Starting Out Strapped

Most of the books on personal finance and money management start by assuming you can first, pay off all loans and credit card debt, then build up a cash reserve, as we do in the article, “Just Getting Started”.

But if you are in the 20- to 30-something age range, just starting an independent lifestyle, you may well wonder if you will ever be free of debt. The book Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead by Tamara Draut –very effectively documents the problem.

Capital (assets, cash) is constantly in motion. It is being transferred from individual to individual, from a corporation to an individual, from individual to corporation, from corporation to corporation. We can also see it being transferred from a class of individuals to another class, when we look at general trends. What Draut’s research so effectively illustrates is how capital is moving from the less wealthy to the more wealthy, and the very negative effects this has on the American society in general. The American dream has never been easy, but it is becoming tougher and tougher to get ahead. As young adults mature, they do understand that they will not start at the level of their parents, but more and more they see themselves as unable to achieve even ultimately the same level of class and wealth as their parents. Burdened by student loans and credit card debt, they start the race to success with two legs hobbled.

The necessity of a college education to achieve even nominal middle-class status need not be argued here. The trend is aptly illustrated by a table from Draut’s book:

To bring this a bit more up-to-date, here’s another quote from the National Center for Education Statistics:

The value of a high school diploma has generally declined, while having the college degree just means you can keep up. Obviously, there is also a premium for having a Master’s degree – in teaching and some social work fields, the Master’s is pretty much the norm.

While parents can generally afford to put their children through high school (though there is a significant percentage who cannot do that) the question of college becomes much more problematic. For the Baby Boomer generation, and even earlier (The “Greatest Generation”) there was a high degree of needs-based support through the G.I. Bill, Pell grants, and more. But as the last century wound to a close, costs of higher education increasingly went up. Teaching science, medicine, biology, more subjects that used to be considered esoteric, requires more expensive “stuff”. The University of Iowa says its tuition and fees are the lowest in the Big Ten, but an undergraduate living on campus can expect to spend over sixteen thousand dollars undergraduate living on campus can expect to spend over sixteen thousand dollars for one year of study. So a college degree is more necessary than ever, yet more costly than ever. See also, “Empty Promises: The Myth of College Access in America“, A Report of the Advisory Committee on Student Financial Assistance.This was a 2002 report. By 2005, the problems had dissolved so they could be fixed by web access to on-line application forms (this is an almost totally sarcastic comment).

Yet as a society the money flows, through tax cuts and tax benefits and public policy, more and more from the less wealthy to the more wealthy.

Student loans, as a replacement for lower tuition (which would require tax support) or scholarships (many of which which would require tax support) puts a long-term burden on young adults, and while the interest might be at favorable levels, it still will represent a transfer of wealth from the less wealthy to the more wealthy.

So the young adult enters the workforce hobbled by student loans, but hoping to move upword in class and income (isn’t upward mobility the American Dream?). Now he or she finds that, as we said above, more and more the bachelor’s degree is only a basic requirement for a job. So that first job isn’t going to pay very much, but he has to live somewhere, and has to buy a car to get to work, and being a cheap car, has to pay to have it repaired… the only answer is the all-too-readily available credit card. Shortly a debt has been run up, and the credit card cannot be paid off each month. So credit card interest starts building up, at rates that most people, if they really looked at them, would consider immoral and usurious. Again, money flows from the less wealthy to the more wealthy.

Now the young adult enters married life – and all too often two incomes are joined by two debts. The couple possibly saves a little on housing costs, though that is definitely not a given. And if the wife becomes pregnant, costs go up, healthcare and debt goes up (because starter jobs probably don’t have healthcare benefits), and income goes down. Can such a couple ever look forward to a quietly prosperous middle class middle age? Is the American Dream lost in the dust of Reaganomics? Bush-whacked by the Bushies?

There are no easy answers here. The older generation (these young-adults’ parents) may well have their own insecurities. They think Social Security will be there for them, yet they realize politicians are trying to turn Social Security over to the financial markets – to abrogate a depression-born social contract. Such parents may be reluctant to provide any support for their young-adult children.

On a national scale, the effects of reaganomics, and tax cuts that transfer wealth effectively from the less wealthy to the more wealthy – the better off you are, the better off you’ll be – are apparent. But to an individual, what can you do about them?

The only advice this writer can offer is to talk frankly with your parents or your young-adult children, whichever is appropriate for you. The young-adult may feel ashamed – thinking he should be able to do better on his own, and may avoid discussing exactly the situation he is in. Perhaps early on letting parents know that he/she will need help getting started postgraduate, or building understanding that money isn’t there for finishing college, or for going on to graduate school, whatever the aims. For the parent, open lines of communication to your adult children. Inquire, and not in a condemnatory manner, just how much debt they are carrying, especially the most onerous credit-card debt. Ask in detail with real interest, just what their monthly expenses are, and how you can help.

It has been said that “we stand on the shoulders of giants”. The obligation of each of us is to build on the strengths of those who have gone before us. What this means is that every rich old fogey has an obligation to every young person, to make the weak stronger, to leave a better society, more especially for those we love. When we look at the flow of assets, of capital, to, from, and around us, are we meeting our obligation as best we can?

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