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Passing Down Bad Debt

America's debt crisis is only getting worse

America's debt crisis has been steadily rising over the past decade, but in the last quarter of 2016, it made its biggest jump yet.

The Wall Street Journal reports:

"Total household debt climbed by $226 billion in the final three months of 2016, according to a report Thursday from the Federal Reserve Bank of New York. Total household debts are now just $99 billion shy of the all-time peak of $12.7 trillion set in the third quarter of 2008 just as the banking system began crashing down. The New York Fed estimates that debt is highly likely to set a new record in 2017."

JOSH ZUMBRUN - Wall Street Journal

These numbers tell me that there's a gaping hole in America's financial literacy, particularly in people's understanding of debt. The poor are getting poorer, and falling into more bad debt as they struggle to break free from poverty. And what's worse, they are passing down this cycle of bad debt to their children, creating a crisis that shows no signs of stopping.

Bad debt

Robert wrote a few weeks ago about why debt trumps savings, but there's a big difference between the good debt that he was talking about, and the bad debt that is currently drowning most of America's middle and lower class.

Good debt makes money for you. It involves taking out a loan or using Other People's Money (OPM) to invest in assets that pay for themselves.

On the other hand, bad debt takes money out of your pocket, and spends it on liabilities like a car, a mortgage, and material items like clothes and electronics.

The problem is, most people graduate school with very little financial education, and begin chasing the American Dream the only way they know how - by racking up a lot of bad debt. They want to buy that house, that car, and have that lifestyle they always dreamed of. So they max out their credit cards and take out loans in order to have it all.

If only they had a little more financial education, they might be able to avoid bad debt by purchasing assets with good debt and generating passive income that will help them become wealthy.

Unfortunately, as we all know, students aren't getting this vital financial education in school, so they are left floundering as they enter their adult lives. And this debt crisis is getting worse, starting to affect students even before they leave school.

Student debt

According to the Wall Street Journal, "the biggest force driving household debts higher over the past decade has come from the rise of student loans and auto loans."

Student loans are growing every year, putting recent grads at a huge disadvantage as they start their adult lives. "A decade ago, there were less than $500 billion in student loans, but as tuition rose and growing numbers of students borrowed for college, the sum surpassed $1 trillion for the first time in 2013 and stood at $1.3 trillion in the fourth quarter."

This is where many people run into confusion. A lot of people believe that student loan debt is good debt because receiving more education can help students get ahead. While that may be true in some cases, student loan debt still falls under the "bad debt" definition, as it is debt that takes money out of your pocket. Plus, a college degree is not a guarantee of being able to pay the loan back.

Many of these students, with a new diploma in hand, look forward to a bright, fresh future, only to be crushed by the reality of their debt. Suddenly, a shadow is cast over any future plans. Instead of being able to invest, buy a home, start a nest egg, or invest in retirement, they spend the first several years of their adult lives using every spare dollar to pay off their debt.

This slippery slope can also cause many new adults to fall into other kinds of bad debt, making it plain to see why the wheel of bad debt keeps turning.

Gen Z has no idea

What's worse is that this alarming trend shows no signs of getting better.

A recent survey conducted by found that "68% of students said 'they literally knew nothing' about student loan payment or refinancing services available to them after college."

The next generation has no clue how to navigate the first big financial decision of their lives. They blindly enter student loan agreements without understanding how it will affect them years down the line. They simply don't have the right education that would allow them to make a smart and conscious choice.

Without this education and knowledge, these students will only carry on the legacy of bad debt that has been passed down to them.

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The only way to stop the cycle

As someone who has dedicated her life to financial education, I am deeply concerned by this cycle of bad debt.

Twenty years ago, Robert's book Rich Dad, Poor Dad lamented the absence of financial education in today's school system. Unfortunately, very little has changed over the past two decades. Today's students still are not being taught the essentials of financial literacy, and it's negatively impacting them before they even leave the halls of high school.

We need financial education in our schools more than ever. Students need to learn financial literacy early before they make life-altering decisions about money. Even just a basic understanding of the difference between good debt and bad debt, assets vs. liabilities, and how to read income sheets, would prepare them for a much brighter future, free of the crushing weight of bad debt.

It's essential that parents begin teaching their children about finances early on. In fact, the earlier the better. That's why Robert and I created CASHFLOW for kids, a board game that makes learning about finances so simple that children can understand it. It's a great way to start the conversation with kids about how money works.

If you're a parent or know a young adult, take the time to talk to them about money. I guarantee you they'll be interested in what you have to say. They aren't getting this education anywhere else, so start introducing them to the basics and help them find the tools to grow their knowledge and end the cycle of bad debt.

Original publish date: February 22, 2017

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