Sep 092013
 

The Dilemma

A lot of people across the country are going back to school this fall. But with the unfavorable employment prospects for younger workers some people may be hesitant to take out student loans and get back into debt. Is improving your human capital through further education a good reason to take on debt? Since the cost of education, even just for textbooks, is growing every year if anyone is thinking about going to school it’s probably better to take those courses sooner rather than later.

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The Changing Times

In 2002 there was $300 billion Federal student loans outstanding in the US. Today it’s more than $900 billion. Sacré bleu ( ゚д゚)!! Part of this dramatic increase is due to the extended period of low interest rates which creates incentives for people to take on more credit (loans.) The other reason is that the western world feels more entitled to creature comforts and luxuries than ever before. Of course I’m generalizing but when our parents went to college their dorms were cheap and dirty. They drank cheap beers. They ate cheap pizza and baloney sandwiches. They saved more of their own money to pay for things instead of using credit cards, or relied on the government for financial aid. If they didn’t have enough cash to buy a TV, they simply wouldn’t buy it. Period. But today young people like myself live in nice apartments. We eat steak, sushi, only drink quality beers, and enjoy posting photos of our Bloody Caesar on Facebook for the world to see. Some people even purchase gym memberships on their credit cards, which puts them further into debt. But it’s okay, because they have to impress their friends right? 😉13-09-gymyolo

There’s a cost to everything. The older generation funded their lifestyles by saving and producing real goods and services. But today most of our lifestyles are funded by debt. The whole world is changing. Debt isn’t seen as a bad thing anymore. It’s actually necessary if we want a normal life. As long as we go into debt for the right reasons and not waste it on frivolous spending then every dollar we borrow today will be an investment in our future. Corporations WANT us to keep spending. Universities WANT more enrollment. Financial institutions make their profits via interest on our debts. Even our governments (despite what they tell us) WANT us to continue carrying debt because if too many people stopped borrowing the economy would slow down.

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If you think it’s better to pay off your current debt than to take on more student loans then prepare to fight an uphill battle. Everyone in the economy from small restaurants, to publicly traded companies, to even the central banks and provincial/state/federal governments are against reducing personal debt. If everyone started to pay off all their debts and not borrow anymore we would create another credit crisis like in 2008 when banks weren’t lending anymore because liquidity had dried up. 13-09-debtvsunemployment

The Solution

So I think the answer is to just go with the flow. Don’t try to fight the trend. Go ahead and apply for those new credit cards and student loans. Just let it happen :)After all if everyone is in really deep debt, then no one is in really deep debt right? 🙄 Think about it. If everyone else is speeding on the freeway then it must be okay for you to speed too (^_-) In fact, if you adhere to the actual speed limit of 80 km/hr when everyone else is driving at 110 then you are more likely to cause an accident 😕 The majority is always right even when they’re wrong, so it’s futile to try and fight the system.

In Canada home prices have been buoyed by excessive lending, and not with actual earned money.  it’s the highly leveraged risk takers who bought homes with 5% down and took on huge mortgages that have benefited the most from the last 15+ years, often at the expense of others who opted for a more conventional 20% downpayment. In the US, all those renters who didn’t buy into the housing bubble still had to bail out the mortgage insurance companies in 2008 because of other people’s reckless borrowing and unimpeded addiction to credit 😐 Families who did nothing wrong still had to bail out the US banks. The hard working Germans had to subsidize and bail out other European countries who lived beyond their means. Is it fair that savers have to be punished for the mistakes of greedy borrowers? 😕 No, of course not. But unfortunately personal accountability doesn’t mean anything anymore and that’s the reality of the world we live in 😐  The majority wins. And right now the majority of young people like myself are inundated with debt. So follow the majority, and you’ll have nothing to worry about as history has shown (~_~)

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We have to be flexible and adapt to economic changes and social trends. As Bruce Lee once said “Become like water my friend.” Debt reduction is such an old school mentality and is no way to live a fun life anymore 🙂 All the cool, young people of this generation are going into debt up to their eyeballs to pay for iPhones, all-you-can-eat sushi, and higher education (゜∀゜) Debt is just another part of life and not something you HAVE to pay off anymore. This is the new wave of the future 😀 For some of you readers it may appear that I’m doing quite well financially for a Generation Yer. I own a condo, a vehicle, and even have some rental income from farmland. But the realty is all these amenities and comforts I have were acquired primarily using debt and not through legitimate savings, or earned income, or heaven forbid actual hard work 😎 I’ve joined the hip new movement of buying instant gratification on credit and have no regrets. Who else is with me? :mrgreen:

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13 Comments on "Go With The Flow – Student Loan Debt"

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Theo
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Theo

Debt in order to generate income or reduce expenses over time is good debt.
Mortgage-good
Farmland-good
Reasonable margin debt-good
Student loans-good
Debt for consumer goods-BAD

Phil
Guest

Debt is debt – There is NO good debt bad debt. Industry uses these terms to suck you in. Run your life like a business. If business is booming, sure borrow, but make sure to pay it down with profits for that day when the business takes a hit and cash flow is low. Want to see if you would invest in you? – prepare a financial statement (net worth and cash flow) each quarter as if your personal life was a business and see if you would invest in you… ideally NW should be rising, as Liquids has been doing, and cash flow should also be rising with the latter ideally rising at a faster rate. It is that simple. Great exercise to keep you honest. – Cheers. – Sorry for the seeming tirade on this, but is really that simple…

GirlCountingPennies (@gcpennies)
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We wish!!! 😛 I’m happier going against the crowd and pay off debt 😛
Mortgage is probably the only debt that I would take on in the future (well, another mortgage that is, as I’ve got one already)… I’m not even sure. I can totally see myself living somewhere on a remote island and owning a hut on a beach that cost me like $100, haha!

Phil
Guest

There is no good debt or bad debt. Get it through your heads! Debt is debt. If you have a debt it means you owe someone eventually for the privilege of having their money now you YOLO nut-bars. Great arguments Liquid, almost had me convinced…, and yet when the lemmings leap from the bridge, try not to be in the line (I know you won’t)… Oh by the way I’ll be the lemming sitting down on the waters edge watching you all jump, sipping MY cognac enjoying the carnage =P. Can’t wait for the show. Get with the program YOLO’s, grow-up and live within your means, and we will be all better off. – Cheers 🙂

JR
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JR

I find this the oddest article you’ve written. I understand the necessity of debt as a means to expand an asset base. But with the acquisition of debt a person needs a contingency plan. The world is full of risk, none of us can see what will happen tomorrow.

Personally, I structure myself to have a 5 year window to get out of debt in worst case scenario. This gives me enough time to rid myself of debt without eroding my asset base. It’s an escape plan!

There are no rules when it comes to interest rates, and we can’t rely on the good grace of the gov’t!

suburbanfinanceblog
Guest

I see an argument about good debt vs. bad debt up in the comments – it’s a touchy subject for sure. I think good debt was something created by lenders 🙂

Fehmeen
Guest

What a refreshing look at the sad old topic of student debt that has ruined the lives of many (I recently read an article about how many people, well into their middle ages, were now bankrupt because of debt that began as simple student loans to finance a bright future). I like the idea of ‘good debt’ versus ‘bad debt’ and I think it’s only good if you’re the one lending 🙂 Now that’s something banks would never admit.

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