Get Out of Generation Debt

BusinessWeek

February 21, 2007

by Marshall Goldsmith

Anya Kamenetz sold her first book, Generation Debt, in 2004 at the age of 23. She has become a spokesperson for young people facing economic obstacles that are new – and generational in scope. She has written for The New York Times, Washington Post, and Village Voice, appeared in documentaries for Fox News and PBS, and spoken on campuses from Boston to Idaho. She also communicates with younger readers through her blog, anyakamenetz.blogspot.com. Edited excerpts of our recent conversation follow:

MG: What is the issue with Generation Debt? 

AK: People under 35 are being hit by three converging historic trends: the cost of education, the changing job market, and the debt culture. The most important is the cost of education. For the first time ever, you need at least a bachelor’s degree to get most middle-class jobs. That degree is now more expensive than it’s ever been.

For most students, the cost of college is double what it was 20 years ago, in constant dollars. And federal aid is available more and more in the form of loans – not grants. That means two-thirds of students who graduate with a B.A. owe an average of $20,000. Professional school or graduate students have even more debt, running into the six figures, on average.

The second most important trend affecting young people is instability in the job market. Young people are finding that short-term, part-time, temporary, freelance, or contract work is the new norm in American companies. That’s why young people are the largest and fastest-growing group of Americans without health insurance.

And the third reason I call us Generation Debt is that we are the unlucky beneficiaries of a prevalent and damaging “debt culture.” America as a whole is coming upon an historic demographic shift [with the retirement of the baby Boomers]. We are looking at boomers’ unprecedented retirement costs, record federal deficits, and rock-bottom personal savings. My generation is going to be the bulk of the workforce when that note comes due.

And to compound the danger, we are coming up in the age of rampant consumer debt. College freshmen are targeted by credit-card companies as soon as they step on campus. As a result, they graduate with an average of over $2,000 of high-interest credit-card debt to add to their student loans.

MG: How did this happen? 

AK: The rising cost of education is in part an unintended consequence of racial and gender barriers breaking down and the demand for college widening as a result. Higher education, like health care, is a highly labor-intensive industry that is to some extent insulated from true competition.

Technology has not really increased productivity, so costs continue to rise faster than inflation. The answer is not just increased federal student aid, but more transparency and market responsiveness on the part of colleges and universities.

The fiscal and consumer-debt situations we are in, however, are more a product of shortsightedness by our leaders of both parties, who are always willing to pass the buck past the end of their terms in office. We need banking reform to protect consumers, and we need a new set of national priorities that takes our country’s long-term future into account.

The changing job market may be the toughest situation to tackle. It is far from just affecting young people. The old employer-based social safety net is outdated. I believe that Americans need to forge a new social contract that will protect people getting into the job market, freelancers, entrepreneurs, and other nonstandard workers with a portable system of both retirement and health-care benefits.

MG: What advice do you have for the people facing these situations? 

AK: Young people are very pragmatic and optimistic, so I try to cut quickly to the solutions.

First: Acquire basic financial literacy. This is seldom taught in school; students must go online and figure it out on their own.

The danger of debt and the importance of saving can be learned hand in hand since they both reside in “the miracle of compound interest.” Interest plus time can either build you up or bury you. The more people understand that, the better off we’ll be as a generation.

Second: Change the way you think about the education-work equation. I meet far too many people who wander through four or five years of college, then three more years of graduate school, changing majors along the way, hoping that the perfect job will somehow just fall in their lap after they are all done. Unless you are a trust-fund kid you can’t afford to do this. It’s a recipe for life frustration and a waste of money and time.

I can speak to this personally. I started exploring my future career path as a journalist early on. I did my first of four journalism internships as a high school sophomore, I worked hard on my college magazine learning all aspects of the business from proofreading to ad sales, and I published my first professional article as a college junior. I am a firm believer that every school should in some sense be vocational.

MG: What advice do you have for parents who have children this age or younger? 

AK: The parents of this generation have a uniquely close relationship with their kids. This is great. But it often leads to a tension between overprotecting and trying to encourage independence that can end up the worst of both worlds. If you sign your kids up for student loans and handle all the paperwork yourself, your kid is not learning the true amount for which they are ultimately responsible.

If you let them hold a credit card for “emergencies” and you pay the bill every month, you are teaching that money comes from the Bank of Mom and Dad. Personally, I don’t think that someone without an income of his or her own should have access to consumer credit.

In a perfect world, I think all parents would be honest and open with their young adults about how much they can contribute to the cost of college, encourage them to gain early workplace experience, and help them be smart education consumers.

MG: What happens when parents don’t do this? 

AK: I was recently on a radio program with a girl who had decided to go to Georgetown because it sounded prestigious and she wanted to be in a city. After an unhappy two years and racking up a lot of debt, she dropped out and headed to cosmetology school to be a makeup artist! I found myself wondering if her parents knew how shallow and uninformed her original college decision had been, or if they were just glad to see her headed off to a good school because “that’s what you do.”

MG: Thank you Anya. You have given both my younger readers and their parents a lot to think about!