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Debt Consolidation Expert
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From this side of the Pacific, we've always shuddered at the prospects for young people in a place like Japan. The routine of archetypal sarariman, or corporate drone, sure sounds dreadful: a drab college education followed by a youth of low-paid toil, long commutes into Tokyo, and little chance for advancement beyond middle management. The very best a sarariman can hope for, we're led to believe, is to someday go into hock for a suburban condo and to scrape together enough money so the kids can attend after-school cram sessions.
It all seems so tedious, so pointless, so restrictivein short, so un-American. In our country, the story goes, a youngster's economic options are limitless as long as he or she's got gumption and smarts. At 21 or 22, the age at which a sarariman supposedly begins his trudge toward a corporate pension, his American peer should be wrapping up college and preparing to enter a workforce that justly rewards ambition. By 33 or 34, an American with a bachelor's degree should be sitting pretty, with a worthwhile job, a house with a backyard, and enough scratch in the bank to send Junior to preschool. Anyone who falls short of that middle-class dream is obviously a no-count layabout.
But is the sarariman treadmill really so alien to the American experience today? The average collegian in the U.S. isn't graduating into a world of boundless opportunity, but rather is $20,000-plus in the hole thanks to student loans and credit cards. So begins the snowball effect: The most desirable entry-level jobs often pay wages too low for the indebted, who must fork over a large percentage of their salaries to Sallie Mae or Citibank. Other posts are reserved for those who can afford to work unpaid internships, or whose parents can support them through an extra year or two of graduate studies.
Employers are increasingly reluctant to defray the cost of health care, so tack on an extra several hundred bucks a year, even $2,000 or more for the technically self-employed"permanent temps," as the saying goes. Though housing is supposedly cheaper than ever, due to record-low interest rates, the ambitious young aren't necessarily enjoying the trend. Rents in many metro areas, where a good portion of knowledge-based jobs are located, remain sky-high; cheaper digs exist in the suburbs, though that means enduring sarariman-like commutes.
High levels of debt preclude the young from getting the sweetest mortgage deals, and they often end up in the clutches of sub-prime lenders. On average, people who had to borrow their way to a graduate degree are already behind $45,900; median debt for grad students has increased 72 percent since 1997. (Aspiring doctors have it the worst, with average loans of $103,855.) Add to those obligations an investment in a humble bungalow, and you're on the hook for a quarter million or morenot counting interest.
The cumulative effect is that merely keeping one's head above water, rather than getting ahead, has become the top priority for Americans between the ages of 18 and 34. Pursuing the relatively modest dream of doing better than the generation before requires serious capitalup front in the form of tuition and loans, and hidden in the form of lost opportunities. Call it the ambition taxthe money you've got to pony up if you want a college degree and a shot at middle-class bliss. But it's really more of a gamble, as there's no guarantee those tens of thousands of dollars will get you where you want to go.
"The next generation is starting their economic race 50 yards behind the starting line," says Elizabeth Warren, a Harvard Law School professor and author of The Two-Income Trap. "They've got to pay off the equivalent of one full mortgage before they make it to flat broke, in order to pay for their education. They can never get ahead of the game, because they're constantly trying to play catch-up.
"And once you've got accumulated debt, the debt takes on a life of its own. It demands to be fed, and it takes that first bite out of the paycheck. And it means the opportunity to accumulate a little, to get a little ahead, to maybe put together a down paymentit's just never there. It's just staggering to me that this is not a part of our national debate right now."
If the early rhetoric in the presidential race is any indicator, neither candidate cares a whit about the struggles of America's young. George Bush and John Kerry are happy to trade barbs about draft dodging and flip-flopping. But they've yet to utter more than a few peeps about alleviating the unique economic burdens of the next generation, and the one after, and the one after. It's almost as if Americans under the age of 35 don't exist.
Let's try to correct that oversight by following the travails of a fictional payer of the ambition tax. With apologies to Cormac McCarthy, he'll be known as the Kid. The Kid is average in every way, save for determination. He'd like to earn the college degree his father missed out on, and eventually find a job he doesn't loathe going to every morning. At some point, he's hoping to find that special someone, settle down, and squeeze out a few namesakes. Nothing fancy.
The first step, of course, is a bachelor's degree, the minimum requirement for most of the jobs typically associated with upward mobility. Recipients of four-year degrees have much higher average earnings than people sans sheepskins$52,200 for a full-time worker with a college diploma, versus $30,400 for a mere high school graduate. For the Kid, college is where he'll start climbing the economic ladder.
It's also where he'll start digging his financial hole. The notion of skyrocketing tuition is such a cliché, it's easy to miss exactly how steep the increase has been. Over the past decade, according to the College Board, average tuition and fees in real dollars rose 47 percent at public four-year colleges, and 42 percent at private four-years. Just in the past year, tuition and fees nationwide rose an average of 14.1 percent; in New York, where Governor George Pataki cut $184 million from the State University of New York budget, a 35 percent tuition hike is on the table.
So a year at Big State U will run the Kid $4,694, not including room and board (which averages another $5,942 in 2003-04). Unless he can snag substantial financial aid, the private route is almost out of the question for the Kidtuition and fees average $19,710 per year, plus $7,144 for a dorm and three squares a day.
Federal Pell Grants were once a boon to students like the Kid, but no longer. In 1980, the average Pell Grant covered 77 percent of the cost of a four-year public college; to-day, it's just 40 percent. Worse yet, despite President Bush's brief State of the Union aside about "larger Pell Grants for students who prepare for college with demanding courses," obtaining a Pell is harder than ever. The Department of Education recently revised its eligibility guidelines, which will exclude 84,000 students from the program entirely, and reduce awards for 1.5 million.
If the nation's commitment to economic mobility is genuine, it's hard to understand the logic behind the Pell Grant cutbacks. When the Minnesota Private College Research Foundation studied the post-graduate fortunes of the state's class of 2002, for example, it found that recipients of state grants earned average incomes on par with their peers who hadn't received aid. "Few other government programs are capable of producing such a positive transformation," the Minneapolis Star-Tribune wrote. Yet federal grants were slashed despite the evidence of their value. Perhaps those who've suffered as a result of Pell cutbacks can take solace in the fact that the money may go toward helping astronauts walk on the moon. Again.
Shafted by the Pell system, the Kid has to pay a visit to a federal loan office or a private bank, just like over 60 percent of his post-secondary peers. The average student loan debt for an undergraduate like the Kid is $18,900, up 66 percent since 1997; over the same time period, by way of comparison, per capita income in real terms increased by just 8 percent. Kathryn Rube of the Public Interest Research Group's Higher Education Project says surveys reveal that nearly 40 percent of these debt loads can be classified as "unmanageable"in order to service the debt, recent graduates must fork over more than 8 percent of their monthly income. And over a third of student borrowers are simply not prepared to meet their debt service obligations once they've left campus.
But we're jumping ahead a bit here, for the Kid has yet to earn that coveted bachelor's. Like three-quarters of his fellow higher-education enrollees, the Kid needs to work while taking classesbooks don't buy themselves, as a snarky parent might say. For undergraduates who identify themselves primarily as studentsas opposed to full-time workers taking classes in their spare timethe average number of hours worked per week is 26. Since the Kid is working to meet expenses, rather than to further his career ambitions, he doesn't have the luxury of taking on an unpaid internship, or even a work-study job with a modest stipend. Instead, he slings ribs at the local chain restaurant, and the hours spent amid the grease have a predictably deleterious effect on his grades.
The other financial ogre the Kid must contend with are credit card shills, who swarm his campus like ants on a picnic chicken. Colleges make millions off credit card hawkers, who pay for the privilege of setting up kiosks or affixing a school's logo to their plastic. Students, in turn, get stuck with deceptively marketed cards at near usurious rates. True, the students deserve some blame, especially when they charge needless luxuries. Groceries and books, however, don't qualify as needless.
The good news, if there's any, is that the average credit card balance among the Kid's demographic has slipped a smidge since 2000 to $2,327; the bad news is that 21 percent of card-toting undergrads have balances between $3,000 and $7,000the high end marking a 61 percent increase from 2000.
The twin burdens of debt and after-hours work, piled atop the rigors of hitting the books, are a big part of why 600,000 undergraduates drop out of four-year schools each year. According to College for All? Is There Too Much Emphasis on Getting a College Degree?, a 1999 study published by the U.S. Department of Education, those dropouts end up making less long-term than peers who earned only an associate's degree. "In addition," the authors add, "they (or their parents) pay more in tuition and are more likely to have student loan debts than are 2-year college students." In other words, the gamble on a bachelor's came up snake eyes.
The Kid's a survivor, though, and after five or six years of loans, study, and work, he dons his cap and gown. Handshakes all around, and Dad buys him an engraved Seiko to commemorate the occasion. Now it's time to join the labor force, $20,402 in the redthe average combined education and credit card debt for a recent college graduate, according to the federal loan company Nellie Mae.
Forget about grad school, of course, as that would mean taking on a whole new set of loans. A Law & Order fan growing up, the Kid once imagined becoming a public defender. But then he read an American Bar Association report noting that a J.D. would, on average, raise his total debt burden to $80,000, and that the median salary for entry-level, public-service legal jobs is $36,000. So never mind that dream.
The Kid's at first a bit dismayed to discover that his other dream jobs have been cherry-picked by more privileged graduates who were able to hop from prestigious internship to prestigious internship rather than wait tables. A job is finally found, though the pay's not quite what the Kid had imagined. In fact, real hourly wages for young college graduates actually fell between 2001 and 2002, the last year for which complete data are available. Prior to that, wages for recent college graduates increased an average of 3 percent annually throughout the 1990s. Those modest increases, of course, hardly kept pace with the attendant rise in student debt.
And as the Economic Policy Institute also recently noted in one of its regular "Economic Snapshots," the majority of job growth has been in lower-paying industries. "Nationwide, industries that are gaining jobs relative to industries that are losing jobs pay 21 percent less annually," the report notes.
Of course, a good portion of the Kid's monthly wages go directly toward servicing his debt. Demos, a public-policy group that focuses on inequality issues, is preparing a report on debt hardship among the young. One of the stats the group is using to track debt is "debt service to income ratio," which is debt payment divided by total income. Between 1992 and 2001, Demos found that the ratio increased by 28 percent for Americans in the 18-34 demographic. And for those in the third income quintilewhich typically covers recent college graduatesthe increase was 43 percent.
In layman's terms, those fatter ratios mean that the Kid and his cohorts are handing over an ever growing chunk of their hard-won cash to creditors. A contrarian might point out that bankruptcies among the young remain a mere blip. But that's largely because student debt, like child support obligations, can rarely be discharged that way.
Another misleading stat is that defaults on student loans have grown increasingly rare. Last year, student defaults hit an all-time low of 5.4 percent, down from a 1990 peak of 22 percent. The downward trend, of course, didn't come about because students are carrying more manageable debt loads. Rather, the federal government got a lot more aggressive about pursuing deadbeats and using collection agencies to force payment. Defaulters were punished with additional fees and sometimes forced to enter consolidation agreements that prolonged repayment until approximately the end of time.
Aside from the debt he accumulated during his college years, the Kid has a new financial bogeymanhealth insurance. Premiums are spiraling ever higher, a trend that doesn't fit into employers' cost-cutting plans. Health-care premiums increased 13.9 percent last year, according to the Kaiser Family Foundation; it was the largest single-year increase since 1990, and the third straight year of double-digit upticks. A good portion of that cost was passed along to employees, especially if they were contract or temporary workers, who expect to get shafted on benefits. Just over 45 percent of America's temp agency workers, for example, are between the ages of 20 and 34well over half a million in total. (That doesn't include another 2.2 million independent contractors and "on-call workers" in the age group.) Barely over 10 percent of these temps receive any sort of health insurance from their employers, according to the latest survey from the Bureau of Labor Statistics.
Given the Kid's low pay and high debt service, there's a good chance he'd join the 17.9 million other 18-to-34ers who lack even the most basic health insurance. His demographic accounts for the single biggest bloc of uninsured Americans41 percent of the country's total. The Kid enjoys the occasional game of pickup basketball, of course, so he'd best pray that his ACLs are sound. Otherwise, a $5,000 hospital bill could nudge him into the abyss.
Afew years pass, a significant other comes along, and the Kid's elders start badgering him about growing up, getting with the American dream, and purchasing a home. Up to this point, the Kid has been renting in a metro area. It's a drag throwing away that money each month, but at least he's not living in his parents' attic. (According to the 2000 census, 14 percent of 24- to 34-year-olds live at home, a 50 percent increase since 1970.)
Adding yet another fixed cost to his debt load might seem like an unwise choice, especially since the Kid doesn't have much in the bank for a down payment. But the way house prices are going, it feels like a now-or-never proposition. "If housing prices continue to escalate, at least you'll be on the train," says Harvard's Elizabeth Warren. "As the train moves, you'll move with it. But it's also a high-risk proposition if it's going to take your income and your spouse's income to make the mortgage payment every month."
Any real estate agent will vouch for the fact that now's an ideal time to be home-shopping, with interest rates at all-time lows. The debt-laden young, however, often don't qualify for the best rates, especially if they've been delinquent in meeting their obligations. Warren points out that in 2001, when the typical mortgage rate hovered around 6.5 percent, Citibank's average was 15.6 percent.
The Kid only needs to put 3 percent down on a house, rather than the 18 percent that was typical during the 1970s. But the lower down payment is a curse in disguise, as it means the Kid will be saddled with much higher mortgage payments. Both he and his spouse will have to work full-time to stave off a foreclosure. "When we look at the median cost of housing, it used to be 30 years ago that a teacher could purchase a home on their own salary," says Tamara Draut, director of the Economic Opportunity Program at Demos. "Nowadays, it's hard for two teachers to purchase a home on their combined salaries."
With the Kid and his partner working full-time to pay the mortgage, they'll need day care for the family's new additions. Day care for a one-year-old costs more than $5,750 per year in two-thirds of American cities, and more than $6,750 annually in one-third of cities. And so the financial onus grows even heavier.
With a little luck and lots of scrimping, the Kid and his kids could do all right, considering. Families like the Kid's are spending far less of their income on consumables than the previous generation21 percent less on food, 22 percent less on clothing, and so on and so forth. Hopefully that spartan philosophy will keep the Kid afloat until middle age and beyond. Hey, he made it this far, right?
But what if some unforeseen catastrophe strikes, like a lost job, an illness, an ailing parent who needs around-the-clock care? The mortgage, the student debt, the credit card debt, the day care tab, health insurancethe margin for error is virtually nonexistent. By the most generous estimates, in the event of a financial emergency, the typical American family doesn't have enough saved up to last more than a few months. The Kid's just got to hope his legs can keep pumping on the financial treadmill, and that no one ups the speed.
The myth of economic mobility has taken quite a drubbing lately, and rightly so. In September 2002, an economist at the Federal Reserve Bank of Chicago, Bhash Mazumder, concluded that "the persistence in inequality is about 50 percent higher than previously thought"in other words, jumping from one class to the next is trickier than advertised. More recently, a pair of French economists, Thomas Piketty and Emmanuel Saez, found that between 1973 and 2000, the bottom 90 percent of American taxpayers saw their average real income fall by 7 percent.
There's little agreement in the ivory tower as to why mobility is so hard to come by nowadays. Flailing around for someone or something to blame, economists have pointed fingers at regressive taxes, greedy corporations, weakening unions, and Wal-Martization. "The underlying factors that cause substantial immobility in the U.S. remain poorly understood," Mazumder confessed in his 2002 report.
From the vantage point of the Kid and his millions of real-life contemporaries, one big answer is obvious: The system punishes the young who dare strive for something better. For those on the young side of 35, debt and its ripple effects have made upward mobility a fiction more often than not.
Yet the presidential candidates seldom address the economic burdens of the young. Ask a candidate to outline his economic plans, and it's all about Medicare, Social Security, slashing the deficitimportant issues, to be sure, but of little consequence to the millions of Americans in their twenties and thirties who agonize every month over their avalanche of debt and diminishing prospects. Howard Dean kicked around the student loan issue at a few press conferences before he flamed out, and John Edwards proposed giving a year's tuition to students willing to work 10 hours a week in their community. Other than that, the rhetoric has been scarce, and concrete proposals scarcer.
The conventional wisdom dictates that this is merely smart politics, since the young tend not to vote. Nor do college kids make for particularly sympathetic charactersthey're often portrayed as hedonists who simply want to spend Mommy and Daddy's cash on a Cancún bender.
So the Kid pays his ambition tax in virtual silence, like that stereotypical sarariman putting in a 16-hour day with nary a complaint. Somewhere on the other side of the world, a Japanese youth preparing for his first trip to the U.S. may read the Kid's woeful tale and marvel, "How tedious, how pointless, how restrictive, how dreadful." He'd be right.
EDITOR'S NOTE: Student loans in six figures. Credit card sharks in cahoots with your college. Mortgages you'll finally pay offfrom the grave. For ambitious people between 18 and 34, reaching the middle class today means taking on unprecedented debt. This article marks the first in an occasional series of election-year reports on the American economy as it's now being lived by our youth.