You’ve just graduated college and worked your first month at your new job. You worked extremely hard to get this position and getting that first paycheck feels like such a triumphant moment.
The possibilities of what you can do with your income are exciting. This is the first time you’ve had a sense of freedom over the money you’ve earned. But the sad truth is - you don’t have any freedom. And that reality becomes clear when you open a letter you receive in the mail a few days later. It’s from a student loan program informing you of your repayment schedule.
This paycheck was never really yours. You owe money. You’re in debt, and will be in debt for a very long time. Once the realization sets in, every coffee purchased or drink with a friend suddenly starts to feel like you’re splurging with someone else’s money. It makes you feel guilty, and sometimes, even depressed.
This is the story of around 1 in 5 American adults who have student loan debt. But, in reality, this is not your fault. It’s just one of the ways that governments and banks might be keeping you poor. The truth is, debt can lead you down a pretty dark road, especially if you’re not concerned about falling deeper into it.
I should clarify that not all debt is bad. It can give people opportunities they might not have had otherwise, it allows startups to get off the ground without using personal capital, and it allows people to make big purchases that can be paid off in smaller chunks spread over a long period of time.
But too much debt and lousy interest rates can cause severe problems. Studies suggest that being in debt makes you more anxious, depressed and can cause many people to experience suicidal thoughts. You might feel OK with how much you owe right now, but these mental health issues can grow bigger as your debt gets higher.
Debt also makes your future feel limited. Your ability to travel, make big purchases, and move onto another phase of life is greatly challenged by the amount of money you owe. For instance, you can’t get a mortgage if you have too much student debt.
Debt can impact your relationships and health. There are studies linking bad debt ratios to high blood pressure and higher rates of divorce. It goes back to that feeling of splurging on something using someone else’s money. This feeling puts a spotlight on spending habits within a relationship, causing stress, arguments and separation. You don’t need to be a gambling addict to have fights over money.
You might think it’s OK to incur debt because when you die, it dies with you, but this isn’t always the truth. A lot of different debts can be inherited by your loved ones, especially debts you’ve taken on with another person, like a mortgage. Being in debt is not great, but don’t be too hard on yourself because it’s not necessarily your fault. We live in a society that has institutionalized debt and has made borrowing a living commonplace. Think about it. We’re encouraging young kids, barely old enough to vote, to take on thousands, sometimes hundreds of thousands of dollars of loans, just to get an education.
We all know how terrible these loans can be, but one effect we don’t really talk about is how they tend to normalize the idea of taking on debt to people who are just entering adulthood. This creates a mindset about money that takes a very long time to shake if it’s even possible to shake it at all.
A student who has a lot of loans to repay may also experience debt fatalism, a state where being in debt seems inescapable. If you’re accustomed to existing in debt, it’s difficult to picture what it’s like to exist without it. As a result, you’re more likely to continue drowning in it.
When people think of debt, there’s often the stigma that it’s the individual’s fault. You hear finance gurus tell you about wasteful people who splurge on the latest iPhone and buy Starbucks every day instead of making coffee at home. And while there are certainly people who are irresponsible with credit, the reality is that most people who are in debt are there out of necessity.
For one, people with children are far more likely to incur debt from the cost of taking care of a child. The same goes for people who have to take care of a parent. These two factors introduce a variety of necessary expenses that no amount of penny-pinching will mitigate.
Most people’s financial literacy is also very poor. It’s a subject that’s seldom taught in schools, so we’re often at the mercy of the lenders and the fine print that we don’t bother to read. Even if we did take the time to read the terms and conditions while applying for a new credit card, would we even understand them?
All of this without even talking about the system whose entire existence depends on debt. Banks. Let's take a moment to look at how banks work. You give them money. 90% of that money is lent to someone else. The person taking the loan puts it in their account, and 90% of that amount is loaned to someone else, and so on. The bank charges interest on all those loans that were made possible thanks to your money. Debt is how they make money. It’s the core of their business model.
To make matters worse, banks are profit driven and often use predatory practices to try to get you to incur more debt because their favorite clients aren’t the ones who pay off their debt as quickly as possible ,but the ones they refer to as “revolvers”. People who are perpetually in debt.
Banks know your income, and they know what you can’t afford. But that doesn’t seem to stop them from issuing you multiple credit cards or locking you into a high-interest loan. These are companies that pursue profits over the well-being of their clients.
Imagine having several maxed-out credit cards and then piling on multiple high-interest loans until you can no longer afford the minimum payment on any of them. Where else can you go? Remember that dark road we talked about earlier? Well, that road can lead to someone taking their own life. This is what’s known as debt suicide. People find themselves drowning in debt and feel that there’s no other way to escape it.
People in debt are three times more likely to have suicidal thoughts. Similarly, people who die from suicide are eight times more likely to be in debt. Sure, you can say that, ultimately, the individual is responsible. But what about the corporations that nudge, push and deceive these people into making poor financial decisions? What responsibility should they bear in all of this?
Credit Card companies, for example, will often use deceitful tactics like charging 0% interest for the first six months to try to get people accustomed to not paying off their credit cards. Then, when the high interest kicks in, there’s a good chance the cardholder has already accumulated a ton of debt.
Strategies like this are designed to nudge more and more people down the dark path, keeping them poor. It’s how banks and credit card companies make more money. In the pursuit of bigger profits, they knowingly neglect the welfare of their clients. This can sometimes mean that parents can’t afford to give their kids a decent start to life, or that the kids can’t afford to give their parents a decent end to life. These are the real consequences. We’re destroying the lives of the common people to fill the pockets of the few at the top.
These shady companies are on one side of the institutional debt equation. On the other side, is what we need all that loan money for in the first place. The two biggest expenses in the life of the average person in the U.S. are an education and a home. In the last 50 years, the cost of both have skyrocketed, far outpacing inflation. To live what many would consider a good life, with a home that they own and a good education, most people either have to come from wealth or incur enormous debt.
But why has college and university tuition risen so much? A main culprit in the U.S. is the reduction of state funding for these schools. For the last 30 years, colleges have been a primary target for governments to cut costs, especially during recessions. This reduction has caused colleges to operate more like businesses to earn the money they need to stay afloat. But the unintended consequence of schools operating like businesses is that they are now more focused on competing aggressively with each other and trying to make the most profits instead of focusing on the welfare of the students.
That means pursuing star professors and researchers with higher wages, keeping class sizes lower to be more attractive to potential applicants, and introducing a lot more extracurriculars to attract students, even though they might be an unnecessary expense that only increases tuition further. There’s no central mechanism in the United States to control the cost of higher education. The country does give students a fair amount of financial aid, but much of the country’s college tuition is paid for through loan programs.
In neighboring Canada, tuition has also risen a lot in the same time period, even though it's more significantly subsidized for citizens. The problem remains that students across North America are paying a lot more for post-secondary education than they were before, and it’s happening on the government’s watch. But there’s a much bigger cause of debt that has also exploded in cost in the last 30 years. Housing. The reason why housing is so expensive now is complicated. I’d love to write it off as greed but that wouldn't be telling the full story.
One of the main causes of housing’s high cost is government regulation. But it's not quite what you think. Regulations are important. There’s environmental impact analysis, soil sampling and numerous other approvals that need to be acquired before a developer can break new ground. These are necessary but expensive steps that need to be taken today that wouldn’t have been done 30 or more years ago and it’s great that we’re doing them now. But there are other unnecessary regulations that are not driven by human and environmental needs. These are housing density regulations, and they have a big impact on house prices.
Housing exists in a system of supply and demand. More supply typically results in lower costs. A great way to increase the housing supply is to build higher-density housing, like apartment buildings. But in many cities and towns across North America, regulations are preventing higher-density housing from being built. And these regulations are often influenced by current homeowners who want their homes to remain at sky-high value.
When high-density condominium buildings do get built in great numbers, there are still some other factors that can prevent home prices from falling. In Toronto, for example, developers largely build luxury condos, ones that sell at a premium price. These condos wouldn’t sell very well at those prices if not for a second factor that’s keeping prices high: investment homes. These are homes that wealthy people buy up as investments, reducing the local supply, therefore increasing the value of these homes. Many luxury condos are purchased as investments only, leaving many of them sitting empty, even during a housing crisis.
Governments have done little to intervene in investment housing and have instead prohibited solutions like higher-density housing. Blame is often passed between levels of government, with local, state, provincial and federal bodies blaming each other and kicking the can further down the road.
The result is that home ownership becomes an enormous source of debt for some people, and not even a remote possibility for others. And there’s no escape from this problem by simply renting either. The cost of rent has also skyrocketed as a consequence of higher housing prices, leading to more financial insecurity, further leading to even more debt. Another problem for renters is when companies buy existing buildings, give them a luxury renovation, and then jack up the price of rent. No new homes are built in this scenario and the average price of a home and rent still goes up.
The question of personal responsibility for debt doesn’t seem so significant when you see how banks and governments are making increasingly larger debt loads inescapable. Debt is painful and it seems like our largest institutions are too invested in profiting from it to make it easier on the average person. For now, we can make sure not to take on unnecessary debts and be sure to read the fine print when we do need to take out a loan. The truth is that governments can do a whole lot more to help their poorest citizens.