Authored by Jeffrey A. Tucker via The Epoch Times (emphasis ours),
The news blasted all over social media, confirming the sufferings of an entire generation of degree holders. Student loan delinquency rates have hit 10.2 percent in the second quarter. It’s a 21-year high, and worsens a $1.7 trillion debt crisis.
Posts on social media reveal graduating students with debts that are rising higher despite high monthly payment. This is due to dramatic changes in interest rates combined with stagnant real wages.
Depending on the type of loan, interest rates can run between 6 and 17 percent, which means that students are paying mostly interest for a few years. With big increases, they can be under water fast. This is normal for home loans. Borrowers know they will pay more than twice the sticker price over the course of a loan. They put up with it with the expectation of a rising asset valuation. The home is the asset in question.
What is the asset with a student loan? The degree. You can stop laughing now.
Welcome to the world of student debt, Class of 2020. What seemed like free money to fund a four-year vacation turns out to be the worst-possible beginning of a new career. Expenses eat up low salaries while interest and taxes take the rest. Meanwhile, graduates are greeted with a reality that they did not expect. Their degrees can get them in the door but guarantee nothing in terms of advancement. Nearly every profession requires certifications that are hard to obtain and impossible to game.
For that matter, I know plenty of 30-somethings who are still paying on debts from college they regret attending and which contributed nothing to their real-world careers.
Life is hard enough but many of these young professionals are also carrying six-figure debts that make it impossible to consider homes and drive down their credit rating. It feels like a sand trap that is never going away. Those with family money can crawl to mom and dad but those without are seeing another decade ahead or more in which they are barely scraping by.
It’s no way to begin a career. It’s easy enough to look at these weeping young people and say they should have planned better. But at the age of 18, when these loans begin, most high-school graduates (especially of that period) have no idea what money is, where it comes from, how it works, and no clue of the hard walls built by accounting realities. They would all try another path today if they could but what’s done is done.
Were they lied to? Yes, but by no one in particular. The period of zero interest rates and fake prosperity deluded an entire generation. Cheap credit and free money encouraged vast corporate expansion that focused mainly on beefing up the labor force, tagging anyone with a degree and sticking them in jobs with low expectations and high salaries. It was all too good to be true but it appeared to be the preferred career path.
The advent of high interest rates beginning three years ago was a silent marking of the end of an era. It was the dawn of the real world of financial constraints. Those are now hitting an entire generation very hard. The credit companies are leaning in hard, collecting all they can, while the bosses at work are demanding more and more productivity, even as job security is no longer what it was. People are being fired all the time with downsizing now a constant feature of professional life.
Debt limits options. Debt hobbles choice. Debt ties you down. Debt is slavery. At the very time when the world should be their oyster, millions of young people are faced with this yoke around their neck.
Ten years ago, young people were getting the message that these loans would never have to be paid. They believed it, and voted for politicians who said this. It was always a ruse. The last administration did their best to wipe out the liabilities for some people in exchange for votes but it came nowhere near affecting the whole. Now the realities of debt finance are eating up the standard of living even as the dollar has lost 25 percent of its value (at least) in the last five years. Prices are still rising.
The problem for these young people is even more fundamental than finances. It is about expectations. Their parents lived better than any generation in American history. Thanks to leverage and boom times, they had huge houses and high living standards with health care, vacations, and rising income. This was a highly unusual time and it was never justified by the fundamentals. The Fed policies of 2000 and then 2008 spread around credit like it was growing on trees, while inflation was kept at bay thanks to the dollar’s status as the international reserve currency.
Somehow an entire generation was led to believe that this is the life to which they would be entitled if only they finished college with a magic piece of paper in hand. There was no sense that they would be starting from scratch, that their parent’s lifestyles were not only a result of a lifetime of work and asset accumulation, but had also been subsidized by cheap credit.
The single most important insight for young people just starting out is this: They cannot and will not live like their parents for a very long time. They must cut back, eat at home, reduce belongings, stay out of debt, live in small apartments, buy used cars, seek out free entertainment, and cut it out with all the frivolous spending.
This is especially true for those who get married after college. There should be no hopes of immediately living the high life like their parents who had 20 to 30 years to get there. The young couple should and must prioritize paying off all debt, never accumulating more. Revolving credit cards are out of the question. The cheapest apartment rents are necessary. Everything you buy should be from thrift stores and eBay, never retail.
A young couple who takes on this way of life will not only build a strong and lasting relationship, they will also build a financial future together. The seeming deprivation becomes a bond that is forged between a young couple. They should entirely ignore their friends who are climbing up the socio-economic ladder too quickly with fancy cars and club memberships, and dismiss Instagram postings of vacations in far-flung places. This is all nonsense.
If one or the other partner in a relationship does not understand this, and seeks to inhabit the same lifestyle from whence they came from their parents, the relationship will be doomed. Living even slightly above one’s means over a long period can lead to financial and personal disaster and a broken home. Living frugally means developing the habit of foregoing consumption and doing without, in exchange for which you build a marriage and home.
This is all-the-more true if a young couple is planning on having children. It’s simply not possible to maintain two full incomes, as moms quickly discover their primary obligation as caretakers and the career path faces massive disruption. Child care is unaffordable if it is even available, and so the best financial decision could be to move to one income. If debt is a factor, this decision is even more difficult.
It has always been true for most that every new generation must build a life for themselves. The notion that the children would enter adulthood with the same standard of living they left is the delusion of very recent origin. It is ending now, quite rudely too. The sooner young people can develop the spending and saving habits of their great-grandparents, the better off they will be over the long term.
As for student loans, those too are rather new developments. Fifty years ago, it was common for students to work their way through school, paying for tuition, housing, books, and food. If they were unable to do this, they did something else.
Today, working your way through college and paying all bills is inconceivable. Paradoxically, the expansion of student loans only ended up driving up tuition costs that made the loans necessary.
It is already too late for those with six-figure debts but a new generation can learn by watching the sufferings of those to whom the system lied. They can make smarter choices about finances, education, and the need for sound personal finance.
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