Tuesday, January 18, 2005

Younger Americans Going into Debt?

An article at Bankrate.com paints a dire financial picture for America's Generation Xers (ages 25-34).
Americans between the ages of 25 and 34 now boast the second-highest rate of bankruptcy, just behind the 35-44 group. The average credit card debt for this group increased by 55 percent between 1992 and 2001, with the average young adult household now spending approximately 24 percent of its income on debt payments.
The source of the information cited above was from an analysis performed by Demos, self-described purpose as
to help build a society where America can achieve its highest ideals. We believe that requires a democracy that is robust and inclusive, with high levels of electoral participation and civic engagement, and an economy where prosperity and opportunity are broadly shared and disparity is reduced.
The italicized portion of the quote is my doing. I highlighted to draw specific attention to that phrase.

Previous posts here have discussed the general increase in bankruptcies in recent years, but the general observation was that while increases in bankruptcies are a fact, the underlying factors as to why debt increases are difficult to assess.

Bankruptcy Judge Judge John C. Ninfo II is in a position to know about the underlying issues of bankruptcy filings.
He hears the stories behind the numbers: college students who run up the credit card bills each semester, then take out extra on their student loans to pay them off. They graduate with as much as $8,000 in debt from this shell game alone -- plus the last semester's financial flings. "Nobody warned me," is an everyday wail in his world.
To fight this growing problem, he has started
an outreach program called Credit Abuse Resistance Education. CARE's website describes the following view:
Unfortunately, too many of our young people are financially illiterate. Too many of them do not get the information in school or at home that they need to overcome the temptations of overspending and abusing credit. They need and deserve the opportunity to hear a counter-message to the constant “just do it” and “spend, spend, spend” messages they see on television, at the movies, on their computers, and often, in their own family’s spending habits.
It is the hope of the program that students will not go down the road of consumer credit abuse once they understand:
(1) the true cost of consumer credit;
(2) how difficult it is to repay consumer debt incurred to buy and do things that you really can’t afford and don’t need;
(3) the many consequences of financial problems, which are becoming more numerous and serious;
(4) the need to have savings and how to effectively budget with a view towards needs versus wants;
(5) that just maintaining debt is not being able to afford it, affording debt is being able to pay it back; and
(6) it is better to live consumer debt free.
I think it is safe to say that CARE's approach to this problem is one of education. However, does financial literacy help those from the lower income strata?

The director of Demos' economic opportunity program and the lead author of Generation Broke, Tamara Draut, describes the situation facing younger Americans.
Student loan debts have doubled to almost $20,000, she says. "When the car breaks down, there's no savings, so it goes on the credit card. Holiday trips home go on the credit card. All sorts of things end up there because young people have already committed more of their money than we did a generation ago," she points out.

As for those still on campus, many from lower income families don't want to burden Mom and Dad, who have already mortgaged the house for tuition and housing, for daily living items. Charging a bagel with cream cheese is their misguided way of helping out, she says. Draut believes the solution begins with prioritizing the country's financial aid policy and expanding grant-based systems. She's also in favor of state legislation, like New York's, that regulates credit card marketing on state university campuses.

Even if younger Americans had the requisite education, Draut argues that children from lower income levels have to use credit cards to make ends meet. The solution? Expanding grants and financial aid.

As if this weren't enough, Draut continues to describe a bleak situation facing those entering the workforce.
But just-say-no programs won't work for a generation that Draut sees as driven to economic hardship by a starting salary too low to cover rent, utilities and health care. "A lot of young people I talk to know very well the difference between wants and needs, and are still in credit card trouble," she says. Even the crazy, out-of-control spending sprees reflect the economic insecurity of this country in her book.
The Bankrate.com article also includes the perspective of Robert D. Manning, Ph.D., a professor in the college of business at Rochester Institute of Technology. He is the author of Credit Card Nation (a book I've purchased but yet to read) and familiar with the topic at hand: younger Americans and debt. He offers a sober outlook for the future.
Manning says the real answer lies in a society that starts smelling the coffee. "It's essential Americans recognize the promise of unlimited resources is over. The government will not be there for this generation, so they need to start targeting their financial goals in five- and 10-year increments."

True reform, he believes, will happen only through an awareness-building, skill-building and behavioral-change approach. So far, he rates Americans as "barely at the awareness level." Yet he pooh-poohs most literacy programs' effectiveness because they lack a sense of urgency.
Judge Ninfo agrees with this assessment.
"Ninety-nine percent of my bankruptcies can balance their checkbook, they just don't. So we don't teach that because it's not the problem. It's the addictiveness of credit cards we're addressing," he says.
Where does that leave the recently graduated college student? There's no disputing the fact that bankruptcies and credit card debt is on the rise for younger Americans. What's in dispute is the solution.

Judge Ninfo is silent on the financial outlook for Americans, his CARE organization stresses that having a basic financial education about consumer credit, budgeting, and understanding needs vs. wants will go a long way in giving Americans the foundation for success.

Ms. Draut's view of the situation is grim: starting salaries are too low to even pay for the necessities. Just Say No programs are empty words, that do nothing to address the problems. The answer? More grants and financial aid. And prohibiting credit card companies from being able to market their product on college campuses.

While I've never been in a position of financial distress, so I can't speak to the pressures that such people face. However, I do not think that the answer to the problem lies with expanded financial aid and grants. I cannot determine if this pertains to educational financial aid and grants or general financial aid. Assuming this relates to education, it may have the effect of reducing the student loan debt burden for college graduates, it may not be beneficial to everyone.

If the larger expense of college is reduced through grants, the remaining dollars available to spend elsewhere would increase. While this in and of itself isn't necessarily a bad thing (setting aside the government monies to pay for education issue for a moment), the question becomes what does the student do with those additional monies?

Does it go to pay for room, board, and other essentials of life that would have gone unfulfilled or onto a credit card? Or, does the money go for clothes, beer, and other (arguably) non-essential things?

Making a blanket statement to a hypothetical scenario doesn't achieve anything. However, the underlying issue of financial (il)literacy still lurks in the shadows. Does giving extra monies to a college student actually teach them how to better manage their money? Even more fundamental: is it too late to change the financial habits of these college kids?



Comments:
So many blogs and only 10 numbers to rate them. I'll have to give you a 8 because you have good content.

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