Build-up of Debt

The Center for Global Awareness is releasing our 6th book this summer: Connecting the Roots of a Holistic System: The Global Economy, A Brief Edition. The book is for students in grades 9-12 and non-economic major undergraduate students. To celebrate this event we are publishing a series of blogs this summer that summarize the essence of one of the chapters in the book: The Impact of Neoliberalism in the United States: Ten Consequences. We hope you follow and enjoy the blog series!  The following blog is the seventh in the series.

Impact #7: Build-up of Debt 

Have you ever been or are you currently in debt? For many of you the answer may be yes! Debt is more a fact of life today for young people than when I grew up. Some of my peers had student loans, but they usually paid them off in a couple of years. They had no credit card debt because no one I knew had a credit card! In fact, I remember getting rejected when I applied for my first credit card – and I was a teacher at the time and didn’t have any debt! Today the words debt and deficits are on the lips of everyone – from homeowners, to credit card holders, to students, to retirees, to government. Big time debt. In this section we will examine three kinds of debt: consumer debt, student loan debt, and the national debt.

1. Consumer Debt

7a Visa logoIn the post-war years, American families borrowed for consumer purchases, but usually it was not too much and kept pace with the growth in their incomes. But the rise in incomes in the post-war years gave way to stagnant incomes for most Americans. Yet from the 1980s onward, despite flat incomes, families have kept on spending. How did families manage this trick? First, women streamed into the paid work force. By the late 1990s, more than 60 percent of mothers with young children worked outside the home, while in 1966, only 24 percent did. Second, everyone put in more hours at work. By the mid-2000s, the typical male worker clocked in roughly 100 more hours each year than two decades before, and the typical female worker about 200 more hours. Third, when American families couldn’t squeeze out any more income from work, they went deeper into debt. Their home served as their personal ATM. Through refinancing their homes, Americans took out $2.3 trillion. Eventually, the debt bubble burst – and with it, the last way to cope with falling incomes.

Consumer debt is simply debts that are owed as a result of purchasing consumable goods that do not appreciate in value. For example, a house is not consumer debt because its value can increase with time. A designer purse or a computer game is a consumer item because once out of the store, it loses its value. Consumer spending drives 70 percent of the economy. Total U.S. consumer debt, as of May 2011, was $2.43 trillion. About 50.2 million households carry credit debt, which averages out to about $15,799 per household. There were 176.8 million credit cardholders in 2008. This means some people owe a lot more money than they are bringing in. But, paradoxically, in order for the economy to recover from the recession, consumers need to consume more, which means running up more consumer debt.

2. Student Loan Debt

7b US Student_Loan Debt Distribution 2012Do you have student loan debt? The younger generation appears to have mortgaged its future earnings in the form of student loan debt. In 2012, total student loan debt in the U.S. reached over $1 trillion. In 2008, 62 percent of students from public universities obtained student loans, 72 percent from nonprofit private universities, and a whopping 96 percent from for-profit schools. Neoliberals seek to decrease funds for public education, which indirectly pushes more students into private institutions. Enrollments at for-profit colleges have increased in the last ten years by 225 percent. From 1994 to 2008, average debt levels for graduating seniors more than doubled to $23,200. Loans now saddle more than 10 percent of those completing their bachelor’s degree with over $40,000 in debt.

Of the $1 trillion in outstanding federal and private student-loan debt, students are actively repaying only about 40 percent of that debt. The rest is in default or in deferment (when a student requests temporary postponement of payment because of economic hardship). When the loans go into default, taxpayers are required to pick up the tab, since the federal government backs just about all loans extended before July, 2010. Two out of every five students enrolled at for-profit schools are in default on their educational loans 15 years later. There is no screening to receive these loans. A credit score is not required for federal loans. Neither is information regarding income, assets, or employment.

T7 College Tuition State Fundinghe two largest holders of student loans are SLM Corp (SLM) and Student Loan Corp (STU). SLM – Sallie Mae – started in 1972, and the government privatized it in 2004. Sallie Mae jumped onto the securitization bandwagon, which is the repackaging a large portion of its loans and selling them as bonds to investors. Financial firms packaged many of the student loans into the same securities that helped trigger the financial crisis. Bankruptcy laws release credit card and even gambling debts, but non-repayment of a student loan is almost impossible. While those with a college degree tend to make higher incomes, during the last 8 to 10 years the median income of highly educated Americans has been declining. Also, a college education has been producing diminishing returns, especially at non-select colleges.

3. National Debt

7d Federal Debt 1940-2012

Federal Debt 1940-2012

In 1980, the national debt stood at $1 trillion. Over the prior 204 years, the nation paid for the Revolutionary War, the Civil War, World War I, the Great Depression, World War II, the Korean war, the Vietnam war, and the better part of the Cold War, and through all that, still only borrowed $1 trillion. Over the next 12 years of relative peace and prosperity, the national debt quadrupled to $4 trillion. In the 1990s, as taxes on the wealthy increased and government spending declined, the national debt stabilized. In 2000, President Clinton produced a $140 billion surplus, the first budget surplus since 1969. The deficit-producing policies of neoliberalism returned in the 2000s. The government lowered taxes on the wealthy to the tune of $1.6 trillion, in which 50 percent of the gains went to the top 1 percent of income earners. Two wars and a $600 billion prescription drug plan for seniors exploded spending. In 2000, the national debt stood at $5.6 trillion; at the end of 2011 the national debt was almost $15 trillion. Bring in less income while spending more money and the result is debt. Mountains of it.

questions-to-consider

  1. Do you, your friends, your children, or others you know have student debt? Do you or they think it was worthwhile to incur the debt? Are you or they having difficulty paying it back?

 

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