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Financial Planning > College Planning > Student Loan Debt

Debt is (a) dangerous (b) lucrative or (c) both?

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(Bloomberg Business) — Debt can feel like an anchor tied to your feet. Credit cards and payday loans can drown borrowers in interest charges, student loans can ruin graduates’ post-college plans, and underwater mortgages can trap homeowners.

Debt can also be a buoy. A student loan can help workers go back to school and get better jobs. Mortgages can help families build home equity and, ultimately, wealth. Even a credit card can come in handy in emergencies. Pulling out the plastic may be the only way for a cash-poor worker to repair the car that gets her to work.

Americans’ love/hate relationship with debt is on full display in a new report by the Pew Charitable Trusts. Most everyone uses debt, the study finds, but we also judge each other for overusing it. Perhaps surprisingly, the most enthusiastic about debt are older Americans. 

That could be the wisdom of age. Pew’s data do suggest debt isn’t so dangerous when used responsibly. The study looked at the baby boomers who have the most debt. The top third of the generation by debt have a median load of $200,000, $162,500 more than the median boomer overall, but these especially indebted boomers also have a median net worth of $298,500. They’re worth more than twice the median boomer and earn 68 percent more.

The “silent generation,” born 1928 to 1945 and now mostly retired, have the least debt of any generation, a median load of just $3,540. But that’s largely because they’ve already paid off their debt. The third of that generation with the least debt, a median of zero, have a median net worth of $637,000.

But while many members of the baby boom and the older silent generation took out debt while also building substantial nest eggs, the data suggest that younger Americans haven’t been as lucky. One problem was the housing bubble, which inflated and deflated just as Generation X was entering their prime working years. When the boomers were, on average, 34 in 1989, they had, adjusting for inflation, $52,897 in debt. When the middle of Generation X turned 34 in 2007, they had an inflation-adjusted $118,391 in debt. Most of that increase was housing debt. 

Will debt eventually work the same trick for the younger generations as it did for boomers and their parents? Let’s hope so, because young people are hardly running away from it, the Pew data show.

Millennials’ median household debt load is $46,000, about the same as their median income. Gen X has a median debt load of $103,800, 53 percent more than their income. Overall, the most common kind of debt is a mortgage, held by 44 percent of all households. But 39 percent have credit card debt, 37 percent borrowed to buy a car, and 21 percent owe money on student loans. 

All that makes it odd that Americans are so judgmental about others’ use of debt, and anxious about their own. Eighty- five percent of the respondents say “Americans use debt to live beyond their means,” and 79 percent say “Americans do not usually use debt in a responsible way.” Maybe they’re projecting their own worry onto other people: 69 percent say “debt is necessary, but I prefer not to have it.”

There is dangerous debt: Frivolous credit card spending. A mortgage used to buy more home than the buyer can afford. A student loan that bought a useless or uncompleted degree.

But Americans, particularly young families who are starting out, should worry a lot less about debt if they are using it responsibly and carefully. In many cases, debt can be a powerful tool for building careers and wealth.


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