A couple of months ago my nephew Billy graduated from our local college, Catatonic State. Billy’s folks are just everyday people. His mom, my sister, is an LPN who works in a local doctors office and her husband, Bob, is a maintenance mechanic who works at the Pepsi bottling plant. Together they earn about $120,000 a year, but after taxes they clear about $85,000. They’re doing okay, they don’t live extravagantly. They’ve got a nice little three bedroom on quarter acre lot in a subdivision. They’ve been there for about 18 years now. It’s a little more than they wanted to spend, but it was in a school district with a pretty good performance and they wanted to take advantage of that since they couldn’t afford a private school. Of course that got them a higher property tax bill. When they moved in there it was $3,200 per year. Now its over $5,000. Inflation, you know.
With the $80,000 they have left to work with every year they have to pay their mortgage, about $1,100 a month, two car payments and auto insurance at about $950 a month. Judy, my sister, gets health insurance from her job at about $350 per month. Bob used to have better coverage with his job but those premiums continued to rise in recent years so they dropped the dual coverage. Of course Billy, who is only 22 and still living at home is covered in that policy too.
Their homeowners policy costs them about $1,800 a year , or $150 per month. There is another $600 per month in phone, cable, gas, water and electric bills and usually around $1,000 per month in groceries. Gasoline, maintenance on the cars and the house, clothing and maybe a little entertainment occasionally eats up another $500 or so, bringing the monthly “disposable income” to just under $2,000. They are in their mid forties and trying to play catch up on retirement savings so they both maximize their annual 401 contributions. Okay, so they’re not rich, but they are maintaining the middle class standard, more or less. The house should be paid for before retirement and they have another 15 years or so to save so all in all they’ll probably be alright.
One unfortunate part of their financial status is that although they are not amassing huge wealth they do earn enough that Billy was not eligible for much financial aid. Bob and Judy could contribute some money to his college education, but certainly not able to foot the entire bill. Billy lived at home throughout and commuted to Catatonic U, worked part time and summer jobs to pay for a little beater to get around, a 2003 Honda Civic. His four year degree cost a grand total of just north of $80,000. Bob and Judy were able to help out with about $20,000, leaving Billy with $60,000 in student loan debt.
Now Billy did what a great number of other young people have done in the past 20 years and got a Bachelors degree in psychology. Of the nearly 2 million bachelors degrees conferred this year roughly 6% of these were in psychology, somewhere between 110 and 115,000. There was a similar number last year and for each of the three years before that. At best count there are currently 170,200 people in the United States who are gainfully employed as psychologists. Well, do the math. Absent a mental health crisis of near apocalyptic proportions there are an awful lot of those degrees that are going to be responsible for the most highly educated class of Starbucks baristas in American history. I tried to warn Billy about this, but the starry eyed idealism of an 18 year old is like a force of nature; intractable and nearly as hard to overcome with reason.
I hadn’t seen Billy since his graduation in May until this past weekend. He has a lot of feelers put out, but no serious prospects of being employed in his chosen profession as yet. He does have a job, though. He is earning $14 per hour working in a nearby catalogue fulfillment warehouse, handling packages, loading and unloading trucks. There are no benefits and he is limited to 32 hours per week. Its not a cake job, but as he is still living at home it does allow him to get around and put a little money in the bank. Now if he were able to land a psych gig he would most likely begin with a starting salary of about $35,000 annually. Statistically were he to remain in the field at mid career his salary would likely top out at around $60,000, perhaps a bit higher in some markets, but that’s the national average. Interesting to note here that this is approximately what his father earns as a maintenance mechanic. In his current job he can expect to net just a little more than $16,000 in a year.
I had a chance to talk with him at some length on their deck Saturday afternoon and here is how it went:
So, Billy, how are things?
Meh, you know, okay I guess.
You guess. Hmm. Having any luck?
Nah, not yet. I’ll keep working at the warehouse for now. I’ll get on to something eventually.
Yeah, I’m sure you will. You looking into anything away from here? Maybe you might have better luck in another part of the country?
Maybe, yeah, but I just been looking around here closer to home.
Well best of luck to you, young man. You know maybe you could obtain a teaching certificate. That and any four year degree could get your foot in the door with a local school district. Pay isn’t spectacular but good benefits and summers off.
I might end up having to do that, yeah, but I don’t want to go to that yet.
You know I’m sure I asked you before, but tell me again why a psychology degree?
Because I want to understand people, help them with their problems.
Oh right, right. Sorry, I forgot that. Hmm. Everybody has problems Billy, but they don’t all need a psychologist do they?
Well, no…but, you know I was thinking maybe a good job with the state, you know? Like mental health clinics, or maybe the department of corrections.
I suppose that’s a possibility. State jobs usually have good benefits and there is some security in them, but you won’t make a lot of money.
Yeah, but not everything is about money. Besides the government will help take care of a lot of that.
Oh? Will they? How’s that?
We all have basic rights, you know. The right to health care, education, a living wage. That is the government’s responsibility, to make sure the country’s wealth is for everybody, not just the 1%.
Really? Where did you learn that?
Geesh! Duh? I have a college degree, you know.
They teach you that in college, did they?
Well yeah, but everybody knows that anyway. Don’t you listen to the news?
Yeah, you know. Capitalism is on its way out. 2008 was just the beginning. We’re transforming America into a more fair socialist system now. Everything will be different.
Hmm. Feeling the Bern, are you?
You know it! Shame we won’t get to vote for him now, but if Hillary wins and we can get congress back from those greedy, racist republicans it will get better. That’s the only reason Obama hasn’t been able to do more, you know.
Oh I think he’s done enough!
No! There’s still income inequality, racism, we still need more green energy to stop global warming…
So in this socialist system the government will take care of all these things, will they?
Well of course. All those companies only care about money! The government will make sure it goes where it is really needed.
Hmm. Well don’t all of those things that the government is supposed to take care of still require money? Where’s the money come from?
Oh they’ll just tax the rich more. And the corporations. They’ll make them pay their fair share.
Billy you know that last year the federal government took in more than three and one half trillion dollars in taxes and they still spent a trillion more than that? In one year!
Well there! See? That means the rich aren’t paying their share.
Oh Billy, Billy, Billy….
Oh no! You’re going to start that again?
No, no….now just a minute Billy. I’m not going to try to tell you anything. Just let me point you along the way. With your college degree and all you’ll be smart enough to figure it out.
Lets just start with where we are, alright? With all of the things that government is already doing, never mind more, they are already spending a trillion more than they take in.
Yeah? So? They’re the government. They’re good for it.
Are they? Where does that extra money come from?
They just print more….
They actually gave you a degree? Are you serious?
Ok, yes sometimes they just print it. That’s a whole other set of issues, but we wont try to tackle that right now. So when they don’t just print it where does it come from?
Well they borrow it.
Right. Who do they borrow it from?
Well think, Billy. Who has money?
I don’t know. The banks?
Right, the banks. Banks from all over the world. And how do the banks make money?
They make loans and then collect interest on it to turn that into more money.
Good! Good, sounds like you were paying some attention. So they make their money by getting those loans paid back.
Yeah, it’s the United States! Of course they are going to get their money back. If the rich were paying their share the government wouldn’t need to borrow it!
Uh-huh. The rich. Okay, you also said the corporations?
Yeah, them especially. They’re hoarding all the money. I mean look at all the money they keep outside the country!
Yeah, Billy, they do. Why do you suppose they do that?
Its tax evasion! Their just doing it to keep from paying their share!
Uh-huh. How do corporations make money, Billy?
They sell stuff. You know, goods and services.
Right! So if there is a seller then there must also be a…..?
Yes! A buyer. Now Billy there has to be millions of buyers for these corporations to have made all of this money, right?
Well….uh, yeah. Right!
So who are all of those buyers, then?
Good, good! That’s right, the people. The people buy goods and services from corporations. That is how they make their money. And you have already acknowledged that they pay taxes because all of the dollars they keep overseas are to avoid taxes, right?
Umm…. Yeah, that makes sense. Yes, but their not paying enough!
Okay, so when the government raises taxes on the corporations what happens?
Well they have to pay more money then.
Okay. So when they have to pay more money they have two choices. They can take it out of their profit and have less earnings for their investors or they have to raise the prices on their goods and services. Which of these two options do you think they take?
Well they raise prices, of course! They’re greedy!
Alright then. So when they raise prices who pays the difference?
Well their customers do! Duh! The people buying their stuff….
Right Billy! So who is in fact paying the tax?
Uhhh…. Hey wait! That’s not fair! The government raised the tax to get them to pay their fair share! They can’t just pass that on….
But Billy! You said yourself that’s what they do. I didn’t make it up.
Yeah, but wait. They should have to take that out of their profit, not pass it on to us.
Alright, lets say they did that. How much is enough, Billy? 70%? 80, 90%? What happens when a company stops making a profit?
Well, they go out of business.
They go out of business. Right. So what happens then?
I don’t know. Some other corporation takes their business then I guess.
Mmm. Well that may be true, but what else? What happens to the employees? And the tax dollars? You’ve lost jobs and tax revenue both. Who does that help?
Take your time.
Okay, but that other company that took their business. They can hire those workers and the total amount of business will be the same then, just to a different company.
And what happens if they are taxed out of business?
I don’t know! What are you getting at?
Well I’ll tell you Billy, for you see its already happened. Remember when Bernie was talking about all those evil corporations moving good paying American jobs overseas?
Well Billy they moved the jobs overseas for the same reason they keep their money overseas. Companies have to at least maintain if not grow their profits in order to stay in business. If every gain they make is automatically taken away by the government’s authority they are left with two choices. They either shut their doors or they move to where they can continue to make money.
Huh. Well, it still doesn’t seem right they can do that, you know? Take away those jobs just to keep more money? See? That’s why capitalism sucks!
So you say. Lets come back to the old Bernmeister for a minute, huh?
Yeah, okay. What?
Bernie says that a college education is a right and an investment in America’s future, right?
Yes and he’s right!
Okay Billy, I want you to think about that for a minute. Bernie tells you it is a right and an investment. Now when you make an investment it usually one of two things, if not both. Time and money. So Bernie says the government is picking up the tab. Are they investing time or money.
Well its money. I mean how do they invest time in that? Of course it has to be money.
Right. So where does the government get its money?
In part, yes, but if they go over budget?
Yeah, or they borrow. But they’ll always be able to take more taxes so it all will get paid eventually.
Well one can hope. So if we were talking about just your own personal benefit for a moment, Billy, how would that “free” college benefit you?
Well that’s easy! I wouldn’t have $60,000 in student loans to pay back! I’d have money for other things that I need. I shouldn’t have to pay so much to get an education to make a living!
Well on that latter point I would have to agree, Billy, but lets stick to the figures, okay?
Alright, so now I am clear that you appreciate on a personal level what it means to have debt. So your student loans, like any other loans, have interest on them, right?
So in the long run you end up actually paying quite a bit more than you borrowed, in fact the longer you take to pay it back the more extra it will cost you. It’s the price you pay for using someone else’s money.
Well, yeah… that’s the terms of the loan. If I don’t get it I don’t get the degree.
Alright. Now you have so much income to work with and you need to stay within your budget.
Now the people who have been gracious enough to extend this loan to finance your education, they know you’re not raking it in hand over fist right out of college so the payment terms are structured in a way that you could manage it within a limited budget.
Well, not so much, but yeah. If I was working in my field making more money then yeah, it would be manageable.
Okay. Now let me ask you this. What do you think about banks, generally?
They’re a bunch of greedy crooks!
Mmm. So a bunch of greedy crooks made you a loan and they have structured your terms to be manageable why? Out of the goodness of their hearts?
No, Billy, they haven’t. If the payments are kept small then the term of the loan is stretched out longer. And the longer you pay….
The longer I pay the more I pay!
Very good! You're catching on! Take a close look at the detail on your loan online, Billy, and you’ll discover that a sizable portion of each monthly payment you make goes to pay interest on the loan while a lesser portion goes toward retiring the principal. Now I will grant you that student loans will offer a bit more flexibility in terms of deferments if you are not working. It may help you out for the short term, but it also translates to still more money for the lender.
Yeah, well when I get a better job I’ll pay it down quicker.
Well I hope you can, Billy, but you need to understand something. You see lending is a sort of gambling in a sense. Lenders make loans based upon their prospect for recouping these at a profit. Now some would say that making loans of such magnitude to young college students before they’ve even started a career is not such a good bet. Its risky.
Well there is a default rate in any pool of loans, Billy, but these lenders a betting on some fairly safe probabilities.
Okay, like what?
Well the probabilities are high that young people with college degrees will go out and embark upon a career. One of the things that typically accompanies this period in a young person’s life is that they will start a family, buy their first house, things that will place more pressing demands upon their monthly budgets. This in turn increases the likelihood that they will only make minimum payments on their loans thus making the loan more profitable by realizing the interest upon the full term of the loan.
Son of a bitch! Those sneaky bastards!
Indeed. Alright Billy I’m going to try to close the loop on all this for you now, okay?
Now first lets take a look at your personal financial picture. Not to pick on you. I just want to use it to help illustrate something.
Alright. You are 22 years old, you hold a college degree that has the potential to start you out in your career making roughly $35,000 per year. You aren’t earning that much now, in fact you are below the poverty line. You live at home, you drive a thirteen year old car, hold little if any assets and you have $60,000 in debt. Sound right so far?
Now lets say you keep chipping away at this debt for a couple of years and then you land a better job. In fact lets be optimistic and say you’ve got lucky and snared a starting salary of $42,000. After your taxes that gives you about $32,000 in take home pay, or just shy of $2700 per month.
So things are starting to look up for you. What happens next?
Well, I’d get my own place, get a new car. Well, maybe not brand new, but a better car anyway.
Yes, that sounds about how things usually begin. So you’ve got yourself a small apartment, which in this market in a decent neighborhood will probably run you about $700 per month.
Lets say you find a halfway decent sedan about four years old and thirty some thousand miles on it for $12,000. You can get it financed for 48 months and keep your payment somewhere around $275 per month. You’re still under 25 so with a good driving record you might figure on your monthly car insurance running about $160. Then of course you’ll have your phone and utility bills now so for budget purposes there’s another $200 per month. You’ll need to eat, of course, but you’re only feeding yourself. If you’re frugal and don’t eat out all the time you might manage with $250 per month. Now, how much are your student loans?
Right now my minimum is $250 per month.
Alright, tally all that up and you’re in the ballpark of $1900 per month, leaving you about $800 dollars to play with. When I was your age I spilled that much.
Yeah, okay. Well that’s not so bad. Like you said things are starting to look up, right?
Certainly improving, yes. So you carry on like this for a couple of years, maybe even get a couple thousand dollars saved. You stay current on your loans, develop a good credit rating. Everything sailing along and then you meet a girl and she’s the one. In a year you’re married and in two years you’ve got one in the oven.
Well, yeah, I guess that could happen. Im in no hurry to have kids, though….
Trust me son, no one ever is. So at this point you will have been in your job for about five years, maybe gotten a few merit raises and brought yourself up to $48,000 a year. You still are carrying about that much on your student loan. Your little lady doesn’t earn all that much and now she wants to stay home with the baby anyway. That little apartment won’t do any more, but it’s too soon to try to buy the house so maybe you rent in a nice neighborhood. That’s going to up the monthly to say $1200. At this point you still owe $6000 on your car and if she’s going to get around with a baby she has to have something safe and reliable. Now you’re into the $26,000 minivan financed for 60 months. With good insurance you’re still looking at a couple of thousand dollars in hospital bills from the delivery and raising an infant is probably going to cost you at least another $10,000 in that first year.
Wait! Wait, hold on…. I’m trying to catch up with the figures.
Oh sorry. I’ll slow down. You realize, of course, that life does not do that? You deal with everything in real time. Anyway… At that stage of your life you’d be 27, your take home pay would have climbed to about $35,500 annually. But now you face a lot of obligations. Taking all of these things into account, still counting your $250 monthly student loan as well, you’re staring down the barrel of at least $3400 per month in expenses, but your monthly net is only about $3000.
Well she’s not going to be able to stay home then!
No, perhaps not. But if she goes to work how much will she earn and how much will the child care cost you? I think I’d be conservative if I said $600 per month. And now your total debt is up around $82,000.
Shit indeed. So, now you probably want to start looking for a better job. And it won’t be long before she’s going to want the house. You do have good credit, though, and you know you will earn more in years to come. You have to fulfill all these obligations somehow so a little borrowing for a time will get you through.
Well sure, I mean doesn’t everybody have to do that at some point? That’s why you want to build good credit, right?
Yes, Billy, that’s why you need good credit. You’re a reasonably safe risk. College degree, stable work history in a gainful profession, family man. So it would be reasonable to think that you might carry that load for a while. There is a continued expectation of income, a pretty safe bet, so with your record why you could obtain all kinds of credit. So lets say we move the clock ahead to when you’re thirty. By then you’ve managed to move up into a better job, maybe earning $60,000 a year.
Yeah, then things would start to come together, wouldn’t they?
Well Billy at a gross of $60,000 you would net somewhere between 46 and 47. We’ll be optimistic and say $47,000 so then you’d be just below $4,000 per month in take home pay.
Okay, so we’d economize a bit and little by little we’d start to gain ground, wouldn’t we?
You might like to think so, but here is where your obligations only continue to grow, Billy. The two of you get another bun in the oven and you just have to get that house in a good, safe school district. Those children will be starting school before you know it and your bride has to keep pace with all of her girlfriends.
Well….yeah, I guess that’s how life goes, but what if we don’t have that second kid?
Maybe you wont, Billy, but you’ve got to at least consider the worst case, don’t you? This is all just hypothetical, but its based on what seems to be typical, okay?
Alright, but where does it end?
Ha ha ha! Oh Billy! You remind me of that Jason Robards line from the movie Parenthood: “you never reach the end zone. It just never ends!”
Well that’s kind of depressing.
That’s not my purpose, Billy. You see I’m describing the debt trap. I’ve given you a trajectory that shows quite easily how one can go, in less than 10 years mind you, from $60,000 in debt to over $300,000…..
$300,000! How’d we get there? Hell a minute ago it was $82,000!
Well yes, Billy. But that was before the house. And a second child. Oh and your $12,000 sedan has given up the ghost by this time. But hey! You work for a living and your credit is still good so you deserve something new, don’t you? What would it be?
Well it would have to be a hybrid, of course…
Of course it would, so….ding! There’s another $30,000 at least, still carrying that student loan and you now owe at least $220,000 on a 30 year mortgage. Im being generous, Billy, because by this time you will have almost certainly exceeded $300,000. But you’ll be so determined to meet all of those obligations that you’ll rely more and more on credit cards. They are easy to get. There’s half a dozen offers in your mailbox every week! And with so many of those 12 month zero APR offers you’ll save a bundle. You can just keep transferring one to another so you never pay any interest. You’ll just keep robbing Peter to pay Paul until Paul drops dead and everything will be fine. And with the house there’s always the home equity line of credit to bail you out of a tight pinch.
Oh man, I don’t want to do all that! Maybe I’ll just go back to school then! You know? I mean if the government is going to end up paying for it? They said there’d never be government health care too, you know.
Ahh sadly, yes Billy. You are right. They did say never and yet here we are. But now here is the really important lesson.
What? All that isn’t enough?
Just hold on. Now you do understand the scenario I just described. You understand how it gets out of control so quickly and what a bad spot you can find yourself in?
Alright. Bernie Sanders, or Hillary, or whoever. When they tell you that the government is going to take care of it? It’s you at age 30, Billy.
How you figure?
Think about it. You kept taking on more and more obligations with the expectation that you’d have the future earnings to pay it all off. But the earnings didn’t come at the level you anticipated and you kept getting committed to more and more obligations. You had to rely on more and more credit to meet those obligations until the only thing you could pay on your debt was the interest. And the debt just grew and grew while your obligations also just grew and grew. Eventually you hit a level of debt where the banks can figure out that they wont extend any further credit. But you’re still left with all the bills. Billy our government has been doing the same thing for years upon years, only now its climbing faster. We are fast approaching 20 trillion dollars of debt and we are still spending more than we take in every year. Now what happens to you if you do that?
I end up shits creek with no paddle!
Bingo, my friend! So anything “free” from the government is anything but free. It ends up costing us all. In banking they have a saying: If you owe the bank $50,000 and you don’t have it? You have a problem. If you owe the bank $50 million and you don’t have it? The bank has a problem. Never try to promise what you know you can’t deliver and beware of those who do.
That is where our discussion ended. I’m not certain, but I think Billy may have wet himself.