A new study shows that prior to the current economic crisis, it was the highly educated people that were more inclined to have unmanageable levels of debt. The percentage of Americans with more than 40% of their income going to debt payments increased from under 15% in 1991 to 27% in 2008.
You would think college-educated people would be less likely than those without a college degree to make this mistake, but the study showed more of them exceeded 40 percent. The study provided some clue as to why this happened–optimism. College educated people with large amounts of debt were more optimistic about future economic conditions. Did they think they were immune to economic problems because they had advanced degrees, so they had less fear when they borrowed? That is the conclusion Sherman Hanna, co-author of the research and professor of consumer sciences at The Ohio State University, reached.
It wasn’t that those with advanced degrees didn’t understand debt as well as those with less education, but perhaps they thought economic conditions would always get better for them.
What caused the economic crisis? There is no one group to blame, but you could probably categorize them two ways: institutions and people. Institutions are guilty, especially those in the sub-prime industry (including the lenders), mortgage security issuers (investment bankers), and rating agencies. Some people place blame on the government’s excessive borrowing, and for not watching the institutions closely enough. At the end of chain are the consumers. We were borrowing too much and not saving enough. Can we blame one group of people more than the others? Some have opined that it was the lower-income and less-educated people that borrowed for mortgages too much.
However, the study found that the debt crisis wasn’t caused by homeowners who took out mortgages, since 35% of renters had heavy debt compared to the debt that 21% of the homeowners had in 2007. They concluded that we can’t blame the uneducated, the homeowners, or the educated.
The study appeared in Consumer Interests Annual and the International Journal of Consumer Studies.
How can I use the information, I ask myself. It provides more information when recession conversations come up. More personally, it forces me to examine my own thoughts about my financial plan. What do you think–comment below, or tweet or Facebook others if you found this interesting.
