Less than a decade ago, unsustainably high debt fueled the worst recession since the Great Depression, and millions of people all over the globe are still in various stages of recovery. But lest we think the worst is over, consider the fact that world debt overall is now far above the levels it was in 2008, and rising at a rate far higher than income. It appears that collectively and individually, we may be spending ourselves right back into another financial crisis, which could very well end up being worse than the last one.
Where is all this debt coming from?
Among the egregiously overextended are numerous governments – Economist Intelligence said that total government debt has doubled since 2008 to $59 trillion – but governments aren’t the only offenders. Add household, corporate and bank debt, and the grand total was $199 trillion in mid-2014: an increase of 40 percent since 2007, according to a 2015 study by McKinsey Global Institute.
And one of the most dramatic increases has been in United States student debt. According to data collected by the Federal Reserve, outstanding student loans have swelled from to $589 billion in 2007 to $1.35 trillion in 2016, a 130% increase. This leaves 2016 graduates with an average student loan debt of $37,172, a 6% increase from the previous year alone. Graduates’ average earnings for the year are $50,556, which represents a 5% increase over the previous year, and a slight decrease from the $50,900 the average graduate earned in 2007. Despite having done exactly what governments and central banks wanted them to do to help end the Great Recession– take advantage of historically low interest rates to borrow and spend – more than seven million are in default on their student loans, and the economic picture for 2016 graduates overall is bleak.
Students aren’t the only ones whose debt levels are surpassing their ability to repay. Overall, the U.S. debt-to-GDP percentage increased from 217% in 2007 to 233% in 2014. Other countries, notably Greece, Italy, Spain, and Japan, have seen their debt-to-GDP ratios swell even further. In all these cases, the skyrocketing debt levels have left many people with little money left over for spending beyond basic necessities, which can only hurt economies that are dependent upon consumer spending to thrive. Still, governments continue to hold historically low interest rates to encourage spending, despite the fact that doing so sends a clear vote of no confidence in their economies.
Even the student debt crisis isn’t insolvable
The U.S. government could make student indebtedness much less of a burden by taking a couple of straightforward measures, as other countries have done. First of all, reducing the interest rates charged for student loans would make a marked difference. As it stands now, the rates applied to student loans are higher than those applied to business and mortgage loans. Some suggest that there is a moral as well as economic imperative to cease treating student debt as a profit center, and that it would be appropriate for banks to charge at or near the base rate that the Fed charges them for working capital, currently near the 5% level.
In addition, extending the time period between graduation and the onset of student loan repayments would significantly ease the burden on students, who typically begin their careers at low wage levels, and for whom the almost immediate burden of student loan repayment cripples their ability to become consumers.
Also consider that student loans in the U.S. must currently be repaid within ten years, with monthly payments much higher than those paid by students in Germany, where the debt repayment is spread out over 20 years, or in England, where repayment of student loans is stretched out over 30 years. In Australia, students get an even bigger break, as they are not required to begin repaying their loans until their income reaches roughly $40,000. Once that income level is achieved, the student pays approximately 4% of their income until the loan is repaid. In addition to offering lower payments and longer payoff time, the Australian model is structured so as to increase or decrease the required payment amount in sync with the debtor’s income. This minimizes the burden in the event of decreased earnings. Students in the U.S. are given no such latitude, and are required to meet the established payments regardless of any fluctuations in their earnings.
In short, the burden placed upon students in the U.S. are onerous in comparison to that which students in other countries face. By treating an educated populace as long-term assets rather than shorter-term profit centers, the economic health of the country would be improved, as well as that of the graduates themselves. Without the crippling burden of massive debt hitting them during their early years in the workforce, students would become more capable consumers, driving the need for additional products and services, and expanding the workforce. It is possible – even likely – that the inevitable surge in the overall economy would reduce the need and temptation to go further into debt, thus avoiding the financial brinkmanship in which not just the U.S., but the world as well, finds itself at the present.
Current global trends aside, what can you do to avoid a personal financial crisis?
Making smart choices can keep you out of trouble
Although student loans are a big albatross for many, particularly in the U.S., it’s pretty clear that other types of debt – credit cards, personal loans, mortgages, small business loans – are problematic for millions who may still be financially fragile from the last global crisis. Debt isn’t necessarily a bad thing, of course, and in fact it’s often necessary to fund a business, make a major purchase or simply to build a credit history. But many people have found to their dismay that debt is a two-edged sword and can quickly become unmanageable if not handled properly.
Fortunately there are numerous resources to help consumers avoid problem debt or find a way out of a debt hole once they’re in too deep. For instance, online resources such as loan-comparison site and credit brokers provide much more than comprehensive side-by-side comparisons of lenders; they also include honest reviews from real customers, as well as abundant moneysaving tips and information about managing personal finances.
There is no reason for any prospective borrower with Internet access to make an uninformed choice. Being well-informed is a prerequisite to making intelligent choices about borrowing, saving, investing and anything else that will affect your bottom line. And ultimately that will be good for the global bottom line as well