Sunday, July 17, 2011

A Generation of Debt Repayment

The Scotsman, a British newspaper, features an article discussing the era of debt repayment in Europe.  Tom Friedman's op-ed discusses the upcoming clash of generations, as the baby boomer generation continues to enjoy the relative comforts available today while future generations are left to service debt.

Countless government programs have made people's lives easier and more comfortable over the past 70 years.  We've built roads, provided health care and income to people in need, supported children's education and health, set up mechanisms to support Americans in their retirement, promoted investment in new industries, encouraged homeownership among groups that haven't traditionally been homeowners, and fought a number of expensive wars.  And some of it we've paid for along the way, and much of it we haven't.  And in the coming generation, that money will have to be repaid - which is going to make sustaining the types of programs Americans are used to (and, many would argue, need) at the same time is going to be very difficult.  As a young person, it's demoralizing the think about the fact that my generation will help fund the expenditures that were racked up without much attention to their cost, and at the same time try to fund our own lives.

If money is being diverted to servicing debt, we aren't going to be able to buy as many things.  A bit less consumerism is probably a good think for individuals, but it's going to drastically alter the way the economy functions and produces jobs.  There's already evidence of that - big purchases like cars and overs are down substantially from a decade ago, and per capita consumer spending has decreased by more than twice the maximum previous percentage in any recession, and it doesn't show any signs of turning around.  The employment situation for 20somethings isn't good - even traditionally lucrative fields like law are suffering (see the comments as well).

What needs to happen to snap out of this funk?  An economist I'm not, but working to reduce long term debt obligations while maintaining government programs in the present seems like a wise start.  We can't afford to drastically curtail government spending right now, but we have to in the long run.  A substantial  part of a long-term strategy needs to include spending cuts for defense (an industry that appears to be concerned about the end of the Iraq and Afghanistan wars).  I know defense spending can be good for constituents, but the goals of our defense policy shouldn't include financing high-paying private sector jobs.  I realize that education is a large cost for this country, but how is it possible that so many people are rallying for cuts in schools (and sneer that teachers, who only work ten months a year, are overpaid) while so few pay attention to the things that really put a dent in our wallet?


  1. As part of a law passed in 2007 (College Cost Recovery Act or somesuch), higher education debt can be forgiven if you make 10 years worth of repayments while working at a non-profit or government agency.

    I think the current situation also forgives debt after 20 years of payments.

    Note that these payments can be income adjusted, so that you don't pay more than 10 or 15% of your income (I think) at once. However, you do accrue interest on the unpaid balance, so that's a risk with this method. After all, what if a non-profit loses a grant or your agency's budget is slashed because of budget cuts?

    Still, this type of law can be pushed farther. If the federal government picks up the tab, the lenders probably won't be too upset. It would also have to be done in such a way to not piss off people who just missed out. Maybe some kind of tax deduction for past payments up to a certain amount to buy them off. This would affect the middle class primarily, so I think it would be attractive to a lot of politically engaged people. Mom and Dad aren't going to like making payments on Daughter and Son's loans for the rest of their lives...


  2. That sounds like a good option for those who can take advantage of it. I suspect (and you may know more about this than I do) that recent structural changes may make it difficult to get qualifying employment. Government positions can be tough to come by (and many public employees aren't doing so hot right now). Do these laws apply only to federal loans or do they include private loans?

  3. Federal loans only.

    You're right about it's limited utility. Let's say that either a high-paying job or a government job means that you don't have to worry about your loans (big exaggeration) - that still leaves the majority of graduates with big problems.