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The Consumer Culture of Debt and Default

Cut up credit cards bills
A good portion of consumers ignore their debts.

This concept is not only accepted, but is a regular feature of financial blogs and news sites. Default rates are tracked for all types of loans including student, auto, mortgage, and credit card debt among others. Data is compiled each fiscal quarter regarding how many borrowers repay and disregard their debts.

A person can pick up and move to another city or another state, but the inherent truths about money and credit follow. Default has become an accepted part of our consumer vocabulary, but when did consumers start ignoring their debts altogether?

The Last Priority for Repayment

Debt is a part of most consumers’ lives. It can be a necessary requirement in order to live in a stable home, acquire an education, or buy a car.

One of the most necessary and highly contested forms of consumer debt is student loans.

Student loan debt now outweighs credit card debt. Besides mortgage debt, student debt is the second highest form of debt for consumers. Average graduate’s student loan debt will be over $35,200 this year.

But debts, no matter how high, are meant to be repaid.

Cohort default rates (CDRs) on student loans were substantially higher in the late 1980s and early 1990s. CDRs measure the share of federal student loan borrowers who default within a specified period of time (between one and two years) after entering their repayment period.

According to the Department of Education, the cohort default rate peaked at 22.4 percent in 1990. Over the years, it gradually reduced to a low of 4.5 percent in 2003. It remained low for several years and then began to increase steadily. By 2010, the year with the most recent data available for two year default rates, CDRs hit 9.1 percent.

Despite having lower CDRs now than in the 1980s and 1990s, high default is still a large concern for the economy and even for individual consumers. American consumers owe a total of $992.7 billion in student loans.

A recent press release highlighted 60 ways to eliminate student loans without actually paying them. Although consumer education programs are beneficial, it seems unfair to advertise ways around repayment. It seems as if the most direct solution, simply repaying the loan, is no longer even considered.

This reluctance to repay one’s debt could have something to do with how borrowers view student loans.

Arabella Flynn, a consulting researcher, said that student loans are often a last priority for repayment because some borrowers feel “defrauded.”

“Higher education is like medical care, in that it’s something you rather need to have if you intend to live a reasonable life in our modern society, but the cost is far out of proportion to what most people can ever pay back,” she said. “What the institution has given them — the degree — turns out to be of substantially smaller monetary value than was promised, for an extraordinarily high price.”

She explained that federal student loans are given out by the Department of Education as temporary funding used to ultimately contribute to the national economy. An educated population can contribute more to the country.

Due to the nature of federal student loans, Flynn said that the rates of default are likely not unexpected for the government.

“They are probably not surprised [when] a decent chunk of the money never comes back,” she said.

Since borrowers cannot return their education and refute the cost, defaulting is the remaining option.

“It’s not possible to repossess knowledge,” Flynn said.

‘Diet of Instant Gratification’

But student loans are only one part of the larger consumer debt pattern. Most borrowers are bound by debts that include auto loans, mortgages, credit cards, and personal loans.

These forms of consumer credit also see high rates of default.

Daniel Morris, CPA and senior partner at Morris & D-Angelo, does not believe that consumers ignore their debts, but life situations turn out worse than initially expected or planned.

“We have become engorged on a diet of instant gratification,” he said. “Debt is like heroin — a difficult habit to break and cold turkey is frequently the only cure.”

Morris said that the recent years of economic struggle will impact the younger population’s views on debt. Some consumers view lenders as venture capital firms, when they are not. This incorrect attitude causes borrowers to feel less guilty about not repaying their debts.

“They read in the press or listen to the rumor mill about people that never repaid, people who lived in their homes without paying mortgages for two, three, four years before evictions,” he said. “They say ‘why should I be the sucker that repaid it?’”

One such borrower, a social worker who asked to remain anonymous, understands the personal conflict in deciding which debts need to be repaid first.

The 60-year-old, based in Los Angeles, explained that her debt problems erupted after her husband’s untimely death from stage-four colorectal cancer. She discovered many unopened bills that he had not discussed with her. Dealing with the grief from his passing and constant reminders about insurance became overwhelming for her.

“I developed a type of billophobia and over time let piles of mail just sit,” she said.

A recent period of unemployment has cut her funds significantly and now many of her bills are strapped with additional late charges.

The most shameful aspect of her debt is her reluctance to repay debts that seem unjust. One bill that challenged her was a hospital bill for her daughter. Her insurance company did not cover the entire treatment.

“They won’t consider any type of charity of forgiveness,” she said. “I think I am often in this avoidance pattern with bills now.”

The Powerful Stigma of Debt

One significant outlet for high outstanding debts is bankruptcy. Although it cannot solve all debt problems such as those from student loans, it is still an option for many.

But borrowers are not created equal. For some, they do not view bankruptcy as an alternative, even as their last resort.

Yelena Gurevich, a managing attorney with Consumer Action Law Group, said that she must explain to her clients that their credit will get better after declaring bankruptcy.

“I refuse to force anyone to file bankruptcy, but sometimes that is the best option to get someone back on their feet,” she said.

Gurevich said that declaring bankruptcy is still viewed negatively and the reluctance to declare bankruptcy is a “cultural thing.”

“All they see is the stigma behind it,” she said.

When she works with clients from Glendale, a predominately Armenian community in Southern California, she has to explain that they simply cannot afford to repay their debts. But it is not about one minority over the other; it is more about immigrants who did not grow up with the idea that debts could be dissolved.

“It is still strong in the communities that feel that they need to repay their debts in order to be a good person,” she said.

One person who faced the hard decision to declare bankruptcy is Joel Freeman.

Freeman, a marketing communication consultant and freelance writer, said his life has been a scramble ever since his wife was injured and left permanently disabled. After rebuilding his life and his credit, he saw it all tumble once again with the economic downturn.

He dealt with Chapter 13 bankruptcy, worked through four failed startups of other organizations within a three-year span, and moved across the country to pursue work opportunities.

Due to their reduced credit score and inability to acquire financial help, some consumers like Freeman choose to walk away from their debts.

Despite the range of indebted borrowers, Freeman does not believe they fit the stereotype of ignorant and overspending consumers.

“The vast majority of people I’ve met with significant personal debt didn’t acquire it to support a lavish lifestyle, but fell into it because credit spending was their last resort,” he said.

Pointing Fingers

If debt is so prevalent in the American culture, is there a scapegoat that can be blamed? Some experts believe so.

Todd Tresidder, financial coach and founder of FinancialMentor.com, attributes the housing crisis as a major turning point. During this period of time, a “shift of consciousness” occurred.

“It used to be a real negative to walk away from your debt,” he said.

Nowadays consumers are comfortable with walking away from their homes, but retaining their credit card debts. He said there is no negative emotion to losing a home anymore.

“It’s a mundane issue for people to talk about walking away from their house,” Tresidder said.

Gurevich believes the negative outcome is due to improper financial education. She said that large debts, which cannot be repaid, are either the outcome of poor personal characteristics or a lack of education.

She said that a consumer, who believes they can put $20,000 on a credit card, has poor inherent personal characteristics. But someone who lets their smaller debts grow due to late payment is someone that is lacking proper education.

“They are not educated on the concept of income and expenses,” Gurevich said. “If they weren’t taught that, it’s hard to learn that after the fact.”

Beyond economic factors, and limited education, Tresidder said that financial issues are caused by life patterns and habits.

“They are mirrored images with how they live their lives,” he said. “The issues that debt clients deal with are simple. The human element makes it complex.”

Although he no longer deals with indebted clients and focuses on wealth management, Tresidder said that staying out of debt is more about a consciousness which extends further than simply having a budget.

“Budgets don’t work for the same reason that diets don’t work,” he said explaining that both diets and budgets require people to discipline themselves for something they do not want to do.

Other experts put the blame on lenders and the increase of credit availability.

Flynn agrees that the concept of money has changed with the advent of credit. She said that before credit existed, consumers would have to save in order to purchase a wanted item. Now, you can purchase it quickly and worry about repayment later.

“Humans are exceedingly bad at forecasting how life will go over any significant length of time,” she said. “Then life with all its manifold emergencies happen, and suddenly there goes your plan.”