October 18, 2012
College Educated Take On More Debt
Americans with college degrees are more likely to overuse their credit cards, home equity loans and other debts than are people who didn’t attend college, according to research in the latest International Journal of Consumer Studies.
“I was really expecting the reverse,” Sherman Hanna, a professor of consumer sciences at Ohio State University in Columbus, said about the results of his research, conducted in conjunction with Ewha Womans University in Seoul and the University of Georgia in Athens.
The study also reveals the increasing fragility of Americans’ finances, particularly in the run-up to the 2008 financial crisis when overall debt levels surged amid what Hanna called a “democratization of credit” that made it easier – critics said too easy – to borrow.
The percent of all U.S. households with monthly debt payments exceeding 40 percent of their pretax income rose from 18 percent in 1992 to 27 percent in 2007. (Consumers have slashed their debt during the recent recession.)
Based on education levels, Americans with a bachelor’s or graduate degree had more than a 32 percent likelihood of being heavily in debt. That compared with 24.5 percent for people who graduated from high school and did not attend college, according to the study, which tracked U.S. households from 1992 through 2007. To make their comparison, the researchers controlled for the effect of incomes.
The researchers designated households in their sample as being heavily in debt if their monthly loan payments and other debt obligations exceeded 40 percent of their pretax income. That is a high share of income to devote every month to paying off loans, rather than buying groceries, saving for retirement, or utilities.
Soaring house prices and bigger mortgages played a major role in throwing many households into debt. The near collapse of the global financial industry was triggered by a cascade of defaults on subprime mortgages. Brokers for these risky home loans frequently targeted minorities and recent immigrants, who are less likely to have college degrees.
But they weren’t the only ones who piled on debt. Amid confidence the housing and stock markets would continue to climb, homeowners often used the growing equity in their houses as piggy banks or traded up to more expensive homes, which they financed with “jumbo mortgages.”
Hanna suggested that his counterintuitive finding – more education means more debt – may partly be explained by the greater optimism that college graduates may have about their futures and employment prospects.
But the findings study may throw cold water on arguments that more or better financial education “will solve all our problems, if we just point things out to people and educate them,” he said.
“That simplistic advice,” he added, “seems a little bit limited.”
Debts included in the study’s 40-percent debt threshold included loans for cars, homes and home improvements, pension loans, lines of credit, credit card and other financial obligations. The researchers counted rent payments as a type of “debt” obligation in order to put renters on an equal footing with homeowners. They used data from the Federal Reserve’s Survey of Consumer Finances.