Generation Debt: The Good, the Bad and the Ugly

by William Richards

NEW YORK (MainStreet) --Indebtedness is a power relationship; one side has it, the other doesn't. A cynic will see the debtor as a serf tilling someone else's land. A naked capitalist, on the other hand, will see the debtor playing a supporting and necessary role the psycho-drama of our national economy.

Debt is a much more nuanced beast. As something so intrinsic to economics, it represents equal parts financial opportunity and millstone. And, that's why we distinguish between good and bad debt.

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It has something to do with debt's cause--a small business loan (at 4-8%) is surely nobler than that a vacation to Key West expensed to your credit card (at a variable interest rate north of 19%). It also has to do with debt's intentions. Money-lenders are in business to lend you money, plain and simple, regardless of your best (or worst) judgment about how to spend and repay that money.

Student loans are the ultimate in good debt, at least historically. Your blue ribbon diploma should indicate, or so the lender believes, that you're going to be a productive, educated wage earner who pays down the principal. That's a good, economically supporting role to play, all things considered, because the promise of prosperity leaves you free to wrap yourself in other kinds of debt--good and bad--over the course of your life: home mortgage, credit cards, and then loans for your own children to attend college.

Student Loan Debt and the Diminishing Retirement Dream

If you're 20 years out of college, though, the underlying assumption that you'll play this supporting role is not as true as it once was--particularly if you're struggling to pay your student loans.

Student loan delinquency rates are up 50% since 2005, according to FICO Labs, and two-thirds of national student debt is owed by adults under the age of 40. Saddled with hundreds of dollars of student loan payments per month, Gen X- and Y-ers and Millennials do not fit the model of so-called productive wage earners--particularly if they can't free up capital for a down payment on a home or gain access to credit.

"The issue with student loans is what the consumer is getting in return," says Todd Balsley of GL Advisor, a Waltham, Mass.-based consultancy that helps those with graduate degrees to plan for future goals and present debt loads. "If you have a student taking on $150,000 of debt with little or no job opportunities when they get out," he says, "that's a huge issue."

And, no income means no 401(k) or IRA contributions, much less spare emergency cash under the mattress.

For that reason, student debt is also redefining retirement--that nebulous future condition when we're all supposed to be free and happy, living off a lifetime's smart choices.

But, let's face it: retirement as we know it is a 20th century invention. The idea that one could plan for a 15- or 30-year window of golfing, crossword puzzles and trips to see the grandkids--all the while covering monthly bills--isn't quite ludicrous. That would be an uncharitable view of a very real aspiration for more than three generations of Americans.

It is, however, changing.

"We are seeing a transformation in the retirement income model," says Kathy Weatherford, president and CEO of the Insured Retirement Institute (IRI). "Employers have shifted from offering traditional defined benefit pension plans to defined contribution plans, such as 401(k)s. In doing so, the risks associated with these plans--including investment risk and longevity risk--have shifted to individuals."

Weatherford notes that this transformation is also about uncertainty. Entitlement programs like Social Security and Medicare continue to be under the microscope not only for budget hawks but also for the millions of Americans approaching those magic ages of 62 and 65, respectively. What will entitlement programs look like for the Boomers in 10 or 20 years? And, what will they look like for Gen X-ers who may be in their prime earning years, but also in their prime debt years.

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Last year, IRI concluded a comprehensive study of the retirement attitudes of Generation X-ers and found that two-thirds were nonplussed about their retirement prospects. IRI's "Retirement Readiness of Generation X" notes that the recession has prompted 15% of Gen X-ers to withdraw from their 401(k) plans and 23% to stop contributing to their retirement accounts altogether. Those diverted funds, says Weatherford, map onto the difficulty claimed by Gen X-ers in paying for essentials such as food, gasoline and medicine.

"Generation Xers are woefully under-saved for retirement, but to turn things around and get them on track for a secure retirement, education will be critical," she says. The irony is that education got Gen X-ers into debt in the first place.

That aside, a re-education on personal finance may help mitigate the sense that retirement is a fait accompli. But, a reappraisal of what we consider "good" versus "bad" debt may also be required.

"From a planning perspective, the assumption is that education is always going to advance the individual and improve their situation," says Balsley. "As a student, you don't think about the consequences of debt, but those consequences appear very quickly after graduation."

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Have student loans left the "good debt" category forever? Sure, they have a lower interest rate than, say, a credit card. But, most people will be indebted for a much longer time than they would with a credit card. And, sure, if your debt is held by the government, you can have the remaining balance forgiven if you've been a public school teacher or worked for a qualifying non-profit for a period of time. But most people fall outside of that narrow path.

Perhaps a third category is in order for student debt. Neither good, nor bad, student debt is like that formerly awesome tattoo you got, well, in college.

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