Yesterday I Tweeted an article that I found on the NY Times site: Placing the Blame as Students are Buried in Debt the article is shocking. A couple of weeks ago I asked, should parents pay for their child’s education? The post generated a number of comments. The NY Times article has generated over 400 comments mostly laying blame on the student and her family for amassing $100K in debt so that the student, Courtney Munna, could get an undergraduate degree in women’s studies and religion. She now works as a photographer’s assistant in San Francisco.
I believe we miss the point when we blame the Munna’s and people like them who accrue debts they cannot repay. Blame does not help and it certainly does not get the debts re-payed. It is scary that the Munna’s are in the position they are in. It is scarier that they are not alone and it scarier still that unsecured student loan debt is being securitized and sold as bonds similar to subprime mortgage loans. I have spoken to people who bought homes during the last boom. Mortgage payments are 40 and 50% of gross income. When I share that the age old rule in mortgage finance, that mortgage debt should not be more than 28% of gross income and total debt no more than 33% of gross income, I usually get incredulous looks back.
The problem is the lack of financial education and financial literacy. Back in 2001 my mother gave a series of lectures for the Georgia Consortium of Financial Literacy. Her topic, the growing debt burden of undergraduate students.
In the mid 1990s Robert Kiyosaki self-published Rich Dad, Poor Dad. He made three bold claims that have gotten him labeled as a heretic or a lunatic:
1) that the nature of the economy has changed from a manufacturing base with old age pension ideas to an information base with workers responsible for their retirements.
2) that because of the lack of financial education that many average Americans were destined to lose fortunes in the stock market.
3) that a home is not an asset.
Financial literacy refers to an individual’s ability to make informed judgements and effective decisions about the use and management of their money (from Wikipedia). The United States is one of four nations who have nation wide, government- sponsored financial literacy programs and offers a free 162 page financial literacy document: Taking Ownership of the Future. The national website dedicated to financial literacy is mymoney.gov. April is financial literacy month.
With all of these efforts what happened? Subprime lending accelerated in the 1990s. The US government put in place financial literacy programs in 2003 and you can’t swing a dead cat in a bookstore without hitting a personal finance book. So what has happened? I suppose I could launch into the fact that wages have actually decreased for middle income Americans over the past decade. I could decry the availability of easy credit. I could decry the apparent widening gulf between rich and poor in America or that CEO incomes, traditionally about 50 times median household income are now about 500 times median household income. But that is not it either. I got my first credit card when I was 22 and had no job, that was over 20 years ago. Unsecured credit has been easy to come by. No, somewhere in the last 30 years we seem to have lost the ability to say to ourselves that we don’t have the funds to pay for that trip. Or that item X is something we should save for. It has become unfashionable to save and this has occurred at every level from our government on down. I cannot tell you the number of books published in the last two years that discuss ways to trick people into saving. Our national consciousness has simply shifted away from saving and toward spending and now it needs to shift back. Recognizing that it is important to start somewhere, Bank of America has a keep the change program in which they round your debit purchases to the nearest dollar and transfer the change to a no-fee savings account. Considering that I began saving as an adult by saving the resultant change whenever I broke a dollar into my home piggy bank, Bank of America’s program is probably a good idea. The B of A program is based on a two simple premises, that people in general don’t value their change which is why it ends up under the cushions on the couch or under the floor mats in the car and that saving must be easy in order for people to do it. There is a whole school of thought that saving has to be automatic in order for people to do it. I don’t know that I believe that. My savings plans are automatic now, but they did not start out that way. Once I got into the habit of saving, I took pleasure in manually moving the money from my checking into my savings account. For me, I got into the saving habit because I could no longer tolerate the crushing burden of debt. Surely more Americans feel that way. So what will it take for us to return to a culture of saving.?
Please comment.
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Ouida, Thanks for putting some rational thought into the personal finance discussion. Maybe we can get people to at least understand the concept of pay as you go. By the way, my county government has a road paving program called “Pay as You Go”, and it has been very successful.
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Calvin, thank you. There is a lot to be said and all of it positive for “pay as you go.”