Where do we go from here?

November 7th, 2005 Stewart Posted in Uncategorized |

Now that all of the children have grown up.

Actually, the missus and I were just discussing the impact the music of Gen X had on our attitudes, and “Games People Play” seemed appropriate enough for this post. I wanted to follow up on yesterday’s note about the BusinessWeek special article on Gen Xers hitting their thirties with significant debt and not enough income.

There’s a tendency in the article to blame this situation on Gen Xer attitudes toward money, a belief that while we had little choice but to rack up significant college loans, we were also wasteful and spend-happy after college, compounding the problem. Let’s talk about some of the other items that have contributed to this issue, many of which are glossed over in the column:

*”The average credit-card debt among 25-to-34-year-olds was $5,200 in 2004, 98% higher than in 1992.” That number is truly frightening. That said, five grand in credit card debt, while appalling, is nothing compared with $40 - $50 K in student loans. So why does it have such an impact? What really harms young workers is loading them with such a distributed debt while they earn rather poor average salaries. (The average 30 year old in the U.S. makes $27,000 a year.) Making several minimum payments on mulitple cards while simultaneously paying down larger debts, including student loans and loans for other major purchases (cars, furniture, electronics, etc.) is spreading these small salaries much too thinly.

* In addition, this situation leads to missed payments, poor credit ratings, mounting late fees and additional charges. And with recent changes in the law, even filing bankruptcy would offer little relief. So instead, Xers get caught up in a debt-cycle that seems unending.

* Federal Pell Grants simply haven’t kept pace with college costs — In 1979/80, when many Boomers were still finishing up with college, the maximum Pell award would cover 77 percent of costs for the average four-year public university student. According to a 2003 report, the maximum award covers 41 percent of those costs now. If additional money was available for attending college, recent graduates would be in far better shape to help our miserable economy as consumers, rather than debt-heavy borrowers.

*”It’s so much more difficult to achieve the adult milestones today than it was 30 years ago.” The workplace is a harder place than it was ten or twenty years ago, but there’s more to it than that. Lots of Boomers don’t plan on retiring until they hit 70, or later. Many Boomers are financially unprepared for retirement as well, due to a sagging economy and rising health care costs. With Boomers planning on staying in their jobs, there is less opportunity for advancement of younger workers. Combined with more jobs being shipped overseas and a young, agile Millennial workforce waiting in the wings, the competition for jobs is about to become even fiercer.

What steps would alleviate this condition? I think a few major changes in policy and the law would go a very long way:

1. No more unsecured debt. Simply put, credit card companies should not be able to establish credit lines without collateral. If a creditor takes the risk of giving out unsecured money, then they need to be prepared to eat the losses when people cannot pay. Simple as that.
2. Fund the Pell Grant system to keep pace with the rising cost of college tuition. If you qualify for Pell, you should be able to go to a four-year public college with at least 90 percent of your costs covered.
3. Make all college tuition, fees, books and housing completely tax-deductable so that parents who are already paying enormous costs for college will see some relief.

There’s a lot more the U.S. could be doing to help this generation, and the next, to pay for college in a responsible way. But we need to get started now.