Highly Educated Have Biggest Debt Problems

The federal government is suing Bank of America for a $1 billion over the bank's pre-crisis mortgage practice known as "the hustle." But it wasn't just naive home buyers who fed the financial crisis. Renters and the well educated had too much debt too, and a new study concludes that college graduates are most prone to debt mismanagement.

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It’s widely accepted that unscrupulous bankers tricked unknowing consumers into loans they could not afford, leading to the financial crisis. No doubt, plenty of that occurred—underscored Wednesday with a $1 billion federal suit against Bank of America’s mortgage arm Countrywide Financial.

But it turns out the “victoms” were not, by and large, unsophisticated rubes. A new study finds that highly educated Americans were most likely to take on unmanageable debt in the pre-crisis years. What’s more, gross personal financial mismanagement occurred across the population and not just in the mortgage market and not just among the unsophisticated.

The study draws a line at the point where monthly payment on household debt equals 40% of income. That’s where default or bankruptcy becomes most likely should the household experience a decline in income, say researchers led by Sherman Hanna, professor of consumer sciences at Ohio State University.

Overall, the percentage of Americans exceeding this 40% threshold jumped to 27% in 2008, from 17% in 1992. College graduates were more likely to be in this group than those without a degree, according to the study. Those describing themselves as optimistic about the future also were among the most likely to have unmanageable debts, the study found. Says Hanna:

“People who piled on debt may have been too optimistic about their economic future, but you can’t blame that on a lack of education. People with college educations may have thought they were immune to any economic problems.”

Meanwhile, folly in the mortgage markets was only part of the problem. One in three renters had unmanageable debts, versus just one in five homeowners, the study found. The percentage of homeowners who had heavy debt burdens increased to 22% in 2007 from 15% in 1992. But the increase was even more dramatic for renters, going to 35% from 20%. Says Hanna:

“The percentage of renters who piled on debt really surprised me. It shows that the financial crisis wasn’t all about housing speculation. There was too much debt in all parts of the economy.”

None of this minimizes the foul play of bankers as detailed so masterfully in Michael Lewis’ The Big Short. Indeed, the suit against Bank of America charges that the bank’s home loan program, known as “the hustle,” was designed to churn out mortgages without proper checks. The bank would collect fees and sell the mortgages into the secondary market.

The government alleges the program was “intentionally designed to process loans at high speed and without quality checkpoints, and generated thousands of fraudulent and otherwise defective residential mortgage loans.”

Clearly, lots of homeowners were duped. But many signed the loan papers without reading them and bear some culpability, as surely as renters who ran up their credit cards. It’s time to stop pretending that people with resources or a good education necessarily know what they are doing with their money. Financial ignorance afflicts all classes and leaves us vulnerable to another financial crisis at any time.

25 comments
helenat
helenat

Well, I can't say I'm surprised by the fact that the highest educated has the worst debt problems.  I have a master degree in finance, but even I almost lost my house and my familiy ( https://debtsblog.wordpress.com/ ).  The problem is that with a good job and a good education the banks will lend you money easily, you will get any credit card you want - and in general life looks good.  Then one day when, as happened to me, your job is gone because the company was bought and ripped apart by a Chinese investment co. you suddenly realize that even if you can get a job within a few months, your little savings will run out very, very quickly.  You take out more loans to cover the short term problems, but now you are trapped and by the time you have a new job it may already be too late.

SentientBeing
SentientBeing

You cannot be an innocent victim if you get a $350,000.00 mortgage when you know that you are unemployed and are unlikely to make a good salary or get an inheritance during the life of the loan. 

The so-called illegal or immoral conduct of lenders is no such thing. Investors want a return on their investment. Lenders lend money which they borrowed. In exchange, they collect interest and keep the spread, based on what they charged and what they promised.

No average investor would beat inflation, or even the economy as a whole, if they only invested in certainties. 

Safety Deposit Boxes are near certainties. They are still not 100% safe. They are not even an investment. Bank accounts, even when you have interest, are rarely a good (profitable) investment, unless you are the bank. 

More importantly, our government's policies created the housing problems. Our policies create a market that would not be affordable if it wasn't subsidized with the word of your government and the knowledge that you will end up paying through your taxes. You cannot efficiently make housing both affordable and safe. Our policies try to make housing affordable to unsafe (not credit worthy) clients.

Government knows no charity. Government knows no mercy. It pledges our tax dollars to make loans affordable. 

Then, to add liquidity to the market you create a secondary market. Then a tertiary market. Then, you really get screwed. Why. Because our government makes promises with the pledge of taxes and its word, and all for the sake of successful groups of voters, politicians, and special interests. 

geoffrobinson
geoffrobinson

Raw intelligence is not the same as wisdom. Simple as that.

JohnMalverne
JohnMalverne like.author.displayName 1 Like

>>> It’s widely accepted that unscrupulous bankers tricked unknowing consumers into loans they could not afford

It is?  I was a licensed mortgage broker from 2004 to 2008 and I'm here to tell you that the consumers knew everything, they were just too greedy to care.  They simply did not care what kind of loan terms they willingly accepted, just so long as they got their hands on that $50,000 cash out for their new car, pool and vacation.

Believe me, nobody tricked anybody because tricking wasn't necessary.  Greedy, stupid people got exactly what they asked for.

SilasBarta
SilasBarta

@JohnMalverne

A mortgage broker assuring us that borrowers (who have a sliver of theexpertise the broker does on this matter) knew what they were gettinginto when they took out loans with ridiculous terms that almostguaranteed default as soon as home prices declined? Seems legit.

sharinlite
sharinlite

@SilasBarta @JohnMalverne I was in the real estate business beginning in the early 1970's...and yes, in those days it was clear to people what a mortgage was all about: 20% down cash; less than 30% on the back end; 25% of gross income to qualify; written verification of income, deposits, assets....then, came the l990's and Clinton and his crew demanded via Barney Frank that "everyone", especially minorities be allowed to get homes....standards relaxed to the point that lenders either made the loans the government insisted on or went out of  business:  every single person/couple regardless of race, age or education understood perfectly what they were getting into...but, the lure of money...cash or a home to "flip" got the greed juices going.  I know, I was there and watched applications with "stated" information  processed by lenders for the approval of the government FNMA, GNMA, FHA, FreedieMac....

eb3188
eb3188

@sharinlite @SilasBarta @JohnMalverne   And they blamed everything on GW!!! I remember Greg Knapp morning show just before Brother Bill Clinton ended his 2nd term. Bill Stated "When I get out of office there will be a BIG SURPRISE for the incoming administration." Is this Part of the Economic Downturn since 2007?? Ya Think!!!!

ThatAnonDude
ThatAnonDude

@2KindsJustice @TIMEBusiness In b-school I wrote a paper on this topic in the broader context. Americans' financial irresponsibility.

StevenKingham
StevenKingham

And at the top of the pyramid we have the geniuses at the federal government with a $16,000,000,000,000 debt.

lairdjim
lairdjim like.author.displayName 1 Like

Intelligence is not information, which is not knowledge, which is not understanding, which is not wisdom.  Education provides information rather than knowledge, but gives the illusion of knowledge, which gives the illusion of understanding and wisdom.  The arrogance of intellectual accomplishment leads people to risk more than is manageable because they are confident in their ability to figure their way out of it.  I should know, I did just that in the uncertain days after the last recession, and lost my business and my shirt.  The most dangerous thing in the world is to believe it when people tell you 'wow you're so smart.'  I've been hearing it from everybody I've ever known since I was a toddler, and I believed it.  At last I have learned, thanks to Adam Smith and Socrates, that the smartest person in the world can still be an utter fool, if he believes his own hype.  Which brings me to President Obama...

sharinlite
sharinlite

When they were fed the Kool-aid starting in middle school about "social justice", they believed every word.  Now, reality rears its ugly head looks them straight in the eye and says:  "you shoulda learned the math: 2+2=4 not 6"...You can't borrow $3 dollars for every $1 you spend and not fall of the cliff. 

segesta65
segesta65

The article never says what the "unmanageable debt" really was. I bet it's student loans, which are in an enormous bubble right now.

sharinlite
sharinlite

@segesta65 School, house, fancy cars, clothes, jewelry and expensive eating places....not to mention sunning in Spain?  After all O and his fam did!

earthourequity
earthourequity

Who is responsible forro lending money? Who is suppose to do risk analysis to lend money? I think the bankers -so lets no bit around the Bush-

StevenKingham
StevenKingham

Don't you mean "the banksters", maaannnnn? You're bold invoking Bush when your messiah has $6,000,000,000,000 smeared on his face with a broken cookie jar in front of him.

eb3188
eb3188 like.author.displayName 1 Like

Book learning and survivor skills are like comparing rocks to apples. Unfortunately some don't have the basic skills which require actual manual labor.

JerryHowe
JerryHowe like.author.displayName like.author.displayName 2 Like

A high level of formal education does not eliminate bad financial judgement. Many times it is based on the level of emotional intelligence which unfortunately cannot be purchased. 

LearnBonds
LearnBonds like.author.displayName like.author.displayName like.author.displayName 3 Like

@GRSblog A college degree comes with raised expectations of future earnings. Unfortunately, past returns does not equal future performance..

tjslater
tjslater

@philosophybites depends on the type of education I suppose. Many people get degrees in subjects that have zero market value, therefore..

GfactorFriend
GfactorFriend like.author.displayName 1 Like

@TIME @TIMEBusiness tell me about it. 13 years later I still have a student loan hanging over my head!

Equateall
Equateall

They know banks waive off some? @TIME Study: The highly educated have the biggest debt trouble | http://t.co/xm8SATAv (via @TIMEBusiness)