Are Young People Too Afraid of Debt?

Following the Great Recession many young people have become not merely respectful of debt, as we would wish; but fearful of it, which could set them back.

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Is debt bad? A.P. Giannini, who popularized the home mortgage a century ago and later founded the Bank of America, didn’t think so. Neither have the countless working-class borrowers who over 100 years have been able to get ahead faster and live better because of Giannini’s breakthrough product: the consumer loan.

Yet in today’s economy it seems more folks have gotten behind, not ahead, through easy access to credit. In a recent poll, 40 million Americans said they were feeling serious stress over the money they owe on their credit cards, house, or car. Something went haywire. Kids have seen the carnage, and now many young people have become not merely respectful of debt, as we would wish, but fearful of it, which could hurt them in the long run.

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Certainly, fear of debt encourages sound practices like paying with cash, paying off credit card balances every month, living within your means and keeping borrowing to a minimum. All good stuff. Part of managing debt is eliminating it in due course. But should you avoid debt at all costs? That might be going too far. There is nothing wrong with the smart use of credit to reach a goal like home ownership or a college education.

Patricia Seaman, director of marketing and communications for the National Endowment for Financial Education, worries that recent experience has left many young people with a warped understanding. “The main message is that borrowing gets you in trouble,” she told Fox Business. “It’s not a complete picture, but that’s what teens have picked up.”

So, for example, at a time when young adults with careers probably should be eager to set up new households, they are instead renting or living with Mom and Dad. Real estate is more affordable than it’s been in many years. Some troubled markets still look like a risk. But many are stabilizing. Goldman Sachs predicts the housing market is hitting bottom and will rise 30% over the next decade. Interest rates are mind-bendingly low. Yet the young fear a mortgage. Debt. Bad.

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There’s been no shortfall in borrowing for college; student loan balances are pushing toward $1 trillion. Still, fearful of the indebtedness that often comes with higher education, some now argue that college should be avoided. Yes, it’s high time to bring sanity to the student debt explosion, as President Obama has pledged. Students need to be smarter about how much they borrow and what degree they pursue with borrowed money. But in general you’re better off with a degree than without one even if it means getting a loan. Graduating typically is worth hundreds of thousands of extra dollars in lifetime earnings.

I’m all for careful debt management and a debt-free existence as soon as it makes sense. But most individuals will need to borrow at some point in their life, or risk short-changing their future. Rather than give kids the impression that all debt is bad, we should help them differentiate between good debt and bad debt, and to understand how debt works.