Debt Free

Debt, we've all got some to one extent or another. What is it doing to us? How has debt affected the fabric of American society? No, not society as in “Maribel, how about taking in the ballet this evening.”, but society as in the average American family.

There are five major areas where Americans get themselves into debt;

• student loans

• unsecured consumer loans such as store charge and credit cards

• mortgages

• medical expenses

• vehicle loans.

This propensity to delve into the world of debt is, in some measure, driven by the American mentality (also shared by the citizens of many other nations) of immediate gratification. We want everything sooner, rather than later. A new GMC Acadia to haul the family around in? I want it now, not in five years. That new Nicole Miller coat that's on sale? It's cold outside now.

In part the mentality of immediate gratification is because everything's so damned expensive these days. Your basic new car is $12,000 to $15,000. There's a whole argument about weather the cost of consumer goods is driven by inflation alone or the higher content demanded by consumers today. You can't find a new car without power windows, A/C, 6 airbags and a CD player. Ditto for the average new home. People demand higher content and more amenities today than they did in the 1960's. The average new home in 1965 was about 1,300 square feet. Now it's about twice that. Slab granite counter tops were once exclusively the province of the rich. Now they're ensconced in every middle end suburban development in the country. Security systems, high tech wiring, built-in appliances, and garbage disposals are the norm.

So, not only do we want it now, we want more of it. Our incomes have risen dramatically. In 2004 dollars, according to the U.S. Census Bureau, household income increased from $43,232 in 1974 to $54,061 in 2004. This is impacted to an extent by the number of multiple earner families now versus in 1974. Many consumer products have gotten far less expensive as well. Remember the $1,000 VCR? Still, even with the increase in real purchasing power, American consumers struggle to keep up with their desires.

The cost increases in other areas, such as health care and higher education, has also contributed to the continued indebtedness of the average American. Looking at many American's introduction to massive debt, student loans, we find that the amount of the average student loan debt has increased substantially. In constant 2003 dollars, the average student loan debt increased from $12,100 to $19,300 between 1993 and 2003. Furthermore, the percentage of students graduating from college with debt levels exceeding $25,000 increased from 7% to over 25%. Wow, that's a big jump, but you probably knew that already!

The two key components that contributed to this increase are the increased cost of post secondary and graduate level education, and the increasing number of students seeking advanced degrees. Heaven help you if you're one of the 20% of students that get a student loan but leave school diplomaless. You're still on the hook to repay the loan, but your employment prospects are definitely not as bright as if you'd stayed in school. According to one report, the percentage of students that indicated that student loan debt had caused them to delay either having children or get married has doubled in the last decade. On balance, that may be a good thing. Get your financial house in order, then have kids. On the other hand, are you ever truly ready for the little munchkins?

Where do young people turn when they find themselves in the huge student loan predicament? Why credit cards, of course. The 2004 study of consumer finances found that, between 1991 and 2000, the level of credit card debt among those under 35 years old had nearly doubled. Obviously, not all of that increase was not caused directly by student loans, but that figure, combined with the previously cited statistics, helps illustrate the debt picture faced by many younger Americans. The Fed says that of the same group, Americans under 35, about a fourth of their income is spent to service debt. Ouch! Even worse, last year, according to the U.S. Census department, only 43% of people in that age group were homeowners. Large debt levels without homeownership do not a good combination make. If statistics were available for those under 30, the picture would no doubt be much bleaker, as fewer in that age group likely own their domicile.

More on this soon, when I'll look further into student debt, but also into the other debts that are dragging down so many Americans....