Drowning in Debt

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Drowning in debt
Young professionals are living beyond their means and paying for it

by jason soriano

It was 2003, and no one––especially those who knew them well––could have predicted the financial misery that awaited Lauren Traubenberg and Jason Schmick. By all accounts, the attractive young couple was responsible, hard working and successful beyond their years.

Having already completed one degree at UW-Madison, Traubenberg was midway through her second bachelor’s degree, this time in nursing, at Edgewood College in Madison. Even after six long years of classes and endless hours in the library, Traubenberg’s confidence was unshaken. After all, she had known for years she wanted to enter the challenging and well-paid field of nursing, and two more years of school weren’t going to stop her. “I just wanted to get life started,” Traubenberg recalls.

Schmick’s prospects were equally bright. A talented Web designer and computer software expert, Schmick was the office manager for a prominent mobile disc jockey company in Wisconsin. In addition, his professional success attracted a number of freelance jobs and prospective employers. The two lived together but rarely saw one another, with Traubenberg taking 15 to 18 hours of credits per semester and both working more than 45 hours a week. When they did manage to squeeze in a quiet dinner alone, the two talked about marriage and home ownership. Together they seemed unstoppable.

Less than a year later, Traubenberg realized she and Schmick were on the verge of financial collapse. Credit card debts totaling more than $15,000 threatened to destroy every aspect of their lives. Their credit rating, job advancements, a home loan––even their relationship showed signs of strain.

“I realized we were in a lot of trouble,” Traubenberg says.

Their families questioned how two intelligent, hard working young professionals fell so far into debt and how such serious financial problems escaped their notice. The answer is simple. They lived beyond their means and spent more money than they made. The simple calculations that drew this couple into debt draw thousands of other young professionals into such dire circumstances every year.

Can there be a “good” debt?
Debt. For many people it’s a dirty word, an unpaid financial burden weighing heavily on their daily lives. It makes sense to blame debt for all of life’s troubles, but for many college graduates, debt is the only way to get a degree. Nationwide, tuition increases outpaced economic growth and government grant increases, so students who needed grant money the most received smaller percentages of their tuition each semester. This necessitated more borrowing. As a result, almost 64 percent of all college undergraduates in 2000 borrowed money for college, making loans a necessary evil for many students. But the payoffs for investing in a degree are huge. According to the U.S. Census Bureau, an individual with a bachelor’s degree earns almost $1 million more than someone with only a high school education over the course of a lifetime.

“Student loans themselves aren’t considered bad debt,” says Kathy Estock, the marketing coordinator at the UW Credit Union. According to Estock, many long-term investments like college or buying a house often require a person to enter into a debt of some sort.

When your eyes are bigger than your wallet
But even if these “good debts” can’t immediately hurt a young professional, some other financial choices early in a professional career are not as benign. Michelle Manson, a 23-year-old graduate of UW-Madison and a registered dietician, understands the temptations a new career and “high salary” can bring.

Raised by a fiscally conservative father, Manson lived paycheck to paycheck in college and even moved back into her parents' house after she graduated to save as much money as possible. So when she was hired by a nursing home for about $35,000 a year, she was astounded.

“I had a grown-up salary with no expenses and no financial responsibilities,” Manson says. She’s not alone. Some starting salaries seem so high compared to most minimum wage college jobs, that many young professionals try to live a lifestyle they can’t really afford.

At first, Manson splurged. She bought a new digital camera and “updated her business wardrobe” to keep up with the rest of the corporate world. Thankfully, Manson reigned in her spending habits when she decided to put a large chunk of her paycheck toward the purchase of a condominium.

“I never had a choice,” Manson says. “I refused to carry a balance on my credit cards, and I couldn’t afford to spend any more.”

While Manson’s conservative attitude prevented her from living beyond her means, Schmick and Traubenberg were not as fortunate. Between going out with friends, furnishing their apartment and paying for car repairs, the couple racked up large debts they were unable to pay off immediately.

Schmick also observed many of his fellow programmers spending money they didn’t have. “Some of my friends who said over and over how broke they were would just randomly spend hundreds of dollars on a new [computer] program,” he says.

Kathryn Crumpton, general manager of Consumer Credit Counseling Service of Greater Milwaukee (CCCS), has many clients with similar stories.

“A lot of students have this ‘I deserve it’ attitude once they graduate,” Crumpton says. “A lot of them expect to get that great salary right out of college, but they’re really making squat starting out.”

Seventh Level of Plastic Hell
Intelligent, hardworking consumers like Schmick and Traubenberg perhaps should have realized earlier that their spending outpaced their salaries. But they are not completely to blame for living beyond their means. After all, money never really changed hands.

At first the pair paid their bills with money from their salaries. Then other bills arrived. Car payments, insurance bills, textbook bills and even “good” debts like student loans accumulated. When this became too much to handle with their paychecks alone, Traubenberg paid off the remainder with a credit card. When one card maxed out, she signed up for another. By the time Traubenberg realized how bad her finances were, she had seven credit cards.

A recent study by student loan provider Nellie Mae found that on average, 56 percent of all graduates carry at least four credit cards and an average balance totaling $2,864. Financial experts agree that short-term solutions like credit cards are one of the best ways to permanently fall into a habit of overspending.

“Kids see a credit card and go, ‘Free money! Let’s go party!’” Crumpton says. “It’s a great way to end up in credit card hell.”

But the money isn’t free. Hidden fees, high interest rates and the infamous “fine print” are all ways credit card companies make money. And often buyers never realize how much money they spend because a cash transaction never takes place. For many, it never even registers that they buy too much. Traubenberg thought she was being responsible when she paid the minimum monthly balance on their credit cards each month, but she lost ground as interest accumulated. Estock asserts that on average, a credit card purchase costs the buyer 112 percent more than the original purchase itself.

“Most people are surprised to find that even ‘cheap’ purchases for something like a $30 sweater suddenly become $80 over time when credit card interest sets in,” Estock says. And as purchases compound, many spenders use the majority of their paychecks to simply break even.

A snowball effect
Some young professionals knowingly live beyond their means and make no attempt to reconcile debts. Underestimating the repercussions of poor spending habits is as bad as the habits themselves. Everyone knows an unpaid water bill results in the water being shut off. Consequently, some young professionals assume that, at worst, banks and credit card companies simply take back those items for which you didn’t pay.

Sadly, this is a naive assumption. Legal actions like repossessions or wage garnishments are only the beginning of how living beyond one’s means can hurt in the long run. Once bad debt accumulates, the results can snowball into major life roadblocks. While a single missed credit card payment might not cause much damage, financial institutions will label consumers as bad credit risks if they repeatedly miss payments or default on loans. This is when the situation gets ugly. The effects of damaged or bad credit ripple throughout life.

Bad credit means most lenders are unwilling to invest in a person again. While credit card companies are more than happy to send bankrupt consumers dozens of new credit card offers, financial institutions like banks are not as forgiving. “Future loan applications for things like houses or cars can be denied because of bad credit,” Estock says. And those willing to lend money to someone with bad credit often do so at a higher interest rate, which drives many further into debt. Crumpton says even a new job might be out of the question. “A lot of employers look at credit scores when you are being interviewed for a job,” Crumpton says. “How do you expect to get that dream job if no one will hire you?”

Reversing Trends
Fortunately, Traubenberg and Schmick’s financial situation never completely deteriorated. Since her father was in the banking business, Traubenberg knew how to rescue a bad financial situation. “We cut down the number of credit cards we had and wrote down the budget for everything,” Traubenberg says. At the same time, Schmick increased the monthly payments on the credit card debts, which cut back on their accumulated interest.

“There is a lot more to managing money than just paying the bills,” Schmick says. “You need a lot of focus.”

But unlike Schmick and Traubenberg, many young professionals lack the skills to manage their own debt, and families are often inadvertently the source, not the solution, of financial mismanagement.

“If no one warns their kids about the dangers of overspending, and if they themselves have bad habits, kids aren’t going to learn the [financial] skills they need,” Crumpton says. Crumpton says she often counsels entire families who have passed on their bad habits to their children.

Fortunately, groups like the CCCS and the UW Credit Union are happy to help young professionals get their finances on track. CCCS organizations around Wisconsin hold monthly financial management seminars, and the UW Credit Union offers numerous online self-help guides. But Crumpton stresses that the ability to manage money does not come quickly.

“Money management is a skill,” Crumpton says. “You have to learn it to be good at it.”

Looking to the future
When people do learn the skills, the rewards can be great. With a much smaller debt load and now only two major credit cards, Schmick and Traubenberg were able to look beyond their finances and focus on one another. They married in 2004 and recently put a down payment on a new home in Madison. Schmick now handles numerous jobs for large Madison companies and specializes as a digital technician and web designer; Traubenberg will graduate this semester as a fully registered nurse.

While Schmick and Traubenberg’s story has an optimistic outlook, others are not as fortunate. In 2001, the average 25-to 34-year-old spent nearly 25 cents of every dollar of income on debt payments and had the second-highest rate of bankruptcy in the United States. Estock says that without careful planning, good financial management and personal discipline, young professionals will continue to live outside of their means with disastrous results. “The light at the end of the tunnel is there,” Estock says. “But you have to know when you’re in trouble and you have to ask for help.”