Beyond Our Means: Student Debt as a Cultural Sign

In my last post, I tried to explain a series of things about debt and how it functions.  The key points are there and you can refer back to them rather than reading a summary. What I sought to point out is that debt is an odd thing. By going into debt, we end up paying significantly more for a product, say, that we want then the advertised price. Moreover, debt, on a certain level, becomes a serious problem. Defaults can and do occur and these become like dominoes. If I can't pay my bills, the people who are employed by my creditors might start to lose their jobs, etc.

In reality this is a lot more complicated but this basis understanding allows us to look at other, more important and, for me, historically interesting things. Let me begin by saying that debt is a serious problem for a lot of people. You have probably read the stats yourself and so you know that the poorest Canadians are actually getting poorer. What does that mean? It means that the poorest Canadians are going backwards. Far from simply making less money than other Canadians (and so the relative gap between classes widens), they appear to be actually losing money (I got my info from the Broadbent Institute). Debt, IOW, can and does occur for a range of reasons and some of those reasons are simply outside of the control of some people. Stereotypes to one side, losing one's job when the factory closes down, say, is a good way to get into debt fast.

What about saving for a rainy day? The news story I cited in my last post suggests that Canadians are not very good at that and, frankly, that is part of the story I want to tell. Why is that? It is because debt has been naturalized as a good and normal thing. Years ago, a relative who was carrying a lot of debt went to the bank. I was disturbed by their debt services payments (the minimum they had to pay and told them so. IOW, I argued that they were carrying too much debt). Their banker said the opposite: not at all; most people have this much debt. Six months later, the bank refused an application for more credit and ... my relative's business went under.

I don't think the banker was lying. I don't think the debt level was unusual. But I think it is problematic. The naturalization of debt that has occurred in Canada is the product of a series of historical developments. These include:

• The democratization of credit (it is no longer for the upper class)
• The development of a set of national institution that manage debt (including, as we saw in 2007-8, the stock market, insurance companies, banks, credit card companies, etc.) 
• Encouragement by the government 
• A shift in cultural values

It is these last two points I want to talk about. How has the state encouraged debt? Consider a common element of debt: the student loan, as an example. We all know that education is good. (That, at least is the burden of another series of blogs I am writing and a book I am considering writing.) But, how do we finance education? The range of people we need to make education work has expanded dramatically and they don't work for free. We need not only teachers but janitors, people to fix facilities when roofs leak, repair computers, process book purchases (or, more often database and aggregator purchases) for libraries, people to run experiential learning programs, councillors, heck even people to tune musical instruments. 

I don't debate the usefulness of these people. In fact, I think they are good and I see no point in looking back on the "old days" when we did not need, say, councillors. Those were not necessarily good old days and simply closing one's eyes to the mental health issues does not make them go away. Likewise, students are looking for experiential learning opportunities because they cannot get what they feel are labour market ready skills in other ways. Said differently, they want to work and want their education to help them get jobs. I think both are great. I am glad students want to work and I think that education does and should help equip people for the workforce. 

Yet, the finance issue does not go away simply by stating that this is a good idea. We finance public education through taxes but what about higher education? That is financed through a combination of taxes and direct student (or the families of students) payments. It is one way, but not the only way, to finance higher education. Other countries, in fact, finance higher education in a range of different ways that limit the degree to which students (or, their families) pay out of pocket. As tuition rates have gone up, summer jobs and the like no longer cover most tuition and students (or, their families) have turned to loans to cover the difference, which was the concern of my friend (see last blog) that got me started thinking about debt. 

There are a myriad of ways to think about student debt, all of which can have some importance. We can think of the percent of students who leave higher education with debt. We can think about the way debt accumulates the longer one is in school. We can think about the ability of people who complete higher education to pay back student loans. We can look at who holds that debt (are they government sponsored student loans, loans from banks, money owed friends or family members?). 

Current data from Stats Canada, which you can find here suggests that students leave higher education with appreciable debt. Here is a graph from Stats Canada that illustrates this. 

There are not a lot of surprises here. College students accrue less debt, BA students have less debt than those in doctors degrees. And, average debt is appreciable. 

Debt causes all kinds of problems, as my friend has said on his FB post. For instance, those just entering the labour market often have little ability to pay back their loans but, after a brief waiting period, have seriously high payments. Those payments can be the source of mental anguish. That I do not doubt, but they are also the source of other problems. For instance, they limit the ability of new workers to make significant purchases ... unless they can get further loans ... which has implications for the economy overall.   

They also create -- or, rather, perpetuate -- inequality. After all, the wealthy don't need student loans and so enter the labour market in a much better economic position than those who have students loans even if they have the exact same qualifications. One will begin to accumulate capital, say; the other will not and no amount of "saving for a rainy day" can disguise the brute facts of math. 

I use this example to illustrate how student debt can hamper one of the very things it was supposed to facilitate: equality of opportunity. 

If these things are true -- if other countries finance post-secondary education in different ways; if debt can subvert the very aims of what it was supposed to facilitate; if it can hamper the economy -- why do we have it? 

Well, the first reason is that no one said that the economy made sense or that it was a cohesive whole. Indeed, almost by definition a capitalist economy is neither cohesive nor does it make sense. I wrote a whole series of blogs (Myths of Capitalism) to illustrate this.  We should not, in other words, be surprised that one part of the economy is intended to facilitate one aim (say, social mobility; equality of opportunity through education) and another part (or, even the same part) subverts that aim.  

But, there is a more significant reason. Think about what student loans do: they are a way of financing post-secondary education.  That might sound odd.  After all, most people don't think of student loans in that way. But, think about what they do: they are a specific form of debt designed to pay for -- aka finance -- post-secondary education. Moreover, the amount of money that they move into post-secondary education is appreciable if Stats Canada data is correct. If that data is correct and the average, say, college student takes out an average of, say, $7 000/yr in debt to pay rent and tuition, etc., that is a fair piece of money being put into the economy and into tuition. It finances, in fact, students who otherwise would not be able to attend college for want or resources (under the current system). Thus, while I know student loans pay for more than just tuition; the fact is that without them we'd have far fewer college students -- or, university students -- than we now have. I have not done the math, but I'd guess that students loans are nearly essential for the economic well-being of colleges and universities. That is: without them, there would be so many fewer students that the economic stability of higher education would be threatened. 

We do not often add this up, but it is something to think about. The economic stability of our post-secondary system seems to rely on student loans. 

Student loans are, then, a way of having students finance post-secondary education and that is, in fact, their purpose.  And, because these are loans, they are paid back with interest. There may be a break on a rate or some other allowances that make the loan more palatable, but ultimately, there is an interest rate and so that means that simply by getting a student loan to pay tuition, a student is paying more than the sticker price. As I pointed out in the previous blog, debt services charges (interest) mean that you pay more -- in some cases a lot more -- than the price of the item you are buying if you go in debt (via a loan or whatever) to make that purchase. Thus, tuition has increased for sure over the last generation but by getting loans -- made necessary by these vary increases in tuition -- students are actually paying more than the cost of tuition for their education. 

This much is simple loan math and put in those terms it does not sound particularly good. In my view, it shouldn't. In effect, the state is suggesting, through student loan policy, not only that students should finance higher education but that they should pay more than the advertised price to do so. But that still does not explain is why we have student loans. In fact, it turns it into a bit of a question. What makes it even more interesting is that the state often portrays liberal student loan policies as progressive measures. If tuition goes up, someone will say, yes tuition is going up but we will counter that with bursaries and easier access to loans. Looked at in this light, easier access to loans does not look very progressive. It is a way for students to get an education that they would otherwise be denied. 

Except: why should they be denied it in the first place? We have student loans in preference to other forms of financing, because student loans are consistent with the general tenor of capitalism and individualism and the prevent the growth of taxes. Said differently, they keep a significant burden of financing post-secondary education on students themselves ... on the individual. We have them because the state does not want to increase taxes and spend the extra tax money on higher education. And, these loans seem natural and necessary. 

This also tells us something about saving for a rainy day. Student loans go often go to individuals -- students -- who have had no chance to save for a rainy day because they have not worked or at least not much. Student loans ensure that young people begin their adult lives in debt. 

I am picking on student loans not because I think they are a particular evil. But, because I think they highlight some of the general problems with debt. Think about what they do: 

• Seem progressive when they are not
• Ensure that students pay more for education than the advertised price because they have to cover interest charges
• Keep the burden of financing on students themselves (something that is more and more true over the last generation)
• Do little to enhance equal opportunity or social mobility and may, in fact, work against it
• Disguise the fact that we have options and choice with regard to educational financing 
• Ensure that individuals begin their adult lives in debt 

In short, student loans, as a particular form of debt, illustrate some of the odd cultural and economic dynamics of debt. As a sign of the time, they illustrate the odd and contradictory nature of our culture which mistakes self-financing for state involvement, regressive measures for progressive measures, and promotes economic instability in the name of promoting equality of opportunity. In short, as a sign of the times, student loans seem to me to be near perfect ... I just don't like the directions in which those signs are pointing. 

Beyond Our Means: Debt as a Cultural Sign

The CBC recently reported that Canadians have a debt problem.  You can find the story here. This is not news. In one way or another key financial institutions (central banks, economists, chartered banks) have been warning of debt issues for some time. There is a certain measure of hypocrisy to these warnings: the very institutions that, in one way or another, create debt or make their money from it, on the one hand, seem to warning about it, on the other.  That is of some significance and it is a point to which I will return later.   What causes this debt? How does it relate to the history of the Canadian economy? Is it a problem?

Debt is an economic issue, but its development is the product of a series of changes in values (culture) and the way financial institutions function. It is closely tied to consumerism and the expansion of consumerism (in terms of the both depth and breadth) over the last generation. Debt has always been with us. Histories of banking and the social elite, as well as governments, show that there have -- as best as we can tell -- been institutions and networks that carried debt for a very long period of time. Heck, the OId Testament has rules against usury. Today, debt has become a normal feature of life. Most of us expect to be in debt for extended periods of our working life. We don't necessarily call this debt "debt" because we don't like the term so instead we use terms like "student loans," "mortgages." "personal lines of credit," or "credit cards," among others. In short, there has been a dramatic expansion of the ways in which we can accumulate debt, label it, manage it, and pay it back. What I'd like to do in this blog and some others is to explore debt from a cultural and historical perspective. I hasten to add that I am not necessarily faulting debt -- although, to tip my hand, I think there is a lot to fault -- but attempting to understand and address the questions I asked above.

Debt occurs when you spend more money than you have. That is simple and relatively straight forward. I'm not telling you something you do not already know, but just to keep everyone on the same wavelength, let's give an example. Imagine I want to buy a car. I don't have the money so I ask the car seller person for a loan. They give the loan. Overtime I pay it back with a small extra charge. That extra change is, of course, called interest and it is compensation that I give the car seller people for getting to use their money. Because I pay interest, this means that overtime, I end up paying back more than the price of the car.  Moreover this interest is compounded. That is, you are, in effect, paying interest on interest. You can find a discussion of this here if you need a refresher. But, for our purposes, what it means is that you end up paying back more on your loan than a straight calculation of interest might suggest. For instance, imagine that I buy a car for $100. Over a three year period, the compounded interest I would pay on my $100, if the interest rate were 5%, is $116.15. For our purposes, what this means is that the car that I bought for $100 ended up actually costing me $116.15.

You can find a nifty site that allows you to calculate compound interest here.

You can think of interest rates as the cost of money. This is confusing because we often think of money as the way of address costs. But, in an economic sense, this is not strictly true. Money is a means of transaction and a symbol of wealth at the same time. When I get a loan, what I am actually doing is buying money. Why would I buy money? On one level the idea of buying money seems to make no sense at all. Well ... as I have already intimated, we buy money (get loans, that is accumulate debt) for all kinds of reasons so that we can take that money and use it to buy something else (a car, a house, an education, etc.). But, because we had to buy the money in the first place, our purchase of the car or house or education is mediated. We are not directly buying that thing that we want. And, for the moment, let us assume that the thing we want to buy is legitimate. After all, as I have been blogging, there is nothing wrong with education. And, I own a house and a car. I'm not shooting anyone down for buying such things. The point that is important to note is that the purchase is now mediated by a series of financial institutions -- I bought my car from a car seller but secured my car loan (bought money to give to the car seller which made the cost of the thing I wanted to buy go up) from my bank. My example is pretty silly and small but run the compound interest on a 25 or 30 mortgage at even a low interest rate over time and see what happens.  You might be surprised.

It is also important to note that not all interest rates are created equal. I'm middle class and because of that I have access to relatively easy credit at relatively low interest rates. In fact, my bank offers to sell me money all the time. They don't call it that. Like I said, they call it credit cards (increasing your credit limit) and lines of credit and "catch up" loans (remember those!).

It does not take a lot of see why excessive debt can become a problem. Bankruptcy (which can also be called a number of things) can be the product of a range of contributing factors, but it occurs when you owe more money than you can reasonably -- or, perhaps even possibly -- pay back over time. This is a product of the expansion of debt and credit (that is, the amount of money people are willing to sell you). I started thinking about this blog because of comments made on FB by a friend who has some serious crushing debt issues. He is about my age and has large student loans. His repayments on these loans are significant and, like many others, he is having a hard time finding full time employment. That is, he works in the precarious employment market, which guarantees neither regular work nor necessarily good wages. His quick calculations have led him to find himself in a situation that he finds really angering and I cannot say that I blame him (a subject I will get to as time goes by).

Let's play out an example to illustrate this point. If I have a salary of $100.00 per month and I owe $20 of that in rent and $15 of that for groceries and $5 for heat and $5 for utilities and $5 for renters insurance and $5 for a phone ... you can see how my regular bills start adding up really quickly. I have now spent over half my income and I've not paid my car loan or my car insurance or my student loan or the loan for my furniture nor gotten Christmas presents for family or gotten any clothes. Debts can mount for all kinds of reasons because there are so many ways to get credit. In addition to my car loan, I suspect most people have a credit card loan they have accumulated somewhere (they may even have more than one), a line of credit payment; they may need to buy school supplies. If you are a parent, you have a whole bunch of other costs. Furniture loans ... etc.

Debt serving charges (interest = the price we paid to buy that money in the first place that we now have to pay back) in this context starts to become a problem. Thus, in one situation debt is manageable. If I can keep my debt low (say, a mortgage and a car loan), I will be OK and can manage that debt from my income. I might not have a lot to spare at the end of the month but I can keep making payments and, over a long time, the amount I owe will slowly decrease. It becomes a problem when one cannot make payments, that is, one defaults, on loans. On a broader social and economic level, this is manageable if it happens on a modest level. In fact, defaulting on loans happens all the time. Money lending people know this and have it built into their calculations. A certain percentage of people to whom I loan money will not be able to pay me back. As long as it is not too many, the interest the others pay covers over that loss and things go well.

When it occurs on a large scale ... then that is where problems begin.  This is what happened in the US (again, there were a variety of contributing factors) in 2008. A whole bunch of people could not pay the loans on their houses (or, mortgages). Because of this, banks suddenly did not have a lot of money left in the till (and insurance companies that had insured those loans took a huge hit). In effect, the amount of capital (money) in the economy shrunk.

Again, I recognize that sounds odd. How does money disappear. Imagine this situation: I owe the Bank of Sackville $100 at 5% interest over three years, compounded that means that I will pay back just over $116. The bank uses that $116 for a bunch of things but let's assume we have a nice bank and say it is paying its employees with that money. Then I cannot make a loan payment because, say,  I lost my job or I was over-extended and had a bunch of other loans. I am starting to have to make choices between paying my loan and buying groceries for my kids. So, I don't pay loan (I default). But, I took the $100 and gave it to the car company. The bank cannot come and get back that money because I no longer have it. It can come and take my car, but I've now had the car for a bit, it has lost value, and so even if they take,  reselling it will not pay back the money that I borrowed (my debt), let alone the interest that is needed to pay employees. And, what if they can't sell it? Here is how money disappears), the bank had on its books my loan and interest as assets. Assets are the money I (or, you, or the bank) have. While the money was not actually there, because they assumed I would pay it back, it was counted as an asset: we have X amount of money coming in.

Again, this is not rocket science and you have all heard of this and perhaps even done it yourself.  You may have said something like "I don't have the money to buy X now but I get paid on Thursday and so I'll buy it then." When you do that you are counting a future earning (money you have not yet received) as an asset. What happens if you are not paid on Thursday?  That asset vanishes. The same thing occurs with the bank. The money that was on the books (because they lent it to me and I promised to pay them back with interest) was a fiction. The money did not actually exist. I was counting my future earnings as an asset that I would use to pay the bank and the bank was counting my payments as an asset to pay employees, give dividends to stock holders, etc. My insolvency -- my default on my loan -- makes it impossible for me to pay it back and the fiction of its existence is exposed. The money is actually not there. Thus, I guess it does not disappear per se but is shown to not exist.

This is what these warnings are all about. In effect, what the CBC expert is noting and what some financial institutions are saying is that there is too much debt in the Canadian economy, our rates of repayment cannot be sustained, this means people will default and defaults on a mass scale hurt the economy. In my example, what happens to the Bank of Sackville if I default on my loan and they cannot pay their employees?

How does all this relate to culture? What interests me is a couple of things and it is to these matters I will turn in future blogs. How did we think it was good to get into this situation in the first place? Why do we accumulate debt when, on one level, it does not make a lot of sense. How does debt relate to consumerism?

Having Your Power

The sale of NB Power to Hydro Quebec is controversial (in NB) for all the wrong reasons. First, no one who supports capitalism has any reason to be upset at this. I am not trying to make an ideological statement here or win cheap political points for the left. I'm trying to state a fact. Regardless of whether NB Power is a public utility or a private company this is what happens in a capitalist economy: larger companies buy up smaller companies. That is "the nature of the beast": to not like it is to not like capitalism. Second, I might be really wrong in this but I can't help but think that there is some anti-Quebec feelings mixed into this equation. I hope not, but I wonder if we'd get the same type of reaction if the company looking to by NB Power was from Ontario? (A quick footnote, I think we'd get even more negative reaction if the company was American.)

What people should be concerned about is the rationale for this purchase. The NB government wants to sell NB Power because it is loaded with debt and mired in an antiquated pollution making stock. The debt is the big issue. Hydro Quebec will, in effect, absorb something like 25 or 30 per cent of the provincial debt. With the deficit skyrocketing, the provincial government was looking for ways to shed debt. This will allow them to go to the electorate with an economic platform that will not increase taxes and will keep debt servicing charges (interest) lower than historic levels even with increased deficits. In the intermediate run it will make it easier to balance the provincial books and allow this government to claim that they are good financial managers. This sale, in other words, creates  financial space for Graham government and that is its main rationale.

Here is the issue: why is NB Power loaded with debt? The answer is also pretty simple: New Brunswickers have not wanted to pay the full cost of their power. Here is the problem: if you don't pay the full cost, the price of power doesn't magically sink. Someone else has to pay that cost and that someone else, in the case of a provincial crown corporation is the taxpayers or ... exactly the same group of New Brunswickers who don't want to pay the full cost of power. In order to keep power costs low for political reasons, the NB government (both Liberal and Conservative) have allowed cash shortfalls to be run up as debt, rather than increasing taxes to pay for them. In this sense, NB taxpayers traded short term lower power costs for long term debt in a crown corporation, that is a corporation that is owned by the taxpayers.

You can think of it this way. Imagine your ... let's say car payments go up from $100 to $110 per month. Now you don't want to pay this extra amount and so you create a company, owned by your family, to manage your car payments. You tell that company that they cannot increase your car payments beyond the $100 at which they now stand. But, the cost of the car is actually $110 a month. So what does this company -- remember you created it and you own it; that is why you can tell it not to increase the car payments and it has to do what you say -- do? It borrows the money. The bank, of course, does not  just lend you this money gratis. It charges an interest rate. I'm making this up so let's imagine that the interest rate is 10%/month to keep it simple. The first month, the company is in debt only $10. It is a small amount; no one notices and not a drain on anything. After one month, however, it is now in debt $11 because of the interest rate and in month two you add another $10 to that debate because another car payment is due. So at the end of month two, this company is in debt $21 in revenue shortfall and interest. Now add 10% and that is increased to $23.10. Let's do one more month: 23.10 + 10 = 33.10 + interest = 36.41.

So, in order to keep your car payments lower then the cost of those payments, the end result is that at the end of three months, the company you set up to manage payments is $36.41 in debt, or one third of pay. And, here is the kicker: $6.41 of that debt are interest. It has been accrued as the cost of service on month your company borrowed. It produced nothing so in effect there is nothing to show for you. One could argue, and I would, that there $30.00 of that interest represents the real cost of the car and so you have driving the car to show for. However that other $6.41 produced nothing at all. No roads, it is excess what one would have paid for the  car had one gone along. Now, imagine that your car needs a repair. You've already told that company that it cannot charge you more then $100 a month so it goes out and borrows the money for the repair and this ads another $5 to your bill. And on and on and on .... The only problem is that you own the company that manages your car payments. After a year, this company is deeply in debt with no way to pay that debt. I don't have good math skills so I can't say quickly how deeply in debt it would be but it would have $120 in payments along, but all that interest compounded, plus repairs. The bill would likely be over $150.00 or more than a  car payment and a lot of that would have been accrued as debt serving or interest.

The real problem is that you've lost track of things or weren't paying close enough attention and are shocked, now, to find out at the end of the year that you have a big honkin' bill to pay and forget that the reason you have to pay it is because you didn't want to pay smaller bills as you went along. What's worse, let's imagine that the economy has turned bad and while you have not lost your job, you did not get your hoped for raise this year and your hours have been cut so that the company you work for can balance its books. So, now you have a big honkin' bill and no way to pay it. What is more, the interest on the debt you've run up is greater than the difference of the payment that you did not want to make and  the real pay. In my example, remember, you were trying to avoid paying an extra $10 a month. Well, if your company is $150.00 in debt, the interest is now $15/month. In other words, you're paying more in interest then the cost of originally biting the bullet and paying the extra tab in the first place.

This is what happened to NB Power and this is why this sale should be controversial. It is not whether or not someone else  can run NB Power more efficiently or any "economies of scale" that might or might not come from being part of a larger company. The issue that we should be thinking about is why is NB Power so debt laden. In effect, no one wanted to give New Brunswickers the bad news: there is no free lunch. If you want power, you have pay for it. Instead, government after government said "well, we'll make NB Power swallow the bill" as if NB Power were not owned by the taxpayers. In other words, to give short term lower cost power, the government said "you can pay more -- and much more -- in the longer run by having NB Power run up a debt" and New Brunswickers, for one reason or another, said "yes, we like that deal." Maybe they were ill informed; maybe they thought "economic growth will solve the problem in the longer run;" maybe they thought NB could sell power to the US and make a profit (although exactly where this power was to come from is not clear); maybe they just didn't know any better.

There is a further problem here. In lowering the cost of power, NB has actually increased consumption and whether we should have or not is another important issue. Consumption of power is bad for the environment. And so in keeping power costs low, NB has actually worked against environmental protection by putting more pollution into the environment than would have been the case.

These are, in my view, the issues we should be thinking about with regard to this sale.