Debt happens, but there are ways out

13 years ago Comments Off on Debt happens, but there are ways out

“Some forms of debt are necessary.” At least, that’s why Dr. Edward Blackburne, assistant professor of economics and international business thinks.

This idea seems ludicrous at the outset. However, Blackburne’s reasoning may be a bit saner beneath the surface than might first be assumed.

“There are three types of debt that are permissible and necessary,” said Blackburne, “and those are house mortgages, car payments and student loans.”

Blackburne explained that student loan debt is “acceptable” for several reasons. The first is that there are very few alternatives to student loans.

“Pell grants are becoming harder to qualify for and college tuition and fees are skyrocketing,” he said. “Student loans are a necessary evil for many, but they are worth it.”

The second reason is that, for many students, a college education would be “impossible to bear without such loans. The human capital you are investing in while in college will pay dividends in the form of higher earnings throughout your lifetime.” Blackburne went on to say that “it is better to borrow aid and get an education than to forego a formal education for the sake of staying completely out of debt.”

So why is it that student loans can be considered “acceptable” while other forms of debt, specifically credit card debt, are not acceptable?

“Student loans are designed for people who have no income, while credit cards are for people with an income,” said Blackburne.

“The problem arises when people start getting in debt for things they don’t need, using a credit card for ’emergencies,'” he said. “If you can eat it, drink it or wear it, it’s not an emergency.”

He explained that the reason why credit cards are so easily obtained by students, despite the majority of them lacking any kind of real credit history and so many of them having little to no income, is that “the companies are counting on parents picking up the payments should the student be unable to keep up.”

Then, once students miss payments, they are hit by what Blackburne describes as the real enemy: interest rates.

“The difference is in the interest rates, which are killer. It really makes a difference,” he said. “Those low zero percent interest rates…are a great marketing tool,” he said. “Then after the six month “test period,” the rate varies at 9.99 percent above the prime rate. That credit card quickly transforms from a convenience “for emergencies” into a 13.99 percent rate monster.”

Even situations where students are very well meaning, they can still find themselves in a lot of trouble when using credit frequently. Blackburne proposed the following situation. A SHSU student that has just graduated is bright, motivated and financially responsible. She only has one credit card with a zero balance, and the only debt she currently has is $10, 000 in student loans. Her new career is with a corporation in Dallas so she “reluctantly” charges $3,000 to buy a professional wardrobe and cover some moving expenses. These are, after all, a necessity. She then decides to get rid of her old, junker car and buys modestly: a $24,000 Honda. Her other goal is to buy a house, so she does and (still being modest) buys a three bedroom, brick home in a nice neighborhood for $125,000. She decides that furniture is not worth the extra cost and that it will have to wait.

“By all accounts, she is being frugal. She drives a modest car and lives in a nice, yet modest home,” said Blackburne. “The reality of it is this. She now has $3,000 of credit card debt at 13.99 percent interest, $10,000 of student loan debt at 6.5 percent interest, $24,000 of auto debt at 4.9 percent interest and $125,000 of mortgage debt at 6.25 percent interest. Her total debt comes out to $162,000 at a total monthly payment of $1,592 and just remember, we are ignoring other expenses such as food, gasoline, insurance, utilities, et cetera.”

Blackburne went on to say that even if she diligently budgets $1,592 for expenses and makes minimum payments, she would be debt free in 30 years with a total interest payment of $156,521.

So what should students do who find themselves up to their elbows in debt and three months behind on their $3,000 credit card debt with the interest rate shooting through the roof? Blackburne’s suggestion is creating a budget (see sidebar) and sticking to it and gave several suggestions on how to do so.

“First off, always try and pay more than the minimum payment on the credit card, even if it is just a few dollars more,” he said. “Also, don’t spread your payments out if you have multiple cards. Simply focus on one card at a time.”

He also suggested divying money up for specific purposes.

“Some money experts suggest having envelopes with cash set aside in them for various expenses,” he said. “Have your rent money in one envelope, and your eating out money in another and so on. And when you run out of money in the eating out envelope, no more Subway for the rest of the month. And don’t go digging into your rent envelope, either. Students can save a lot of money by eating in a lot.”

Blackburne recommended that students not overestimate their income.

“So many of them will say, “oh, I’ll just work 30 hours this week instead of only 25,” and then they end up not working that much and don’t have as much income as they projected,” he said.

Finally, Blackburne also said discipline is key.

“Most people will sit down and do an honest assessment of their finances but they do not have the discipline to carry through with it. We are not disciplined at all,” he said.