debt: It’s not nearly as bad as everyone says it is

[Independent voter]

Guy says taking on debt is a good thing because it will help you towards a brighter future, eg, take on student loans, get a good job, become wealthy, etc. He talks about countries taking on debt too.

I know in agriculture you can't survive if you don't take on debt. You should have zero or negative equity I think they say.

I took out student loans. I also borrowed from an uncle which turned out to be a bad idea cause I was slow in paying him back.

They have a good chart at the link that was too big to paste.







https://www.washingtonpost.com/poste...ne-says-it-is/

aking on debt can be a terrible idea or a wonderful idea. More often than not, whether it’s a student, a home buyer or even a country, it’s the latter: Taking on debt is an absolute necessity if we want to invest in the future.

More precisely, taking on debt is how we borrow against future resources to pay for current investment or consumption. And therein lies the rub: There have to be future resources against which to borrow. Whether it’s a college student, a homeowner (see “The Big Short”), a country (see Greece), a city (Detroit) or a “territory” (Puerto Rico), the reason debt becomes unsustainable is because earnings or growth fail to materialize.

That’s the recipe for a debt spiral, when paying what you owe to your creditors is not just tough, it’s increasingly impossible because your debt burden is growing faster than your income. You figuratively drown in debt because you lack the growth to push back its tide.

I was reminded about these dynamics by this Wall Street Journal piece from Sunday, from which the following figure is drawn. There’s a lot in there, so let’s start unpacking.


(Source: Wall Street Journal)
First, student loan delinquencies are now higher than those of the other types of debt shown in the figure. You may be aware of that, as student debt burdens have become a campaign issue, at least for Hillary Clinton and Bernie Sanders (Donald Trump’s response to debt issues tends to be some variation of: Just default … that’s what I do!). But the key point in the article is that many of these borrowers “never learned new skills because they dropped out.” They can’t finance their loans because they’re paying off “an asset they never received,” i.e., a college diploma.

For-profit colleges have generated particularly serious problems in this space. Researchers “tracked the earnings of some 1.4 million students who left a for-profit college in the two years through September 2008. Seventy percent of them dropped out. Those who enrolled in associate’s and bachelor’s programs earned an average of $600 to $700 a year less in the six years after leaving school compared with the six years before they entered.”

The right part of the figure, showing real median weekly earnings by education level, tells the other important part of the story. The magnitude of the college earnings premium comes across clearly in the figure, underscoring the point that many borrowers who do “receive that asset” will have the means to service their loans and come out way ahead. Conversely, many of those who do not will be stuck trying to pay their debts without the salary premium.

[Important data note: The Journal kind of pumps up the college premium by combining those with four-year degrees along with those with advanced degrees. The four-year college premium over those with terminal high school degrees is about 67 percent in these data; for those with advanced degrees that premium is about 100 percent — i.e., they earn twice what high school workers earn. Also, if we’re thinking about young graduates, they earn considerably less than those in the WSJ figure. See Elise Gould’s careful analysis of young college grads.]

The other thing you see in the wage figure is that, contrary to popular mythology about how all you need is a college education to be forever insulated from any of those negative wage trends that befall the “less skilled,” even college wages appear to have stagnated since 2010. I carried the analysis through to 2015 (data here) and found that while earnings generally rose last year, no education level had surpassed its 2000 value. As I recently argued on this page, that’s surely one reason people are pissed off about the economy.

My point here is not to deliver a “stay-in-school” public service announcement, though that’s definitely part of the message. It’s a broader message about debt.

Taking on debt to pay for college is usually a smart move, but you need the degree/asset if you hope to earn the premium. Dropouts who over-leveraged but fail to benefit from the earnings premium must be able to restructure or charge off their loans. These issues are fulsomely discussed by education economist Sandy Baum (here with Martha Johnson), who has been writing about student debt from a smart, nuanced perspective for years.

This understanding of debt dynamics applies across the board. Puerto Rico, which over-borrowed without regard to its growth, now must be allowed to restructure its debt so that it can begin to grow again (with its fiscal affairs overseen by an oversight board). Though knee-jerk debt hawks (do hawks have knees?) squawked when the deficit grew sharply in the Great Recession, that was exactly what needed to happen to offset the private sector demand contraction. As growth returned, the deficit receded.

Remember all of this, not just in your own life as you consider taking on student (or housing, etc.) debt, but when you hear politicians blithely rant about any public borrowing. With interest costs as low as they are, significant deterioration in our public goods, and the need for both more jobs and higher productivity growth, borrowing to invest in infrastructure right now would be a smart play. But chins would be stroked and fingers wagged by those who fail to grasp these dynamics.

In other words, there’s smart borrowing and foolish borrowing. As they say in the economic serenity prayer: Keynes grant us the wisdom to know the difference.

[Deleted]

greece pay debnts

[Stacyrect]

Debt: It's not that bad till it ruins your life

[TwoNineMarine]

Outside my mortgage I'm about to be debt free.

Not completely on topic but I'm happy as fuck about it. So I decided to comment. Lol.

[Hiricine]

Debt is good if the reason you incurred debt was an investment thats likely to return. A mortgage, for example, usually represents huge savings on equivalent rent. A business going into debt to buy equipment thats likely to return on investment is worth going into debt over. Of course, not all investments are good investments. An engineering degree is generally a good investment. A Sociology degree is generally not a good investment.

Debt is bad when it pays for consumption. For example, when someone charges their groceries on a credit card that they intend to just roll over each month, when someone finances a luxury car or puts a vacation on a credit card.

If you can't afford it now, why should you be able to afford it later? If you can't effectively answer that question, you shouldn't be spending the money. It applies to individuals as well as governments.

[lockedout]

Outside my mortgage I'm about to be debt free.

Not completely on topic but I'm happy as fuck about it. So I decided to comment. Lol.

I have car payments and that's it.

[TwoNineMarine]

I have car payments and that's it.

Excellent! Congrats! It's nice being down to nothing. I love it.

[Aori]

Debt is stressful as fuck. I'm drowning in medical bill debt.

[Donald Hellscream]

As long as you don't rack up more debt than you can reliably pay off its not a problem really, like for example I took a 13500 DKK ( about $2000 ) loan to pay the deposit fee for my apartment, but those are money I will receive again once I move out so all I had to do was to sign a contract saying that the money would be used to pay off my loan should I still be indebted once I move out.

[alexw]

Guy says taking on debt is a good thing because it will help you towards a brighter future, eg, take on student loans, get a good job, become wealthy, etc. He talks about countries taking on debt too.

I know in agriculture you can't survive if you don't take on debt. You should have zero or negative equity I think they say.

I took out student loans. I also borrowed from an uncle which turned out to be a bad idea cause I was slow in paying him back.

They have a good chart at the link that was too big to paste.







https://www.washingtonpost.com/poste...ne-says-it-is/

aking on debt can be a terrible idea or a wonderful idea. More often than not, whether it’s a student, a home buyer or even a country, it’s the latter: Taking on debt is an absolute necessity if we want to invest in the future.

More precisely, taking on debt is how we borrow against future resources to pay for current investment or consumption. And therein lies the rub: There have to be future resources against which to borrow. Whether it’s a college student, a homeowner (see “The Big Short”), a country (see Greece), a city (Detroit) or a “territory” (Puerto Rico), the reason debt becomes unsustainable is because earnings or growth fail to materialize.

That’s the recipe for a debt spiral, when paying what you owe to your creditors is not just tough, it’s increasingly impossible because your debt burden is growing faster than your income. You figuratively drown in debt because you lack the growth to push back its tide.

I was reminded about these dynamics by this Wall Street Journal piece from Sunday, from which the following figure is drawn. There’s a lot in there, so let’s start unpacking.


(Source: Wall Street Journal)
First, student loan delinquencies are now higher than those of the other types of debt shown in the figure. You may be aware of that, as student debt burdens have become a campaign issue, at least for Hillary Clinton and Bernie Sanders (Donald Trump’s response to debt issues tends to be some variation of: Just default … that’s what I do!). But the key point in the article is that many of these borrowers “never learned new skills because they dropped out.” They can’t finance their loans because they’re paying off “an asset they never received,” i.e., a college diploma.

For-profit colleges have generated particularly serious problems in this space. Researchers “tracked the earnings of some 1.4 million students who left a for-profit college in the two years through September 2008. Seventy percent of them dropped out. Those who enrolled in associate’s and bachelor’s programs earned an average of $600 to $700 a year less in the six years after leaving school compared with the six years before they entered.”

The right part of the figure, showing real median weekly earnings by education level, tells the other important part of the story. The magnitude of the college earnings premium comes across clearly in the figure, underscoring the point that many borrowers who do “receive that asset” will have the means to service their loans and come out way ahead. Conversely, many of those who do not will be stuck trying to pay their debts without the salary premium.

[Important data note: The Journal kind of pumps up the college premium by combining those with four-year degrees along with those with advanced degrees. The four-year college premium over those with terminal high school degrees is about 67 percent in these data; for those with advanced degrees that premium is about 100 percent — i.e., they earn twice what high school workers earn. Also, if we’re thinking about young graduates, they earn considerably less than those in the WSJ figure. See Elise Gould’s careful analysis of young college grads.]

The other thing you see in the wage figure is that, contrary to popular mythology about how all you need is a college education to be forever insulated from any of those negative wage trends that befall the “less skilled,” even college wages appear to have stagnated since 2010. I carried the analysis through to 2015 (data here) and found that while earnings generally rose last year, no education level had surpassed its 2000 value. As I recently argued on this page, that’s surely one reason people are pissed off about the economy.

My point here is not to deliver a “stay-in-school” public service announcement, though that’s definitely part of the message. It’s a broader message about debt.

Taking on debt to pay for college is usually a smart move, but you need the degree/asset if you hope to earn the premium. Dropouts who over-leveraged but fail to benefit from the earnings premium must be able to restructure or charge off their loans. These issues are fulsomely discussed by education economist Sandy Baum (here with Martha Johnson), who has been writing about student debt from a smart, nuanced perspective for years.

This understanding of debt dynamics applies across the board. Puerto Rico, which over-borrowed without regard to its growth, now must be allowed to restructure its debt so that it can begin to grow again (with its fiscal affairs overseen by an oversight board). Though knee-jerk debt hawks (do hawks have knees?) squawked when the deficit grew sharply in the Great Recession, that was exactly what needed to happen to offset the private sector demand contraction. As growth returned, the deficit receded.

Remember all of this, not just in your own life as you consider taking on student (or housing, etc.) debt, but when you hear politicians blithely rant about any public borrowing. With interest costs as low as they are, significant deterioration in our public goods, and the need for both more jobs and higher productivity growth, borrowing to invest in infrastructure right now would be a smart play. But chins would be stroked and fingers wagged by those who fail to grasp these dynamics.

In other words, there’s smart borrowing and foolish borrowing. As they say in the economic serenity prayer: Keynes grant us the wisdom to know the difference.

Correct. We use a debt based monetary system where new money is borrowed into existence. All money is created this way via loans. As long as the money that is created via that debt is used in a wise fashion, it generates the economic growth/return that enables the associated repayment commitments to be met. Without society taking on debt there literally cannot be economic growth. But the money-debt can be used in both good and bad ways, to either invest and start companies, build infrastructure, etc, or to literally throw a party. This is why I get annoyed at the national debt-fetish crowd. Its not the debt that matters but what the money that that debt represents is used for that does.

[Garnier Fructis]

The very idea of owing money to anyone is anathema to me. I plan to stay debt free as long as possible.

[Damajin]

The very idea of owing money to anyone is anathema to me. I plan to stay debt free as long as possible.

That's how I feel as well, I hate debt with a passion and am doing everything right now to not incur any debts and probably the only major one I'll ever incur will be from building a home which through design and such I intend to be hyper efficient and pay it off very quickly via the savings.

I want minimal expenditures every single month, only way to do that is to live frugal and avoid debt like the plague.

[chazus]

The article has nothing to do with the problem.

[TheTaurenOrc]

Debt: Lets you buy shit you otherwise couldn't afford!

[Auxora]

Well the term debt is a really wide range as a term, so it's way too large of a topic to call it simply good or bad.

Some personal debt is ok and totally normal. You need to have some debt to build up good credit, and nearly all cars and homes are bought on credit. Most people don't stress about this kind of debt since it's kind of just part of life.

But if you're talking someone coming out of college unemployed with $100k in student loans, or someone making $30k a year with $20k in credit card debt, that's definitely not great. Or worse yet someone with $80k in debt for major medical bills. Those are usually the situations when people are talking about debt and drowning in debt. That's the debt that causes people to be miserable and depressed.

[Ayla]

Debt: I can only afford to pay my mandatory minimum, and find myself buying food on credit. But they haven't started calling me and haven't broken my legs, so I think I am okay.

Bring on the debt!

[Daerio]

And this entire conversation is going to ignore the other half of this equation?

What about the people holding those debts, and living their entire lives based on usury? Those people sure add a lot of 'value' to the economy.

What about the fact that 40 years ago, interest payments on debt for the average American was almost nonexistent, and now "the average household is paying a total of $6,658 in interest per year. This is 9% of the average household income being spent on interest alone."

When 10% of the economy is going towards paying interest... it's a pretty serious problem. People hate math though, and they hate economics even more, so I can understand why nobody really seems to get it, or care.

[Celista]

Federal student loan debt is different from most debt individuals take on. Payment plans are flexible, are capped at a percentage of your income, and are written off in the case of permanent disability or death. They are also written off after x years, with lower repayment terms for individuals who work for 501(c)(3) organizations, as nonprofits tend to pay less than their equivalent for profit counterparts.

All other debt (for individuals, not for organizations) is kinda poop and should be avoided as much as possible.

[lockedout]

Debt is stressful as fuck. I'm drowning in medical bill debt.

That really sucks I always felt bad for people who have to deal with this.

[Damajin]

And this entire conversation is going to ignore the other half of this equation?

What about the people holding those debts, and living their entire lives based on usury? Those people sure add a lot of 'value' to the economy.

What about the fact that 40 years ago, interest payments on debt for the average American was almost nonexistent, and now "the average household is paying a total of $6,658 in interest per year. This is 9% of the average household income being spent on interest alone."

When 10% of the economy is going towards paying interest... it's a pretty serious problem. People hate math though, and they hate economics even more, so I can understand why nobody really seems to get it, or care.

People around here tend to dismiss that side of the argument as unnecessary or worse, quasi conspiracy. Very stupid of them, but go figure.