April 19, 2012

I had the most interesting conversation today while at the swimming pool waiting for my daughter. I spoke to the young cashier about the global debt crisis and all of a sudden I had a group of people all listening and speaking about how bad debt was. They seemed to be impressed that someone much older than them sympathized with young people starting out with debt written all over their faces.

One of the other cashiers jumped in and told me about a college course she just finished about the European debt crisis and how this might affect us in the West. I was impressed that the topic of debt was a subject being taught and discussed in university and that it was so timely and relevant.

I then mentioned I had been helping individuals and families all of my professional life with managing credit and debt and that the real culprit hiding under the tip of the iceberg was the impoverishment of the middle class over the last 35 years in Canada. I explained that, since the 1970s, individuals had sunk into a lifetime of debt, from $21 Billion in 1975 to $482 Billion in 2012.

There was much more to the story than profligate consumers who couldn’t balance their chequing accounts. Inflation was the silent enemy, a toxic mixture of rising costs for basic survival without a similar rise in wages. This was the formula for dependency upon credit, which just got bigger and bigger, each and every year since credit cards arrived on the scene as a miracle of 20th Century commerce and technology.

Suddenly, this young person’s boyfriend arrived and after hearing the conversation hurled out into the forum the normally suppressed topic of student loan debt. “Yeah, you know student loan debt is a big problem. It’s a trillion dollars now.”

Being surprised to hear such an inflated figure I replied, “Well, actually it’s more like $14 Billion in Canada."

“Oh, I’m talking about the U.S.”

“Actually, the total household debt in the US is $2.6 Trillion.”

My young friend said, “Yeah, well $1 trillion is student loan debt.”

I tried to correct what was obviously a mistake, perhaps a hyperbole rather than fact. He then moved on to another unpopular topic, “And you can’t get student loan debt discharged in bankruptcy.”

This was only partly right. I said, “It’s only in the US where the student loan debt cannot be released from a bankruptcy. In Canada you still can, but the government’s collection tactics are aggressive and demonstrate contempt for the fresh start or second chance principle of bankruptcy legislation. Since the 1970s governments, both federal and provincial, have enacted laws that prevent student loans from being discharged, first for 2 years, then a year later, in 1998 they pushed it up to 10 years that was only recently reduced to 7.”

The girlfriend re-entered the discussion, “Why is it that nothing is ever said about the high cost of post secondary education?! Why does it have to be so expensive?!”

I was very impressed to hear that young people do understand economics. Yes, I’ve been saying this for years that student loans have simply helped perpetuate excessively expensive universities and colleges. And the whole idea of governments lending poor people money, truck-loads of money, has always struck me as being peculiar. I said, “Just think about it for a moment. Why lending institutions out there lend money to poor people – people that cannot afford to attend universities and colleges – when they do not have a job or any income?”

The boyfriend argued, “Well, that’s the only way people can get into university. And they should pay it back.”

“Yes you are right but my point is that student loans originated as a way to open up post secondary education to people who could not otherwise afford to attend. In the 1960s it became an embarrassment that only the wealthy were attending universities. Back then people graduated with very modest debt loads. Do you know how much a friend of mine owed after graduating with a BA in 1974?”

“No, I have no clue.”

“It was $3,500.”

“Yeah well that is nothing. Today it’s twenty or thirty thousand.”

So, our conversation soon ended. I left the swimming pool encouraged that young people have figured out that debt is bad, that they should pay their credit card balances off in 30 days and not pay any interest charges - that there is something inherently wrong with the cost of post secondary education – and something not quite right with assuming gargantuan debt loads to get it. They do have a choice. And one choice is to do something about the student loan dilemma for the cash strapped, debt ridden middle class of the new millennium.

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