The Rising Cost of Young Adulthood
I wrote a couple of weeks ago about some new statistics on the growing burden of student loans. This week, CommonWealth magazine published an interview with Tamara Draut about her new book, Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead. In the interview, Draut discusses her research and explains how factors such as large student loan obligations and high housing costs in the cities where most young adults go to start their careers are making the transition to fully independent adulthood harder for young adults to achieve. The interview gives some interesting insights as to why $200/month student loan payments really can be a heavy burden for 20-somethings.
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Comments (25)
Kathleen,
I believe you are raising a very, very important issue. I still believe that the solution is to avoid debt. A wise person makes the personal policy of "I don't do debt". Adopting that policy as soon as possible in life is paramount to maintaining personal freedom.
Jim Anderson
www.lighthouseonline.net
March 5, 2006 6:50 PM | Reply | Permalink
How do we fix the problem? Go to the root of it, which is that rising property values -- more precisely, rising land values, since buildings, like cars, start to depreciate as soon as they're built -- are being poured into private pockets by our traditional approach to what we tax and what we don't.
What do we do? Replace at least some, and preferably all, of our dumb taxes -- those on wages and sales and buildings -- with taxes on land value. Doing so will bring down the price of land (just the same way rising interest rates do) and pour money out of the pockets of those who own our best land (the central business district of our largest cities, where much of the office space and rental housing is located) and into public coffers.
Reducing the penalties for earning a living and producing goods will help drive up wages.
Reducing the opportunities for speculative gain on land will mean that landwealth that is sitting in the portfolios of a relative few will be shared with the commons.
When someone is keeping a small, old and obsolete building on a supremely well located piece of land, the rest of us suffer, because in order to have a place to live or a place to work, we have to go further from the center of things. This is sprawl. This is long hours spent commuting. This is not fun. This is not a good use of our time or our money. This is not good for families.
Fix the incentives. Get that obsolete building in a prime location replaced with something current. Reducing the taxes on the building, and increasing the taxes on the land value work together to push the landowner to either put the land to better use himself, or lower his asking price so that someone else can afford to do so and still be profitable. We all benefit, except, perhaps, for the heirs of the fellow who owns the obsolete building.
Our young people will be able to afford the place to live, and be able to find work in a vigorous workplace. Win-win situation! Economic justice!
Land values will continue to rise. They rise because of technological progress (think of elevators, air conditioning). They rise because of population increases (more people needing places to live and work, people living longer, natural population increase, immigration in search of a better life or proximity to natural and manmade amenities, like the waterfront, Broadway, museums, coffeehouses, whatever). They rise because we-the-people invest in infrastructure (bridges, subways, etc) and services (emergency services, schools, libraries). Should we try to stop any of these things? No, of course not. But to allow some landholders to privatize the economic benefits of these, and require the rest of us to (a) pay them for access to "their" land and (b) pay sales and wages taxes to finance the infrastructure and services that help prop up those land values is DUMB!
The alternative, collecting the annual value of land, is SANE and SMART! And very do-able.
We'll create a society that all our children can afford to live in.
LVTfan [that's Land Value Taxation]
http://www.wealthandwant.com ... if you'd like to see an end to poverty
March 6, 2006 8:19 AM | Reply | Permalink
I take it you plan to avoid taxes by living in your car.
Ron Byers
March 7, 2006 1:08 PM | Reply | Permalink
Try going to college without incurring at least a little debt. I did it in the 1960s and it was hard. Speaking from experience, I am not sure I would recommend going to college and working full time to anybody.
Try buying your first house or your first car without a loan. Short of inheriting money from your parents or grandparents, that isn't going to happen.
Babies, people in their 20s and 30s have babies. There is nothing more expensive than a baby, unless it is a teenager, or a college student. It is probably going to be necessary to pay for the things the children need, not want, but need. You will incur debt paying for children, at least in this society.
Jim, maybe you might try giving some realistic advice. For me that means, never buy food with a credit card. Pay off your credit cards monthly. If you don't think there will be enough money to buy the electronic toy you want, don't.
Ron Byers
March 7, 2006 1:16 PM | Reply | Permalink
No, but I would probably avoid buying more land than I really can put to good use, and I'd choose my property based not on its potential for appreciation but on how well it serves my needs now and how well it is likely to serve my future needs.
As they say, pay for what you take, not for what you make. Take what you need, and leave the rest. And if you take the very best, be prepared to reimburse others for your use of it.
If I needed to be close to my work, I'd choose one sort of place. If gorgeous views were my primary interest, another. If cultural amenities were my thing, that would guide my choice. If I was close to retirement, I'd choose to locate in a place outside the commuting distance of the high paying jobs, so as not to be competing with folks earning big dollars for a place to live close to the center of that action.
And the beauty of it is that my wages would be mine, not to be shared with the commons. And I wouldn't be paying taxes on my home, so it would be entirely my business whether I placed a cottage on my land or a highrise, as long as I paid my fellow human beings for the piece of land I claimed. But the value of the land I claim as "mine" is rightly owed to the commons.
lvtfan
http://www.wealthandwant.com ... if you'd like to see an end to poverty
March 7, 2006 7:34 PM | Reply | Permalink
Jim, maybe you might try giving some realistic advice
Here we go again. Someone else who has been convinced that debt is necessary. Your comments indicate you haven't read the previous comments on other blog articles here, that turned into discussions. If you read some of the other discussions on previous posts, you will see why this line of thinking that debt is necessary is what leads to financial problems and why. There were some extensive discussions on this topic. There are numerous published sources you can look to, including Elizabeth Warren's books. I know it seems unreasonable on the face of it, but until you understand the economics behind it, you won't see how important it is that you arrange your life so that you don't need it. It may be tough to live that way at first, but once you get out of the cycle, you are much more secure financially.
If you think debt helps you, you have been decieved and are systematically transferring your hard earned wealth to banks, increasing poverty in society, and systematically making our economic problems worse. That is a sweeping statement, but without rehashing all my arguments, that is a summary. To see more about the realities of debt visit my personal blog.
Jim Anderson
www.lighthouseonline.net
March 8, 2006 6:38 AM | Reply | Permalink
I have visited your personal blog, and find it amusing. You remind me of the fundamentalist parent who tells his children to abstain from sex before marriage. Obvously good advice, but I think any parent who doesn't tell his teenage children about birth control hasn't been a good parent.
The truth is, in our society, debt happens. It would be better to organize our lives so that it doesn't happen, but most of us can't wait to plunk down $100,000 to $300,000 to buy a house. We need someplace to live right now. Others of us will have medical emergencies that can't be planned a year in advance. Still others will find an immediate need for a new used car because the old one is broken beyond repair. Last I looked a state college costs about $17,000 per year. Unless you are blessed with rich parents, try paying all of that without taking out a student loan. College is something we can save for, but not the cancer co-pay that confronts us the month after the boss has decided to change insurance plans.
Having assued you that I generally against debt, let me address the argument that debt is unnecessary. Unlike you, I don't live in a beach house. I am from the midwest. Around here we know that without some serious debt you and Dr. Warren and just about everybody else would starve to death. Why, well around here every farmer goes into debt to buy the seed, fuel, and equipment needed to grow the grain he can't sell until the end of the season. If you have some way to avoid debt in the agricultural business you might try letting my cousins know. They have been ranching and farming successfully for generations. They have no idea how to avoid debt. Trust me, they will not dismiss you if your arguments are well founded.
Now how about some real world advice on keeping debt to a minimum?
Ron Byers
March 9, 2006 1:19 PM | Reply | Permalink
Excellent thoughts.
Ron Byers
March 9, 2006 1:25 PM | Reply | Permalink
sorry for the duplication ... see below!
March 9, 2006 2:32 PM | Reply | Permalink
Ron,
Thank you for taking what I'm saying seriously. I understand your frustration. When this idea of living without debt is first presented to people who haven't seriously considered it, we all have considered it impossible.
Your argument that debt is necessary isn't convincing me. The prices being so high is a symptom of the debt problem. Debt has falsely inflated demand, and so more debt is needed to keep it up. High prices are no excuse for more borrowing. That causes higher prices. There are affordable places to live, and there are places in this country where housing is cheap and of high quality too. If everyone started realizing that, prices would adjust back down to reality.
As far as the agricultural business, I have no experience in that industry. But it doesn't matter what industry you are in, if you have to borrow money to keep going, you can't afford to be in business. All businesses have some upfront expenses and need cash before they make their sales, but the owner is wise to use investment capital, not debt, to finance the business. If the investment has too poor of a return to put their money there, then the business isn't worth doing. Invest in something else. That is a hard lesson I had to learn in my business. Make the business profitable enough to support itself, or don't do it. If you don't, when bad economic time hit, you are at high risk of losing your business, and as a small business owner you have probably personally guaranteed debt you can't pay. So you stand to lose everything you ever worked for, because you borrowed to do business.
I don't intend to tell people what to do, I am just sharing what I've found in my experience. Since you've asked, I'll try to outline what I think are 9 steps to breaking out of the debt trap:
1. Commit to getting out of debt - The commitment is important or you won't see it through to the end.
2. Start paying yourself first. Save 10% of what you make, right off the top before you pay any bills.
3. List all you own and all you owe. You have to know the facts about your financial situation before you can make a realistic assessment. Failing to do this is a sure recipe for disaster.
4. Sell what you don't need. You have to start being realistic about what you really need, and what you just want. You may want to downsize your car. If you're making payments, maybe you can get them reduced by selling it and getting a less expensive one.
5. Set up a repayment plan. You might need to go to a financial financial counselor, not someone who is going to sell you some investments, but someone to help you with you get your finances in order. Someone that can give you unbiased, realistic advice about what you can afford, and what you can't. A good program that costs next to nothing is "Crown Financial Ministries" that have counselors who volunteer at churches all across the country. Dave Ramsey is another one that has an educational program and counselors to help you out.
6. Decide to do it in half the time. You'd be amazed what you can do if you put your mind to it. A little extra every month makes a big difference. Especially if you can find more money by eliminating overspending, and live on less than you make. Dave Ramsey has a strategy that uses a snowball effect for paying down debt.
7. Add NO new debt. Cut up your credit cards, make a new policy of living on cash, and have a family that doesn't do debt. If you can't pay cash, you don't get it. You decide to be content with what you have.
8. Share your plan with your creditors. Let them know you intend to pay all your debts. If they require a $100 payment tell them you can pay $20, and ask them to stop charging interest. Make a point to tell them that if they continue to charge interest you'll never get out of debt, and you won't be able to pay them back. You might at least get an interest rate reduction. Start with the smallest balance and pay it off first, then add that payment to the next smallest and pay it off. Keep doing that until everything is paid off.
9. Stick with it. Remember your commitment. When it seems like it is getting tough, think about how much easier it is going to be when you're done. Think about how freeing it would be to not have to make a mortgage payment!
Hope that helps.
Jim Anderson
www.lighthouseonline.net
March 9, 2006 6:26 PM | Reply | Permalink
Thank you for your reply.
I have given the same advise to others many times. Unfortunately most of them tell me that the advice is like a 12 step program or a diet. Good intentions are always trumped by life. Number 9 is very hard to do in our society.
Ron Byers
March 10, 2006 2:15 AM | Reply | Permalink
I agree. That is why we need to be there for each other, and help those in need. It seems we were made to be interdependent. Things like this can't be done alone.
Jim Anderson
www.lighthouseonline.net
March 10, 2006 6:22 AM | Reply | Permalink
I think we're missing the point of Kathleen's original post here. This isn't about incurring debt during college, or or incurring additional debt by buying a home, but the debt that's unavoidable to new college grads.
If you're a middle class kid coming out of school with a Bachelor's and $200/ month in student loan bills, chances are you're looking at a big city to start your career in. Try renting a place to live for less than $500/ mo in any of the top 10 markets in the US. Now toss in $200 in utilities and bills, and $200/ mo in food. Congrats, you're now looking at $1100/mo right off the bat. OK, so let's say you diodn't major in finance or IT, and you're only making $28k out of school. That means after tax, monthly, you're taking home about $700 a month after billsaand living expenses. Not bad, right? Well, throw in the cost of commuting to work. If you're taking public transportation you're looking at $50-$100/ mo. If you need ta car, god help you, because if you want a reliable vehicle you're looking at $200/ mo for used or $400/ mo for a new car. Plus gas. Plus insurance. Then, let's not forget that first apartments don't come furnished. So, even if you get your stuff at IKEA, you're looking at about $1k for furniture. Where's that money come from? Aunt Millie and Uncle Pete? If you're lucky. But if you're like me, that's your first use of the credit card. Now you're looking at $100/mo to pay off that card, which will take you almost a year.
Look, I actually work with dozens of personal finance experts and they all say the same things that Jim said above. All are great tips -- in a perfect world. The world isn't perfect, though, and shit happens to people and most kids don't make $50k out of college like the movies, TV and commercials make people believe. It's not a good situation for folks 21-30 years old. Period. And unless you got a buttload of scholarships and grants to pay for school, or Nana wrote a hefty check paying for all four years when you registered, you're looking at automatic debt, and you can't even think of eliminating it (let alone try to save for a downpayment on a house in an ok neighborhood) for at least 10-15 years after graduation day.
Fool me once, shame on... shame on you. A foomie can't get fooled again. -Our Illustrious Leader
March 10, 2006 10:08 PM | Reply | Permalink
The world isn't perfect, though, and shxx happens to people and most kids don't make $50k out of college
Agreed, but that is no excuse to go into debt. That is the very reason they need to plan ahead. People just have to be more creative today. Using the paradigm that debt is "automatic" just makes things worse. Starting out in such debt, with no way to pay it down - as you illustrated - should indicate that the traditional path to a college education isn't working anymore. Avoid that path, and find a different way to get that education.
Maybe start with some less expensive trade school with job placement, and work part-time or full-time, and maybe use a current employer's scholarship program, if there is one. Stay away from the student loans. With a higher paying job from that education, then go to college part-time and pay as you go. Maybe kids just have to start staying home longer, until they save enough money to have 1 year of emergency funds and have a specific trade skill. It can be done.
It might be important to always check our assumptions. Not all education improves pay. See this week's issue of Business Week (March 20, 2006) which discusses how few of executives who hit the very top jobs have an MBA.
Why do we have to insist that we get everything NOW? Why can't we have a little patience in reaching our goals? When we borrow to get there faster, we end up worse off.
Jim Anderson
www.lighthouseonline.net
March 11, 2006 7:19 AM | Reply | Permalink
Re: If you're a middle class kid coming out of school with a Bachelor's and $200/ month in student loan bills, chances are you're looking at a big city to start your career in.
Why? Outside a few very specialized fields, like acting, there are plenty of jobs in the suburbs and in smaller cities. My first "real" jobs were in the suburban fringe of Detroit, and later I have worked in Akron and St Petersburg. Why do new grads need to flock to NYC or LA?
March 11, 2006 12:14 PM | Reply | Permalink
His analysis of your expenses out of college isn't affected very much whereever start your career. His points are very well made. Things happen out of college.
Ron Byers
March 11, 2006 4:44 PM | Reply | Permalink
The majority of high profile business people in the world live with substantial levels of debt. Manage debt. Don't let debt manage you.
When I started working at $5/hour I could buy a Mazda GLC for about $2500. That job now pays $10/hour but a similar Mazda now costs $15,000. So if you're just starting out and you need a reliable vehicle you are most likely forced into debt.
Our country is in debt. That means every single citizen is in debt. This is the way the world functions these days.
You have to be a mighty strong swimmer to turn the tide and expecting people to live without debt in order to change the tide of high prices is just too unrealistic.
March 12, 2006 5:54 PM | Reply | Permalink
rE: His analysis of your expenses out of college isn't affected very much whereever start your career.
Nonsense. Anyone here think the cost of living in, say, Des Moines, is the same as it is in Manhattan?
I'm sorry but I just don't see that starting out from college is all that difficult--assuming (yes, big assumption) one isn't graduating into recessionary times (that is bad) and one has a marketable degree. I started out at 18K in 1992, then went up the ladder over the next fourteen years to my current 55K. My first year out of college I shared a low-income townhouse with a Polish immigrant and I lived really cheap; the next two years I lived in a one bedroom suburban apartment (rent: 425/mo). Finally in 1995 I bought a small starter house. I fail to see why that progression (adjusted for inflation) would be out of reach for someone like me graduating today. Of course there may be an expectation's issue with nwe grads thinking they should be able to afford a McMansion and a Lexus on their starter salary, but that's another issue.
March 13, 2006 5:22 PM | Reply | Permalink
Jim,
I'm not sure I completely agree with you.
First, a wise person makes the personal policy of "I don't do inappropriate debt." For many people, that will mean they don't take on any debt, because it's not appropriate to their income level, education level or general wealth level. For others, debt will be a smart move. Buying a first home, for instance - taking on an appropriately sized mortgage can be a smart financial move as compared to sinking rent into a ratty apartment for years until you've finally saved enough to pay cash for your first house.
Second, while avoiding student loans is an admirable goal, it's not always the best approach. Students who work their way through college may graduate without debt, but it may take them twice as long because they can't carry a full course load. They have some greater stability in the long run, because they don't have the constant burden of student loan payment obligations, but it may come at the cost of several years they could have been working at a higher wage - potentially, a much higher wage. This will mean they'll be older before they can start saving signicant amounts of money. Investment returns in vehicles like 401(k)s or IRAs are compounded - depositing cash earlier is beneficial, even when you're talking about the same amount of principal that's ultimately contributed.
There are also countless studies showing that students who don't finish college within 5 or 6 years are much less likely ever to get their degree. Every hour that a student spends working will be an hour that he isn't able to spend studying. For some, cutting back on sleep time will be an option, in order to get everything done, or maybe they just won't need to study as much. But the reality of our world is that some young adults are simply more adept at school than others; for the ones that struggle with it, not having the time to study and/or being exhausted when they do study, might be what makes the difference between their ultimate success or failure in college. And as cumbersome as student loan debt can be, it's even more so when you have to pay it back without the earnings bumpt that typically accompanies the college degree.
March 15, 2006 11:51 AM | Reply | Permalink
I understand where you are coming from and appreciate your position. I have subscribed to the same idea all my life that it is necessary to borrow for some things that would otherwise be unattainable, but are a good "investment." That was reinforced in business school.
However, because of the increasly legal complexity of the agreements, I have learned there is more at stake than I ever thought. I learned this tough lesson when I lost my business, which I ran relatively conservatively. Business school didn't prepare me for what I went through, in fact, what I was taught contributed to my problems. I feel strongly about keeping my commitments, and my reputation is important to me. As a result, I cannot in good conscience sign another loan or credit card agreement, or even agree to the terms of a checking account at a bank, without feeling compeled to consult an attorney to explain the difficult provisions. This is so astonishing to me that I feel the need to warn others of the danger, especially when it is so easy to get entagled in an agreement we never really understood we were in, because we never signed anything in the first place.
Didn't Congress send a clear message that those who defaulted on their debt were irresponsible? Well, if you take that seriously, you can't agree to credit card or loan agreements that put the terms of default outside of your control. That is "irresponsible". In the least, it isn't reasonable. As long as we remain pragmatic about it, and on the one hand open these accounts while on the other protest them, we change nothing.
Another reason I take the position that it is wise to have the personal policy "I don't do debt" is because of Proverbs 22:7.
"7 The rich rules over the poor, And the borrower becomes the lender's slave." I believe the Bible is true and correct. The Bible doesn't teach that being in debt is a sin, just that it is foolish and is a ticket to slavery. That may not be politically correct, but so what. I believe it is true. It also gives me great insight to the condition of our country and our government, and is an indication of what our future holds if we continue down our current path.
With that said, I appreciate very deeply what you've written in your books, and the work you've done to influence legislation to counter the political power of banks. You are making a tremendous difference. Thank you, very much! If there is ever anything I can do to help you, please let me know.
Jim Anderson
www.lighthouseonline.net
March 15, 2006 8:41 PM | Reply | Permalink
Hi everyone,
I ran into this site because I am doing a little research on the subject. I figured I should give my input since I am a 24 year old masters student with $200/month loan payment, $14.50/hr pay, and $600/mo rent in LA.
I agree with most of you. I do believe that property taxes should be revisited and I agree that we shouldn't be in debt. However, we should be realistic. Eventhough I was one of the lucky ones with scholarships and aptitude to work and study at the same time (I work almost 40 hrs/wk) I am still stuck with school loans.
Fortunately, despite all of this debt and high living cost I am able to make a living for myself and have accured some saving that I have been able to use in hard times (and when I want to splurge myself). I think that the golden rule in this subject is to live within your means.
Many of my 20-something friends want to live extravagantly when they cannot. I think this is a reflection on our society's pressure on my age cohort to be successful, rich and fabulous. To do this, they get into unnecessary debt. They use debt as the first option instead of considering it as the last.
In my experience and observation, debt with home or school loans is not the problem but credit cards. The interest rates are ridiculous and they dont get you anything. My friends buy dresses with credit and and discard them before they finish paying. This is the problem for 20-somethings. There is need for more restraint and without it we will never move up into financial stability.
I have friends that are living with their parents, or depend on them in one form or another, not because they cannot afford rent or school loans payments, they earn more money than I do, but because they have large credit card debt. And they can't leave their parent's home because, instead of paying off their credit cards and/or saving, they spend money on other things, mostly unnecessary like designer clothes.
College and home loans might be unavoidable considering school and home costs. However, other debt is avoidable.I think each new college grad needs to diferentiate between what they want and what they need and be willing to wait a little longer for what they want. Its okay not to wear designer clothes.
March 27, 2006 12:31 PM | Reply | Permalink
I agree, let's be realistic.
If you don't have the money (the means) to buy something, whatever it is, a car, a house, a college admission, etc. You have to borrow money to buy it.
How is it living within your means, if you have to borrow?
Jim Anderson
www.lighthouseonline.net
March 28, 2006 7:33 AM | Reply | Permalink
yes,but that is somewhat misleading,when today's CEO's came out of college, there were few MBA's. Unlike this generation where an MBA will almost be a prerequisite to upper mgmt. In short, folks who matriculated in the 70s did not have the same pool of credentials to compete against as todays kids will.
What I found startling was that basically two-third's of the CEO's gave from Harvard, Wharton and Northwestern.
March 28, 2006 1:28 PM | Reply | Permalink
I agree. Much of what you see with your generation is described as a sense of entitllement...they do not want to earn those rewards..they simply feel they are entitled to have them today.
March 28, 2006 1:31 PM | Reply | Permalink
True, if you want to work your way up in a public company, or a very large private one. The best way to do this is to get the MBA while you are working your way up in the company using the company's continuing education benefit. They will pay for your MBA. Obviously, CEOs in these companies are not going to be hired directly from the ranks of fresh MBAs. CEOs are hired because of the results they can get, not because of their educational credentials. The education is simply an attractive feature. I believe I am qualified to make that statement as a former CEO myself, who rubbed shoulders with the CEOs in the Young Entrepreneur Organization and Young Presidents Organization - international organizations of many powerful executives and small business owners.
Jim Anderson
www.lighthouseonline.net
April 2, 2006 8:32 AM | Reply | Permalink