To answer the question of the OP, no, it isn’t right. It’s a big, fat looming problem that is going to have a huge negative impact on all of us in the future. Canadians are still doing better than Americans in the areas of banking, mortgages, savings, etc, but as we saw in fall of 2008, we are far too closely tied to the American economy to not be dragged down with you guys. (Lest you think that’s smug bragging, I am fully aware that it is our “socialist” government that didn’t allow Canadians to go as far down the garden path as Americans, not some innate superiority of Canadians.) My idea of a good use for extra money - pay off some debt, reduce our mortgage, etc. Until we’re debt-free, extra money isn’t for playing - it’s for paying.
Jim and I have an interesting situation, though - his company is privately-owned, and the shares offered to employees traditionally return about 30% dividends (the last couple of years have seen a ~65% return). We have actually gone into debt to buy these shares - I’m not completely comfortable with it, but we’re looking at leaving a lot of money on the table by not buying these shares. I hesitate to say debt is always bad when you have situations like this, but this is not the same as buying consumer goods that you don’t need to fill your house on a 27% interest credit card.
I think before this recession there was a growing debt free movement. The popularity of Dave Ramsey and his near pathological debt avoidance as an anecdotal point. But that those in that movement were still a minority - carrying credit card debt from one month to another is seen as pretty normal - and if it increases slightly month to month - it isn’t really seen as worrisome (although that, to me, is a huge red flag).
With the recession some people got a wake up call that perhaps debt wasn’t the wisest thing - and it happened on both sides of the credit card bill. People who saw their incomes cut found that “being able to afford the payments” can be a transient state. And credit card companies discovered risk.
What remains to be seen if people who had this epiphany retain it when their personal financial situation improves…and if enough people have had it that it becomes “less normal” to carry debt. While I hope its sticks, people LOVE the instant gratification that credit card debt provides.
It’s worse than that. I was just car shopping a few months ago and some dealers were offering 60/84 or extended amortization loan. If the payments on a 60 month loan were too high the dealer was kind enough to offer to drop the monthly payment to the same they’d be with a 84 month loan! plus a baloon payment at 61 months. And people were taking it!
The Freddie Mac site has a table of 30 yr mortgage fixed rates. In the early 70’s the rates were 7-8%. by the late 70’s they were up in the 10-12% range and by 1982 they were 17-18%.
And a very important reason is the ease with which students can get loans. This has a lot to do with why college costs have over the past 20 or so years risen much faster than the CPI.
Another thing that is sort of sticking in my craw is the way everyone is so focused on a college education, rather than a technical diploma. There are many professions that require only one or two years in school, and then you’re out making a very good living with small (if any) student loans, but it seems like trades/technical professions are really being overlooked. Not everyone can or should go to college and get a degree, but it seems like everyone is trying to do so.
A fairly sizable minority, though. 30%of people in the US have $0 credit card debt, and another 30% pay off their credit cards in full every month, so it’s that last 40% who has credit issues, not most people.
Which begs the question, if student loans were extremely hard to come by what would the universities do? Stop tuition hikes or even reduce costs until they could attract a capacity enrollment. Or continue hiking up costs while attendance drops?
My grandmother showed me my Dad’s tuition bill from a local college in 1968. $133 per semester for tuition. I put that in my handy-dandy inflation calculator and it comes to $784.58. Anyone sending your kids to college for that amount?
And the thing was, my grandparents saved their asses off for years to be able to put my Dad through school. They talked about that once he finished school they were finally able to start getting ahead.
But $784 is less than what my daughter’s daycare charged per MONTH for her first five years of life. Is it any wonder that we work harder, but end up in more debt?
You need to distingish between “good debt” and “bad debt”. Good debt is debt where you are leveraging credit to buy wealth producing assets. Your mortgage and student loans are examples of good debt because homes generally increase in value and education generally increases your income potential. It’s the equivalent of a company taking out a loan to expand their business.
Bad debt includes credit cards, car loans and other loans or credit used to buy assets that depreciate or have no long term value. What you are seeing these days is an increase in bad debt. People ringing up huge credit card debts or worse, borrowing against the equity in their home to buy crap so they can can finance a lifestyle above their means.
Unfortunately, counterexamples in both categories seem rather common lately.
(To be precise: it’s easy to find examples of college graduates whose education increased their income potential, but not by nearly enough to offset the debt incurred while obtaining it.)
Are you saying what I think you’re saying, that the cost of a college education is not as effective at making you lots of money (because of the extremely high debt incurred) as people think it is?
There’s a lot of fuss in the UK at the moment, because large numbers of graduates are finding it hard to get a job at all, let alone one that would allow them to pay back their debt.
For example, my daughter’s boyfriend has a degree in archeology, and has only had one job in that field and only for a short time. He’s a temporary Xmas postman at the moment.
Fortunately, the rules here are that you don’t have to repay your debt until you earn over £15,000 p.a.
This is the kind of thing that I don’t understand of news stories from the US (but mostly stories about cases of mortgages where the debtors must have known from the beginning that they’d have to default eventually):
Are such cases never prosecuted as fraud in the US?
The problem is that the cost of a college education and the value that the degree confers to future earnings are wildly variable. My degree was (more or less) an Information Systems degree that allowed me go into a field that pays relatively well. It was from a fairly inexpensive state university. I paid for it with some grants, what seemed like a large student loan, and working a series of jobs. As it turned out the student loan wasn’t all that big - I had 10 years of $100/month payments to pay it off. Easily offset by my increase in income.
But others get liberal arts degrees from expensive schools that often don’t lead to an appreciable increase in income than what they could make by entering the workforce with a technical degree or AA from a community college. So they might end up with huge loan debts and very little extra income to service that debt.
Now, I’m not saying that getting a liberal arts degee from an expensive private school should never be done; just that one should consider and weigh the tangible and intangible benefits against the costs and potential future income
No, the high debt doesn’t itself make the degree less useful - there is no inherent connection between the two. It can cost as much to get a degree in a field where jobs are few and pay is low as in one where the salary of a recent graduate makes it relatively easy to pay off the loan.
You really have to wonder about the wisdom of what’s happened in the past 40 years: Is the country better off when it’s routine for college students graduate in debt to the tune of tens of thousands of dollars? Are the educations they receive so much better than in the past?
And I find it fully plausible that being already deeply in debt tends to make some people less fastidious about adding a few thousand more via credit cards - a “culture” of debt.
A “culture” of debt sounds accurate - would it be also be accurate to say that a lot of young adults don’t really think of their future past, “Must get degree in something” and aren’t making their best financial career decisions?
I sometimes listen to Bruce Williams and he is of the opinion at least with cars that no financing over three years is ever justified. If you need more than three years to pay for a car you can’t afford it.