Debt: Americans, not the federal government.

We frequently hear about the $20 trillion debt of our federal government. Why isn’t there greater outrage, ask you? Because, answer I, Americans are not much better about debt than the federal government.

Do you remember the “sub-prime mortgage crisis,” also known as the “debt crisis,” or the “financial crisis?” Of course you do. It was all about unpayable debt and it was a mere 10 years ago. We all lived through the aftermath. So what is the status of “debt” today? Let’s take a look:

As you can see mortgage and home equity loans (HE revolving) account for a bit more than 70% of American family debt. The total is more than $13 trillion (more than $40,000 per man, woman and child). The federal government is still the winner, but Americans are spendthrifts, as well. And, by the by, check the “peak debt” in September 2008 when we had the financial meltdown and compare it to today. Comforting?

However, the next-largest category isn’t auto loans or credit cards. It’s student loans. Note, as well, what is happening to student loan debt (the red band). It is clearly the winner when it comes to areas where debt is rapidly increasing. It is also the winner by far in defaults (and, importantly, nearly half of debt is held by students who aren’t required to make payments yet because they are still in school, unemployed, or otherwise excused). Therefore, those individuals do not yet contribute to the “delinquent” pool.

The recession (gray band) clearly was not the cause of the either the increasing student loan debt or the increasing defaults. This requires a bit more analysis. (And, by the by, delinquent loans are predominantly held by borrowers who never actually got a degree.)

[Source: Blame IQ tests for the student debt problem, by Patrick Watson)

The article by Mr. Watson points a finger at something that would never have occurred to me. Let me state at the outset that I believe education is its own reward. Education debt, however, is not.

Employers want to be sure that applicants for a job are qualified for that job. How do they do that? Today, they do it by requiring a college degree. That was not always so.

[Directly from the Watson article] In 1971, the US Supreme Court decided a case called Griggs vs. Duke Power Co. The subject was employment requirements. Duke’s practice—and many other companies at the time—was to give job applicants an IQ test… The 1964 Civil Rights Act banned pre-employment tests that were not “a reasonable measure of job performance.”

The court ruled that IQ tests were not directly related specifically to the job that was to be performed and, thus, they were  illegal. Further, the Court required employers to prove that their employment tests were necessary for business purposes and not racially discriminatory. Who would want to go into a court to prove that? Thus rang the death knell of “employment tests.”

What replaced “employment tests?” You guessed it. An employer could require that the applicant held a college degree which served much the same purpose as an IQ test. College degrees are a convenient, legal substitute. So apart from whatever the individual studies in their college curriculum, the degree itself has become the credential necessary for employment.

The US Supreme Court effectively bestowed on colleges the status of a monopoly with all the inefficiencies attendant to a monopoly. The federal government unwittingly (or wittingly) augmented the problem. Colleges can discriminate based on testing, something that employers can no longer do.

Roy Filly




About Roy Filly

Please read my first blog in which I describe myself and my goals.
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