A new study of people aged 18-34 published in the journal Social Science Research could have been co-authored by Sallie Mae and Citibank's PR departments. The study found indebtedness had a positive correlation with feelings of self-esteem and mastery. The poorer the young adult, and the more credit card and student loan debt she is carrying, the more confident she feels about her life and her future, at least until age 28 when reality appears to sink in. "Debt is a resource that people can use to get the things that they want," Rachel Dwyer, an author of the study and a sociology professor at Ohio State, told the media. A higher education and a little extra purchasing power: Priceless?
Not so much. Over the last seven years, I’ve talked to hundreds of young people whose lives have been destroyed by student loan and credit card debt. They feel betrayed, not empowered. Take the young man who went to Iraq, only to discover the fine print said the military wouldn’t pay off his private student loans from a technical school. " "I really feel that I, as well as my parents, got screwed pretty badly. The reason I joined the army was to get rid of my loans," he told me. My research and other surveys indicate that heavy loan burdens impel youth to move back in with their families, delay saving and planning for the future, put off starting businesses, buying homes, or starting families of their own, and fuel feelings of hopelessness. Psychologist Jean Twenge has documented record levels of anxiety and depression among current college students, who are graduating with an average $24,000 in student loans, up 6% from the year before, only to face unemployment levels upwards of 20%.
Given the facts, there are three ways to put in context the results of this study.
- Timing. The survey questions were last asked in 2004, when Angelo Mozilo, the subprime mortgage king of Countrywide Financial, was the 24th highest paid executive in the country. Our collective image of the beauty of unlimited easy credit has changed somewhat since then.
- Ignorance. Years of surveys by the State PIRGs and others show that students do not grasp the full dollar amount of their college loans, nor do they have the financial literacy on average to understand the full impact of credit card debt.
- Cognitive dissonance. Poorer young adults, especially those who take out larger loans, need to have confidence in themselves because they are taking a bigger risk. It may well be that this kind of fire in the belly leads to more borrowing, not the other way around. I'm surprised that these social scientists talk about the "effect" of debt without making any apparent attempt to tease out correlation and causation.
So if the psychological benefits of debt are flimsy at best, while the negative consequences remain scary and very real, what should we be doing to protect young people? As has been happening for a generation, the economic downturn led states to cut higher education budgets, which led to tuition increases, which led to increased borrowing. Defaults are up too. At the end of May, the Education Department took the first tentative steps toward making colleges accountable for unmanageable debt. For-profit colleges, which enroll only 12% of all college students, account for 46% of loan defaults. New "gainful employment" rules say that at least 35% of grads of a given for-profit must be earning enough to pay off their loans. It’s weak, but it’s a start. These accountability measures should be toughened and made to apply to all colleges. Colleges can innovate using technology to become more affordable, they can focus on preparing students for higher-paying careers, they can petition the states for more funding, or all three. What’s not going to work is pretending any longer that debt is an empowering gift to young people.