borrow isn’t too far fetched. Or else they shoot themselves in the foot.
Or we can just let adults be adults. The perpetual “guns kill or people kill” argument lives on.
How do you make people do the right thing for themselves? This isn’t only credit cards. It applies to smoking and eating healthy too. I think it’s common knowledge that french fries are not good for one’s health. Yet the amount of french fried consumed every day in this country is probably measured by thousands of tons. People want french fries. Restaurants happily serve them. Whose problem is it that people eat too much fries?
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I am surprised at your less than ultimate disdain for Elaine and her debt-accumulating “consumption smoothing.” At the very core of it, consumption smoothing is not an inherently bad thing because eventually we all have to make big purchases without the necessary cash on hand (i.e. new computer, refrigerator, etc.) But what is troublesome is incurring this debt with no way to pay it off and knowing that you are going to “need” a new computer again in 24-36 months. If you haven’t paid off your old computer when you buy a new one, then you have problems.
Eventually, Elaine is going to be faced with the fact that her consumption smoothing has allowed her to live at a level that far exceeds her income. Combine this with the fact that she can’t perpetually accumulate and transfer debt, and ultimately her credit and checking account (I am assuming she has no savings) will suffer. However, let’s just assume she lives all the way through her life transfering her debt, her survivors will probably skimp on the funeral when they find out about all the debt they inherit.
There has to be personal accountability in the credit market, and this cuts to the core of the issue. Whether or not you can legislate that is a whole other question. The regulations for guns, alcohol, and automobiles fall within the purview of the U.S. government largely for public safety reasons. In order to make this claim about credit card debt, you are going to have convince a lot of free-market-ers that they are being adversely affected by Joe “Generation-Y-I’m not afraid of debt because everything is going to get better and work out” Schmoe. Seems like an up-hill battle. Until then keep on putting solid info out there and at least some of us will be better off.
Evelyn Guzman says
Those are good suggestions for policy changes regarding consumer debt. The question though is how can we help make them a reality? You’re right, discipline is the key. There is really no need to get into so much debt. Buying things that are not really necessary is beyond me because by next year they have a garage sale on these items. It just doesn’t make sense.
We had usury laws, but the SCOTUS essentially nullified them. Not much historical perspective here. Just same old “caveat emptor”. It worked for capitalism’s first 400 years, right??? RIGHT???
Harry Sit says
@MSJW – I don’t want to judge how other people live their own lives. Somebody accused me of being Uncle Ron Paul in the first post of the series. I’m not like that. I only want to see people live up to their own decisions. If Elaine wanted to go in debt for things she wanted or if David and Lisa thought attending friends’ weddings is more important than debt on their credit cards, who am I to tell them they shouldn’t? I can’t force my lifestyle onto theirs. I only disagree with the book’s author saying these young adults can’t get ahead. Like I said, they chose not to. These are college educated adults. They know what they are doing. On the other hand, I understand people make bad decisions even by their own standard. Therefore we need to help protect them from their own mistakes. So maybe putting a limit on debt-to-income or debt-to-assets ratio isn’t a bad idea.
@John – I don’t think having or not having usury laws makes any difference in these particular cases. The book didn’t say the interest rate on their debt was unusually high, only that they had a lot of debt.
I’m laughing at MSJW saying computers and refrigerators require debt. I purchased both of those this year without debt. By the way, I didn’t get a computer or have home internet until I could pay cash. I still have the Dell at home that I bought in 2000. Also, I sold my old refrigerator for $150 on Craigslist this year to a young couple that was just starting out. Clearly these things can be done, I’m not the only one.
I long ago put the kabash on wedding travel. I spent a fortune on that when I first got out of school. Then I made a rule that unless I’m in the wedding or its a member of my direct family I’m sending a gift.
Clearly from these stories, people just feel entitled to live a certain way. That’s fine, but there’s a price to pay for everything.
I don’t get why people like the author insist we have to have a Mama (the government) to clean up our messes and take care of all our problems.
Oh-ho-ho. No constructive comments here, but I just wanted to let you know TFB that I really really enjoy reading your blog in general and this latest post in particular. Good old “Choices you make determines the life you live” (C) comes to mind.
I agree that you nor I are in any position to judge these people for making the choices that make the most sense to them. However, where I see your logic going down the drain is that you don’t feel like you can tell someone that its wrong to carry a high debt-to-asset ratio, but you are ready for the government to tell all of us what we can and can’t do. With that said, you are right on that there should be checks on debt-to-asset ratios, but does it have to be legislated?
And Ted, thanks for laughing (I am glad that you are so debt savvy, and I am also happy to report that I am a debt free HOH of a young family just starting out), but I was trying to relate back to the individual case studies.
Harry Sit says
MSJW – The thing is even if I absolutely despise people who borrow a lot and consume a lot, it won’t make any difference. I can shout all day but they are not coming to me for advice. Now, we have two choices: (1) Do nothing because they are adults and they have to bear the consequences of their own actions. But some people don’t have that much self-discipline. They end up ruining themselves. (2) Set a boundary and don’t let them screw up too badly. This boundary can only come from the government because the lenders are happy to lend to them and make a profit. That’s why I’m in favor of legislating a limit on debt-to-asset or debt-to-income ratio.
It turned out there’s a third way. It’s in the book Nudge which I’m reading now. I will get to it in a future post.
Part-time work and a debit card is a much better way to get through college than credit card debt. Even a traditional student loan beats entering the job market saddled with a ton of maxed-out credit cards.
Rob A says
“…we all have to make big purchases without the necessary cash on hand (i.e. new computer, refrigerator, etc.)…”
I quoted that MSJW on 8.4
I’m not being judgmental and/or taking a holier than thou stance here, but this statement embodies why many people my age (30) have so much debt. We’ve all bought into this instant gratification thing and many of us can’t discern our wants from our needs.
Okay- so NO ONE plans on getting themselves into debt. It creeps up on you out of desperation to pay the rent or the electric bill etc..
It isn’t always about buying a new computer or a big screen tv.
My debt came from my insurance company dropping small group coverage (we own our own business) and I had already had my son- who was delivered via emergency c-section. Guess what? I got Blue Cross Blue Shield, became pregnant with my daughter and guess what?! A c-section is considered a pre-existing condition- SO we had to pay for the whole pregnancy- including another c-section. That was the beginning Then came a couple dental crowns and some problems with my daughters teeth. It just kept adding up. ANYWAY- it happens. The main thing is choosing the right way to GET OUT of debt. We did not fall for any of those get out of debt companies cuz no way was I gonna trust them to help. Instead we just refinanced our home for 4.75% fixed 30 year loan. We payed off all credit cards AND our car- plus our house payment dropped $700 a month and we are now DEBT FREE!! Other than the house payment- we can sleep at night and feel a complete load taken off our backs. Cards are cut up, debit card or cash is what we use now. If we don’t have the money- we don’t buy it.
They did require good credit scores to get the low interest rate.
So to anyone out there- this is a good solution for getting out of debt if you are able. Good luck!!