Life or Debt: Can Youth Liberate Their Finances?

By Marcus Gadson, February 22, 2008

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Young people will have to work longer and harder than previous generations to pay off all of their debts, but some are taking steps to avoid getting financially strapped.

The goal for most will be to become fully self-sufficient; able to pay the rent, bills, and student loans. Beyond that, young people will look to start promising careers, save for retirement, and possibly start a family. Even a cursory look at today's economic landscape reveals that many youth are not financially ready for their futures. In fact, for many it will be years before they have anything approaching economic independence.

College at What Cost?

Perhaps the greatest threat to young peoples' economic well-being is the soaring cost of a college education. College tuition at both private and public institutions increased by more than twice the rate of inflation, though some schools are finally making an effort to control their rates. Princeton University, for example, announced in January of 2007 that it would freeze tuition for the upcoming year.

Adults of a certain generation would have trouble believing how much some colleges are charging. Some private universities such as the University of Chicago have price tags of around $50,000 per academic year. But even public schools have seen dramatic increases. For example, in-state students at the University of Michigan will have to shell out $21,658. In the space of one year, 2007, tuition increased 7.4 percent at Michigan. Out-of-state students of course, are on the hook for even more.

In conversation after conversation with college students, they revealed just how worried they are about meeting their costs. Emily Gurvis, a sophomore at Loyola University of Chicago put it best: "whenever I actually stop to contemplate how much my education is costing me, I have a small heart attack." Such desperate thoughts can also lead to desperate actions.

A woman, who wished to remain anonymous, spent a year at Michigan State University in East Lansing, but the tuition kept increasing and she simply could not afford to stay there. "I left at the start of the spring semester sophomore year, came home, got full-time job while taking classes part-time at another university."

Those who do wish to continue studying at expensive universities must often turn to student loans. In the past decade, student debt has gone up by more than 50 percent, and the average student graduates with close to $20,000 in loans to repay. Nearly 8 percent of college graduates in 2004 had debt burdens of $40,000 or more. Yet, while many students are less than excited about all this debt, few are surprised.

The former Michigan State student said with resignation, "As twisted as it is, it just seems normal that after college you spend a significant amount of time paying off school loans." Not that anyone is happy with this status quo. Jacob Bower-Bir, a graduate student at Indiana University in Bloomington, believes that "in a nation that boasts top universities and a strong economy, I think it is ridiculous that college is not universally and freely accessible."

Credit or No Credit

Unfortunately for students, student loans are not the only type of debt they have to deal with. In 2001, students have racked up an average of $2,748 in personal credit card debt, compared with $1,879 in 1998. Occasionally, the debt is simply due to irresponsible spending habits; students who desire the newest iPod, or a state-of-the-art video game system, and charge it on a credit card today, instead of saving up to buy it tomorrow.

But many young people are forced to rely on credit cards to buy books for classes, as well as food or medicine. These cases challenge the prevailing attitude that youth are mired in credit card debt by choice; many used their credit cards simply to survive.

Then there are the predatory lenders who target young people. For example, every year, 18 to 24 year olds pay about $963 million in fees because of abusive overdraft loans, which is a small portion of the $17.5 billion that customers of all ages pay because of such loans.

The way it works is that banks and credit unions across the country make unsolicited loans to customers without warning when their checking account balance falls below zero, and then charge them high fees for each overdraft transaction. This practice generates enormous revenue for the banks and frequently drives accounts even deeper in the red. Young people are particularly affected because, unlike their elders, they can generally draw on fewer financial resources to pay these loans. The burdens of loans and debt can even impact future career decisions.

Of Debt and Dreams

Tufts University graduate Lucia DiPoi had to pursue a different career after taking stock of her financial responsibilities. In addition to $19,000 in federal loans, DiPoi, is also on the hook for $65,000 in loans from Sallie Mae. The interest rates on her loans top 13 percent, and she faces monthly payments of $900. She had to forego her dream to work in an overseas refugee camp because, according to a New York Times profile, the salary "would have been enough for me but not for Sallie Mae."

Increasing financial pressures make finding a lucrative career imperative, but many youth are not confident in the job market to alleviate their debt stress. Several young interviewees were pessimistic about ever landing a decent-paying first job. A Butler University Indianapolis alumna who wished to remain anonymous said, "I wasn't optimistic (about my career prospects) after college, which is why I came to law school. It is getting harder and harder to get a job with only a bachelor's degree." Others expressed the view that it didn't matter how much they learned, or how hard they worked; what would matter in the end was whether they had the right connections.

Even when they find those jobs, their starting salaries are fairly low. The average student graduating with a liberal arts degree can expect to earn $30,337. To put that in perspective, the mean salary for University of Virginia liberal arts graduates in the 1970s was $30,000, or around $50,820 when adjusted for inflation.

Solutions for Savers

Indeed, the obstacles toward financial freedom are formidable. But policymakers at all levels of government can help alleviate the burden youth face. First and foremost, they can take steps to make college cheaper. Providing more Pell Grants and increasing the number of students eligible for that kind of aid would go a long way. Likewise, the government should provide more low-interest loans to college students, so they don't have to resort to loans with usurious rates from private companies.

In July of 2007, congress took a positive step when it voted to cut subsidies to student loan companies by billions of dollars. Congress will use the savings to cut interest rates on student loans, and increase Pell grant funding. The federal direct loan program, started in the 1990s under the Clinton administration saves students' money in the form of lower interest rates and saves the government money because it does not have to pay money to a middle man.

Congress could take other steps to reduce the amount of debt young people carry. Leslie Parrish and Peter Smith of the Center for Responsible Lending say policymakers should "limit the number of high-cost loans overdraft loans a bank or credit union can make to a customer per year to prevent the customer from falling into a cycle of debt (PDF)"

Less debt and more affordable college educations mean youth would have more money to save and invest. Just imagine, if instead of making a $5,000 loan payment every year, that payment were instead $2500. Young people could use that money to fund an 401k and begin saving for retirement. Such action should also come with an exhortation to personal responsibility. Public officials should say: "you have more money in your pocket now, but the purpose isn't for you to blow it on a Nintendo Wii. Use this money to lay the ground work for your financial future."

More importantly for society, young people without huge debts to pay off are more likely to consider lower-paying careers as teachers and civil servants. Simply put, these steps are an investment in the country as well as aid for youth.

But, it may be years before these changes happen. So in the meantime, students need to do what they can to empower themselves financially. Carmen Wong Ulrich, author of Generation Debt: Take Control of Your Money (Warner Books, 2006), and guest blogger for Qvisory.org -- a nonprofit that helps young adults achieve their financial, health and career goals, says that one of the best things young people can do is "to actually pay attention" to the purchases they make. She notes that, "It's very easy to turn a debit card into a credit card by spending more than you have."

FinAid.com publisher Mark Kantrowtiz emphasizes that young people should apply for scholarships before they get to college and while they're enrolled to reduce the number of loans they have to take out. Additionally, Kantrowtiz advises young folks to save as much of their paychecks as possible when they get their first job, and begin planning for their futures.

Advice from the experts above suggests that common sense goes a long way. Although youth economic empowerment might seem an impossible task in today's debt-ridden landscape, doing the little things now will help young people chart a bright future on sound financial ground.

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For further reading:

Credit Card Debt Explained

Young People and Debt

Youth Job Prospects

Demos Youth Economic Opportunity Guides

Demos is also sponsoring a conference on this issue: "A Better Dear: Reclaiming Economic Security for a New Generation," on May 8 in Washington D.C.

Marcus Alexander Gadson is a freelance journalist and commentator on political and social issues. His writing has appeared in Indiana Herald, Cincinatti Herald, the Black Commentator, Opednews.com, and Blogcritics Magazine.