I just read an article about household debt in the United States. It’s now higher than it has ever been, even before the 2008 financial crash. The authors of the article went back and forth between whether the increased debt was good or bad.
The increased debt is good, they said, because it means the economy has improved and consumers are more optimistic about the future. On the other hand, the debt could be bad for the future. The biggest increase in debt is student loans, which can stifle consumers’ ability to buy homes or other big-ticket items. This can put a damper on the economy.
The fact that a greater percentage of household debt is student loans rather than mortgages can be good for the economy, the authors said, because total student loan debt is much smaller than total mortgage debt. So, the increased student loans are less of a threat to the global financial system than the mortgages that caused much of the problem in 2008.
Yet student loan debt, unlike mortgages, can typically not be shed or restructured. It becomes a debt that borrowers may be saddled with for the rest of their lives, which can prevent them from purchasing homes or starting businesses. Many students are graduating with more debt than their earning capacity will allow them to pay.
In my opinion, it would be beneficial for students to learn about student loans before heading off to college. I hear from many college graduates who are shocked after graduation to discover how much debt they have accumulated.
A helpful exercise before starting college would be for the student to consider the potential income their chosen career will provide and then develop a realistic after-college budget based on that income and living expenses in the area they hope to live. Based on that budget, they should be able to discern the debt payments they will be able to make. That, in turn, will help them determine the maximum amount of debt they would be able to handle. Of course, there are other factors to consider, such as interest rates.
Knowing ahead of time the maximum amount of debt they should incur will help the students make better decisions about their student loans.
Source: “Household Debt Makes a Comeback in the U.S.” by Michael Corkery and Stacy Cowley, The New York Times, May 17, 2017.
Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.
