What's In Your Pocket? A Graduation Guide For Living In The Age Of Debt

A few weeks ago, one of my friends was sorting a box of stuff that had gotten thrown into the garage prior to a kitchen renovation years ago.  She found an historical artifact that she swears she is going to send me for a future lecture on the recent economic meltdown.  It is a flier from one of those advertising mailers that usually has coupons for a few things you really want (like laundry soap), as well as ads for a few local gardening centers and siding contractors.  This particular ad was for Countrywide Financial, one of the lenders whose dishonest practices figured prominently in the home loan bubble.  Countrywide offered to refinance her home if she just filled out the coupon and sent it back, no credit check required.  "Imagine!" she said to me, as if she had found a poodle skirt in the closet. "Refinancing your home through an advertising mailer!"

But that was exactly how it happened in those days.  And despite everything, that's how it is still happening, except that the banks are shifting their lying ways away from a market they have already destroyed and towards consumers who have not yet had an opportunity to go into bankruptcy.  This market is working class and middle class college students from prestigious institutions who will actually become paid workers (as opposed to the people who take massive loans out for on-line degrees and for profits, who default at the highest rate and often don't get a degree either.) A graduating senior who went to a mandatory financial aid exit interview informed me that, as part of this counseling session, a representative from a major corporate bank was available to explain to them how important it would be to sign up for a couple credit cards to establish a good credit rating.  This would assume, of course, that these students had not already signed up for credit cards from the people who shill these instruments in the student center. 

Part of what amazes me (other than the fact that colleges allow these snake oil salespeople on campus) is how persuasive the banking industry can be in convincing us that what is good for them is good for us too.  Got debt?  Here's a great idea:  you need more! Because actually, paying back a college loan that is the equivalent of one or two down payments on a house, or four or five decent used cars, does not give you a credit rating at all.  This was what I discovered when, prior to buying a house and after having paid back a small but significant graduate student loan, I tried to get a car loan.  Oh sure:  they were willing to lend me the money, but not at a good rate of interest.  Why?  Because I had no credit history, even after having made payments of over $20,000 in principal, interest and fees.

It is this crazy glitch in the system that allows the credit card lady to encourage people who are already massively indebted to take out more loans and not be locked up for the liar that she is.  The only thing more un-American than having a bad credit history is having no credit history: hence, much of the information young people are being given as they exit college in debt is, in fact, aimed at helping them to take on more debt.  We have to remember that this counsel is coming from a business class that contributes gobs of money every year to politicians who howl about a national debt that they claim is out of control, not because of war, runaway medical costs and tax breaks for the wealthy, but because of education and services to the poor, elderly and disabled. This national context makes it particularly bizarre that there is advice all over the Internet (probably written by former English majors now working for Bank of America at $10 an hour) about how to raise your credit score by maintaining a "healthy" amount of debt all the time and paying it off over the full term ("small amounts every month" is the phrase that recurs constantly) so that the banks can haz maximum interest the borrower can demonstrate good consumer citizenship.

So here's the Radical financial aid exit interview for those of you coming out of college or graduate school who are looking down that financial shot-gun barrel:

• Paying off your college loans early saves you lots of money in interest.  This may seem inconceivable to you, but making one extra payment a year will save you thousands of dollars in the end.  Figure out how much extra that is every month (if your loan payment is $500, that's less than $50, or one Saturday night bar hopping in lower Manhattan) and add it in.
• Everyone needs one credit card to buy plane tickets, and to cover some kind of emergency. By emergency, I mean realizing that a new transmission is in the cards, and you need that vehicle to get to work.  A new couch on sale at Crate and Barrel is not an emergency.
• If you are consistently carrying credit card debt you cannot afford to live the way you do.  It is one thing to use a credit card to buy a couple thousand dollars worth of clothes that you will need to start your job; another entirely to be buying your groceries and gas with a credit card while your paycheck dribbles away on other things.  Create a realistic budget, compare it to what you actually spend, and adjust accordingly.
• You don't "need" to buy your home; hence, you do not "need" to build a solid credit rating in your first few years out of school.  You may never need to buy your home.  You may want to buy your home; it may fulfill a lifelong dream of domesticity to own your home; but it is actually not necessary.  In fact, owning your own home is far more expensive than any real estate agent or loan officer will tell you:  yes, the property taxes and the mortgage + the mortgage deduction will come out to less than renting in most places.  But, utilities and energy costs aside, what about the part where a tree falls on your roof, or the old drunk upstairs leaves the bath tub running?  So don't kid yourself that taking on all kinds of new debt following graduation is part of your long-term financial plan.
• Consider getting a second job to pay off your student loans.  One or two shifts a week as a food server, with tips, would actually allow you to double your payments and -- get this -- pay off that debt in far less than half the time, because you are whacking away at principle at an astonishing rate.  The biggest lie about student loans is not the idea that the education you went into debt for is worth having, but that you should be able to graduate and just have a normal life like rich people do that has no pain in it.  Paying off debts often hurts, and requires sacrificing leisure if you are going to do it expeditiously.  But you might want to do that to become debt-free.
• Debit cards are worth it if you pay attention.  If you don't pay attention, your bank will charge you all sorts of fees for using a debit card, but if you do pay attention, you don't have to worry about carrying wads of cash around and using your credit card just because you have neglected to go to the bank.  That said, having an unmeasurable access to your money makes it more likely that you will spend it in unplanned ways.  Cash is better.
• When establishing a bank account after graduation, look closely at smaller banks and credit unions.  Any institution that has to work for your business is going to be more competitive in its services and fees, and credit unions are established for the benefit of the membership, not shareholders.  One thing to remember is that you can change banks if the one you are patronizing doesn't serve you well, although online banking practices makes this infinitely cumbersome.  I have been planning to leave Bank of America for years (the account that I originally opened was at a local bank that was eaten by larger banks in the go-go eighties, and eventually by BOA in 1995) and I have put it off because I would have to re-enter all the payment information for my monthly bills. Dumb, eh? But my point is this:  bank fees change all the time, and banks count on it that you are not paying attention to them.  That extra $35 you are being charged for this or that is a big chunk of that extra student loan payment you want to make every month.
• Suze Orman is a highly grating personality but she is right about almost everything.  One of her, or someone else's,  money management books should be on your summer reading list.  Her basic message is a good one:  show yourself a little tough love, don't indulge yourself with a life you can't afford, free yourself from high interest debt, and you will liberate yourself to make the choices you want to be able to make in life.  You might not become rich -- but you will be dramatically less coercible.  You won't have to stay in a job you hate just to pay the bills; you can save money and support a life doing underpaid labor (like college teaching, for example); you can change careers; you can drop out of the workforce for a few years and raise your kid/travel/try to write a novel.

And while you are at it?  I know this is anathema, but go talk to your parents about money.  You would be surprised what they know, and if you are really lucky they will share their mistakes as well as the things they think they have done right.