Shackled by debt, in ‘free' America

Individualism is a jealously guarded fundamental principle in the West, more so in the US, as opposed to the idea of dependence on any institution, formal or informal.

However, the practice that nobody needs to take care of anybody (except for paying taxes to the State), or needs to be dependent on any institution (except for receiving social security and welfare from the State), has run into serious trouble. It has, ironically, resulted in a slavery of sorts, reversing the basic Western belief in liberty and freedom.

The financial crisis in the US, in its essence, demonstrates how mindless debt can be used to ensnare the entire society in a form of soft slavery.

Scourge of student loans

Let's take the case of American students. Students loans are “investments” by lenders, as these young borrowers, after graduating, are expected to have a future flow of earnings, good enough to cover the loan and interest on the loans. Young students are told that they will not find a job that will assure them a comfortable living, unless they graduate from a university.

Graduation is not possible without college education, which, in turn, is not possible without contracting huge loans. All over the West, student indebtedness is a growing concern. It has caused violent protests in Chile.

In Britain, according to a recent Parliamentary report, rising university fees mean that student debt is likely to treble to £70 billion by 2015. But the scale of problem is far greater in America.

In the US, tuition fees have risen, on average, about 6 per cent a year since 2000 and 8 per cent in 2011-12. American spending on higher education, which is further rising, totalled $461 billion in 2009 — equivalent of 3.3 per cent of US GDP.

The increase in tuition fee in the last decade is over 300 per cent with inflation, by a conservative estimate, increasing more than healthcare, housing and gas. Students have to borrow more than twice what they borrowed a decade ago.

The quality of student debt

The result: about 36 million Americans hold outstanding student loans that will be a staggering $ 1 trillion for the first time! While the numbers vary, depending upon studies and data, the average student loan debt at graduation is anywhere around $25,000. Even before they start their lives, these young adults are submerged in debt, which is an especially cruel burden in an uncertain, lacklustre economy. What is the quality of these huge debts?

One in three Americans with student debt defaults or can't pay on time, thus suffering penalties. Since 2007, the average American family has lost 23 per cent of its worth. Like any other loan, the ability to service these debts and repay them depends on the future earning potential of the students, which is conveniently assumed as uniform for all borrowers.

Research shows that graduates getting a decent job are on the decline. Among college graduates, 9.1 per cent are unemployed, and among teens, 23 per cent. Graduation certainly improves the odds, but does not necessarily guarantee employment. But the loans are guaranteed by the parent as a co-applicant or many times by the Government! Thus, when the loans become bad, the sufferer could be the already overburdened parent or the State itself!

Some argue that the entire debt can be forgiven by the Government. However, that will have far-reaching consequences for the lenders and the Government. Bankers cannot do much when the graduates are not absorbed by the market; nor is the government enthused about write-offs.

Addicted to loans

Fortunate are those students who are able to get a job. But they may continue with their debt burden by taking, for example, an auto loan. Even as pay checks stagnate, auto lenders keep extending loans. The average length of auto loans is about six years.

Once students become wage-earners, they are encouraged to obtain credit cards to get loans, and, sometimes, to service or repay another debt. From here on, the demand for credit increases for various purposes, such as buying a home, gadgets, clothing, eating out and the like — unmistakably eroding personal freedom.

The lender enslaves the borrower in ‘free' America. These millions of Americans who pass by the Liberty Statute in New York everyday will have to spend the rest of their lives working to pay their debts.

Many will never escape the clutches of debt-bondage, perhaps even when they die. One only has to add up all forms of debt in the US now, a mind-boggling $178,000 for every man, woman and child in America.

These individuals will have to earn for everybody — from bankers, to credit-card companies, to Government, to social security payments and finally, if anything is left, for themselves.

The past three decades saw the financial genius in the US at three levels: from discouraging savings to encouraging spending; snuffing out all savings to continue spending; and, finally, moving to unsustainable levels of insanity in borrowing and spending. The huge debt bubble is fast approaching its bursting point. The devastating financial consequences apart, this has created perpetual bondage and stress in society, eroding federally guaranteed liberty.

(The author is a corporate lawyer and a fellow of Institute of Chartered Accountants of India.)

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