Young people need to know that not all debt is bad.
For young adults in America, the concept of debt has earned a negative connotation related to the huge amount of loans taken out by college students to pay for tuition.
The Federal Reserve estimates that student loan debt in the United States exceeds $1.3 trillion. A significant percentage of Americans who reached the age of 18 within the last 15 years have enough student loan debt that they are finding it hard to manage their finances, even when those former students found good-paying jobs.
Those same students who have been given loans in order to achieve their dream of a college education have also been enticed to get a credit card, often with high interest rates and large amounts of available credit. Suddenly, Americans are starting their professional lives with debt statements showing up monthly they cannot possibly pare.
All of those factors can lead people to believe debt is bad, and in some forms, it certainly is.
But Ted Beck, president and CEO of the National Endowment for Financial Education, wrote in the Wall Street Journal recently that young people need to be taught the benefits of debt as well as the dangers.
Beck is also a member of the President’s Advisory Council on Financial Capability for Young Americans and chairman of the JumpStart Coalition.
“It is useful to teach our children about the dangers of debt,’’ Beck wrote. “But we need to make it clear that debt can also be a useful tool. We need to demonstrate that we can go into debt and bring ourselves out of it in order to build a strong credit profile.”
Beck’s message is that young people need to show they can pay off their debts, meeting their financial obligations, so that lenders will offer them a lower interest rate when they are read to buy a home, a car or start a business.
Debt is not necessarily bad. Even people who can avoid debt still take out loans and keep a balance on their credit cards. In Spectrem’s quarterly wealth segmentation series study Asset Allocation, Portfolios and Primary Providers, 31 percent of Ultra High Net Worth investors with a net worth between $5 million and $25 million maintain a first mortgage. Seventeen percent have credit card balances and 17 percent take out automobile loans.
Student-loan debt is acceptable, Beck said, as long as it stays within the student’s expected first year salary upon graduation. That amount with that kind of income would be manageable.
Likewise, consumer debt should stay below 15 percent of income, according to Beck, pointing to Great Depression babies “who grew up to be avid savers and cautious spenders. They made judicious use of debt while figuring out how to keep their savings/spending discipline.”
Beck’s warning is that when parents instruct their children to avoid debt at all costs, those offspring fail to learn the valuable lesson of debt, besides failing to build a credit score.
“Parents, if we do not discuss the positives and negatives of finances, we leave our children defenseless to figure it out on their own,’’ he said.
Kent McDill is a staff writer for Millionaire Corner. McDill spent 30 years as a sports writer, working for United Press International and the Daily Herald of Arlington Heights, Ill. From 1988-1999, he covered the Chicago Bulls for the Daily Herald, traveling with them every day through the nine-month season. He also covered the Bulls for UPI from 1985-88, and currently covers the team for www.nba.com. He has written two books on the Bulls, including the new title “100 Things Bulls Fans Should Know And Do Before They Die’, published by Triumph Books. In August 2013, his new book “100 Things Bears Fans Should Know And Do Before They Die” gets published.
In 2008, he resigned from the Herald and became a freelance writer. The Herald hired him to write business features and speeches for the Daily Herald Business Conferences and Awards presentations.
McDill also writes a monthly parenting column for the Herald’s Suburban Parent magazine.
McDill is the father of four children, and an active fan of soccer, Jimmy Buffett and all things Disney.