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Are we addicted to debt?

Her voice catches when she talks about her current situation. Ask about the future, and she cries.

“I’m sorry,” she says. “I get a little emotional.”

Melissa N. (she asked that her last name not be used) is 33. She received her first master’s from DU in 2007 and expects to earn a second early next year. She has a job. She has two young children. And, after many years as a single parent, she is recently married.

Life should be good — but Melissa says she has problems. Huge problems, in fact, thanks to cumulative student loans she pegs at almost $200,000 and an additional $20,000 or so in credit card debt.

“We don’t have any money left over after we pay the bills,” she says. “It comes down to this: Are we going to buy groceries, or are the kids going to get to play a sport and do the things normal children get to do? We’re in this debt situation because of survival. I know I’m not unique.”

America’s debt burden

As it turns out, she’s right.

According to a 2009 National Foundation for Credit Counseling (NFCC)/Harris Interactive study on financial literacy, more than 13 million American adults live in households that carry credit card debt of $10,000 or more month-to-month. An equal number are behind on their payments to the point that some amount of their debt is in collections. They can’t draw on personal reserves to pay their bills because one-third of adults say they have no savings.

Situations vary person to person, of course, but if one generalization applies, it’s that very few were prepared for what was, without question, a perfect financial storm.

Americans funneled less than 2 percent of their disposable personal income into savings in 2007 and less than 3 percent into savings in 2008, according to the U.S. Department of Commerce Bureau of Economic Analysis. Combine that low level of preparedness with the loss of more than 3 million U.S. jobs between December 2007 and January 2009, outstanding consumer debt of more than $2.6 trillion in December 2008, and a sharp, sudden reduction in credit access that started last year, and you have a situation primed for disaster.

When it hit, it struck on every front:

In 2008, foreclosure notices were filed against 2.3 million properties, an increase of 81 percent increase over ’07 filings and a jump of 225 percent from ’06 filings, according to RealtyTrac.

Upward of 1 million autos were repossessed in 2008, according to Manheim Consulting data.

More than 1.2 million Americans filed for personal bankruptcy between March 31, 2008, and March 31, 2009, the largest number of such filings since the Bankruptcy Abuse Prevention and Consumer Protection Act became law in 2005, according to the Administrative Office of the U.S. Courts.

“This was a splash of cold water in the face,” says Gail Cunningham, NFCC’s vice president of public relations. “It was a long overdue wake-up call.”

Recent graduates like Melissa N. weren’t the only ones caught napping. Sixty-plus years of increasingly easy access to credit had removed the stigma of borrowing from almost all segments of the population.

“Initially, people borrowed money for homes,” says Gordon Von Stroh, a management professor at DU’s Daniels College of Business. “Then, after World War II, borrowing money for a car became a more common occurrence. In the ’60s, we saw people borrowing for education on a limited basis. In the last 10 years, though, things really began to snowball. I think a lot of that had to do with technology. Credit cards were just a more simple way to carry money around.”

Thanks to the gap between purchase and payment, credit also removed the most significant barrier between cash-strapped consumers and the things they want, opening the door to what some call national debt addiction.

That’s a label that rankles Daniels College Finance Professor Mac Clouse.

“I can’t tell you how much I disagree with that term,” Clouse says. “We’re not addicted to debt. What’s happened is that easy credit allowed us to become impatient spenders. In the old days, if I wanted to buy a $5,000 television, I would save until I could afford it. Today, I go in and buy it on credit.”

Nashville-based attorney Mark Patterson, author of the Tough Money Love blog, agrees.

“America has a debt-driven consumption addiction,” he says. “There’s a culture of instant gratification that’s associated with inadequate personal and financial resources, and it’s become culturally acceptable to meet that need for instant gratification by borrowing and spending.”

Although Patterson concedes that tough economic times make conspicuous consumption less fashionable these days, many Americans argue that accruing revolving (i.e. credit card) debt was never their choice.

“There are millions of us who don’t fit into the middle class and who don’t fit into the poverty level, and we seem to always get swept into those stereotypes,” says DU alumna Melissa N.

She’s already been laid off four times in her short career — the most painful occurring the Monday after she received her master’s. Now Melissa worries she’ll lose her current job before the economy kicks into high gear.

“I had zero [credit card] debt two years ago, but after the last layoff, the only way my kids and I could survive was to use credit cards,” she says. “Now the banks are getting funky. All three of my cards raised my interest rate to almost 30 percent. I pay a little more than the minimum, but it’s been the same balance for the last year and a half. It doesn’t go down.

“You have the expectation that you’re going to make a salary that makes it feasible to pay off the cost of your education and also make a decent living, but that doesn’t seem to be the norm.”

For students anticipating a similar predicament, Patterson’s tough love advice is to buckle down and crunch the numbers.

“Do something similar to what I’m doing to prepare for retirement,” he advises. “I won’t retire for six or seven years, but I’m working on a spending budget now. I’m adding in every detail of what it’s going to cost my wife and I to live, then I’m going back and asking where the money is going to come from.

“Students need to think ahead,” Patterson adds. “They roll their lives forward four years, talk with parents and people who have graduated, put on paper what it’s going to cost to live then plug in what they can reasonably expect to make in their chosen field after graduation. Is there any money left over to pay back student loans? If so, how much? That [amount] gives them an idea of how much they can safely borrow for college.

“If they come up short, they need to borrow less. That means they may need to work part time. They may need to forgo unpaid summer internships and get a job that provides some real money so the magnitude of their student loans will match up with the income they’ll have after graduation to pay it back.”

The student debt story

What James Herbert Williams, dean of the University of Denver Graduate School of Social Work (GSSW), doesn’t want to see is students who think they have to abandon their dreams because of the weak economy and the added burden debt. He’s made it his goal to help DU students enter the job market equipped to earn a viable living while working in careers they feel passionate about.

“One of the things private schools can do that public schools don’t is provide more opportunities for students,” Williams says. “These are difficult economic times, but I would like to have a full-time person housed in our building who focuses on career development for our students and starts working with them the day they arrive. I would like that person to help students understand exactly what they need to do over the next two years to be strong contenders in the marketplace.”

In the interim, Williams makes seeking scholarship donations a top priority.

“I’ve lost a fair amount of sleep because of the amount of debt our students take on,” he says. “My goal as dean is to continue to raise money so we can increase the amount of non-loaned financial aid we give students and minimize the cost of a degree.”

Despite the economy, GSSW’s enrollment remains high, a situation likely due — at least in part — to a projected 22 percent increase in the number of social work-related jobs in the coming decade.

“When the job market is not strong, people think about how to re-tool. They think about [earning] additional credentials to become more competitive,” Williams says. “This year, we have more students than we planned for. It’s a very, very strong class. My hope is that when they graduate two years from now, the economy and the job market will be better.”

Students like Katie Jones hope so, too.

After receiving a BA in psychology from Hamilton College in New York, Jones worked for two years before returning to Colorado and enrolling in GSSW. She expects to graduate in 2011 with a dual degree in social work and business, then start a nonprofit modeled loosely on one of her former employers.

“The organization had a vocational training program that I really liked, and I want to start something similar,” Jones says. “My plan is to get leadership and community organizing skills through GSSW and use business training from Daniels to make everything work.”

Her strategy is what Williams calls social entrepreneurship, and he’s seeing a lot of it these days.

“Will they make more? Yes,” he says. “They’re expanding their skills so that they can have opportunities in a wide range of different areas, but they’re still keeping true to the mission and the values of the profession.”

Jones has steered clear of one of the largest debt-inducing traps for students — carrying a balance on her credit cards — and is doubling up on her car payments so she can shave two years off of that loan.

Navigating the student loan system hasn’t been as easy.

“I have about half my tuition covered for grad school, at least for social work, but I already have a lot of debt from undergraduate,” Jones says. “When I first graduated, I looked at the amount of debt that I had and saw that it would take a very long time to pay that off if I were only paying about $150 per month. I requested a higher monthly payment, but the lender wouldn’t allow it.”

“I haven’t looked at it since, partly because of my frustration at having to pay them off so slowly,” she says. “It’s going to take years and years to pay off.”

Bank policies part of the problem

Jones’ frustration doesn’t surprise Maureen B. (she asked that her last name not be used). Her son is about Jones’ age and attends school in California. Although his challenge is with bank fees rather than student loans, one underlying condition is the same: bank policies perplex the inexperienced.

Her son wound up with hefty ATM and overdraft fees he didn’t anticipate because he was told he would always be able to access his current balance online. Today’s twenty-somethings expect this type of instantaneous accounting, Maureen B. says. Checking his balance before every purchase didn’t keep her son out of overdraft trouble — he did not read the fine print in the brochures, she says, and didn’t realize that there is a lag time before charges were reflected in his account.

“Twenty-somethings do NOT read instruction booklets — not for their Xbox, not for their MacBook, not for nothin’,” Maureen B. says.

Her son’s bank had also encouraged him to acquire a credit card, she says.

“His Visa credit card was part of his student account,” she notes. “But when I looked at his statement, I found a charge for the ‘Income Defense Fund.’ He was paying about $6 a month for this. The Income Defense Fund was to protect his income in case he lost his job. He’s a student — he has no income! This is part of a student account? The bank was really taking advantage of an inexperienced new client.”

When the Credit Card Act of 2009 takes full effect, creditors will face new limits on how they acquire and manage customers. Key provisions require 45-day written notice of interest increases, prevent imposition of a fee for on-time payments, disallow over-the-limit purchases and fees unless consumers opt-in, severely limit the ability of providers to sign customers under the age of 21 and require colleges and universities to disclose marketing agreements made with card issuers.

Efforts are under way to move the act’s effective date to December 2009 from February 2010, a move the Consumer Bankers Association (CBA) opposes.

“The act proposed the most comprehensive changes to consumer credit cards in decades, and CBA members are working hard to make sure there is a seamless transition for credit card customers in implementing the new law,” says CBA president Richard Hunt. “Banks are engaging in massive systems changes as well as significant compliance and legal review before final changes can be put into place.

“The new law impacts many areas, including customer service training for new policies and procedures, technology changes for billing and payment processes, changes made to disclosures for marketing materials, and many other interrelated services,” Hunt explains. “Our members were on schedule to comply with the new law by February 2010. Changing the implementation date in the middle of a significant process already under way puts credit card customers at risk of not being properly informed.”

While government intervention will help consumers in certain areas, Michael Williams, a Daniels finance professor, says personal responsibility remains the key to successful money management.

“Don’t use a credit card unless you can pay off the amount at the end of the month,” Williams says. “And don’t leave college with a credit card debt. Don’t do that. Student loans are an investment as opposed to simply a debt — I guess in my line of work one would think that — but you still have to realize that you’re undertaking a [financial] obligation.”

Editor’s Note: After this article went to press, some credit card providers announced charges that may impact those who pay off their balance each month or charge less than a designated amount per year.


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