Lessons learned from the debt trap

I've been following the New York Times' series on Debt Trap. It's about real life stories of how a regular Joe or Jane has dug himself/herself deep in debt. The housing mess, outrageous spending and credit cards are the main culprit. People were booted out of their home as a result of foreclosure. College students amassed unbelievable credit card debts which forced them to file for bankruptcy. Now, let me elaborate the latter case.

The guy in the Debt Trap story finished college carrying with him thousands of credit card debt. He used his credit card primarily for school expenses and daily living expenses such as rent, utilities and the like. He lives in New York and studied Graphic Design in college. By the time he graduated, consolidated debts amounted to US$80,000. This includes student loans and credit card debts. A big chunk of his financial obligations consist of student loans.

In this awful time of recession, jobs are scarce especially those jobs that we aim for. The guy couldn't find himself a job relating to his degree and so, he ended up as a social work intern making US$16,000 a year. With that kind of salary and with the amount of debts he carry and to top it all off, living in New York, he eventually stopped paying all his credit cards and filed for bankruptcy. And, we're just talking about the credit cards, the student loans is another story.

I empathize with this guy's situation but I see a number of wrong decisions, abuse and mismanagement as to how and why he ended up with debts up to his eyeballs.

1. Credit cards -
According to the article, the university profits from the credit card business of the bank. The university gives the bank the list of the enrolled students and in turn, the bank gives them a percentage on the money they make from the credit card debts the student carry. The students who are considered a revolver are regarded the profitable ones. College students, in my opinion, are not in the best position to handle plastics. It is subject to abuse and in no time, they'll find themselves unable to pay their credit cards. Scheming universities should put a stop to this kind of partnership with the credit card companies.

2. Student loans -
The cost of college education in America is expensive. Very expensive, more so, if the student decides to enroll in a private university. Lucky are those who can get in with a scholarship, they only have to deal with the ancillary expenses. Regular paying students on the one hand, have to worry about the entire thing. This brings me to the financial planning of the parents in preparation for their child's college expenses. Have they saved enough for their child's education? As for those students who have to foot the bill for their own college degree, wouldn't it be better to get into a state university as opposed to a private one if finances are a bit tight?

3. Choosing a course -
The guy finished graphic design in college and he was unsuccessful in getting a job in his field. In fact, he ended up as a social work intern which, unfortunately couldn't sustain his financial obligations. Wouldn't it be better to get a degree in the math and science field? A course that would have more career options. A course that would land you a job that is not easily fungible? If you ask me, I can take a short-term course in graphic design without the need to enroll in a 4-year college degree.

We'll find ourselves debt trapped if we don't stop living beyond our means, making stupid decisions and by being complacent. The external factors like the financial crisis affect us greatly only if we are caught unprepared. Again, managing finances is a case to case situation. It pays to be one step ahead of the pack. Read, learn and practice the tips you find in personal finance websites. Offline, there are mentors on the subject. Find them. Our finances is our responsibility, not your partner's, not your neighbor's nor the government's.