How Can We Break the Debt Traps Devastating Our Generation?
Debt is becoming a huge problem not only for the nation but also for young adults. According to The Pew Research Center, Americans owe over $1.3 trillion in student loan debt. That report came out in March of 2019 and I’m sure now that we are in 2021 that debt has increased. Most families rely on the government to help pay for their college degree, but the cost of college degrees are going up and so is the related debt. Student loans aren’t the only debt that’s affecting our generation.
Other debt traps include not understanding how a mortgage loan or credit cards work. These issues affect most communities but are DEVASTATING to the black and brown communities. Most of us have discussions about building wealth and ownership in our communities, but building wealth becomes very complex when you are buried in $300,000 worth of debt. Can we break free from the debt traps devastating our generation? I believe we can if we begin to understand the “true cost” of borrowing.
*This post is based on my opinion, experience, and my personal research and is for educational purposes only. If you are seeking further guidance please see a professional expert. To view my full disclaimer, Click Here.
The 6 debt traps plaguing our generation. What could be done to avoid getting trapped?
Debt Trap 1: Credit Card Debt- According to SOFI, “46% of all Americans have an outstanding balance. It could take Americans a decade just to pay off a $5,700 balance and most of credit card debt is used to help maintain a higher education”. Credit cards when used correctly can be very resourceful but credit cards that are misused and maxed out can bring a lot of stress down the road. One of the ways that credit card companies make money off credit card balances are through Annual Percentage Rates (APRs). An APR is the interest rate you are charged to borrow money. When we carry a balance, APR is the interest that will be paid for carrying a balance. This interest amount depends on the amount of the balance that is owed. When we use our credit cards, we must practice paying off the balance every month if we want to avoid paying interest on our balance.
Side note: You can pay your balances off every weekend or every two weeks to build discipline.
Debt Trap 2: Student Loan Debt- One of the biggest debt traps affecting our generation is student loan debts. Thousands, maybe even millions of students are paying back hundreds of dollars each month in their student loans and then wonder why the balance of their loan isn’t going down. The reason that the student loan balance isn’t going down quickly is because the majority of your payment if not all of your payment is only going towards the interest and not the principal of the loan. Most students when they sign up for student loans aren’t aware of this. That’s because most student loan companies ask the students to read over the form and most students just click through the pages because they want the money so that they can have funds for school. One of the ways that we can address the student loan issue is by starting a college fund for our kids and stop sorely relying on FAFSA and private student loans to get us through. Again, the cost of college tuition is going up and scholarships and grants are becoming more difficult to get.
Debt Trap 3: House Mortgage- Home ownership is not a bad thing. I am in no way trying to persuade anyone not to purchase a home. Homes become a debt trap when we don’t have a plan on how we will pay on the principal of the home. For example, a house mortgage could be $800, but out of the $800 dollars $600 could be going to the interest and only $200 will be going towards the principal. When you are owning a home most of us look at it from our personal point of view and not the bank's point of view. If a bank loaned you $185,000 for a home and the interest rate was over 4% you could be paying over $300,000 of interest in a 30-year mortgage, on top of the money that you borrowed. If you would like to own a home have a plan on how you will be able to pay more on the principal so that the balance can go down and you can pay off your home faster.
Debt Trap 4: Car Payment and Car Maintenance- Some of us need a vehicle to be able to get from point A to B and to transport our families, but sometimes, trying to “Be like the Jones,” we end up getting a car that’s very costly. Yes, I know that a car loan is only for 5-6 years, but maintenance is something that sometimes can become an issue if you don’t have the funds to pay right away. That total might have to go on a credit card and if you haven’t been paying off your credit card balances, the debt trap has been activated. To make sure that you don’t fall into the debt trap of car payment and maintenance, create a separate bank account that is specifically for car repairs, also don’t bite off more than you can chew, financially. Find a car that you like and make sure that you will be able to keep up with the payments.
Debt Trap 5: Payday Loans- Most of us don’t go to these services unless we have exhausted all of our options. Payday loans are loans that give you funds, usually under $10,000 and you get the loan deposited in your bank account in one or two days. Usually you request this loan in between your paychecks when you are short on money. The biggest problem with Payday loans are the interest rates. The interest rates of payday loans range from 65% upwards to 530%. The deciding factor of getting a high interest rate is our credit score. If you have bad credit or no credit you will be taken advantage of. If you aren’t careful and can’t make the payments you will find yourself in a debt trap that could possibly cause damage to your credit and if it gets out of hand you may have to go to court. It’s best if you just avoid payday loans at all cost. Payday loans do more harm than good.
Debt Trap 6: Not having health or life insurance- Health insurance in our country can be VERY expensive. Depending on your finances you may not have enough money to pay for health insurance, but not being able to have health insurance could be very costly in the event you have to go to the hospital. One of the biggest debts on credit reports are mortgages, student loans, and medical bills.
Not having life insurance works in a similar fashion. When a loved one dies unexpectedly, and they have a lot of debt and no life insurance, that can become a debt trap to their family. All the types of debt traps that are listed above can be a part of the deceased’s debt that is owed and if someone was a cosigner on the debt, that person will be responsible to pay off that amount.
Also, the cost of a funeral is not cheap. One of the things that you can do to avoid not having health insurance is to find a job that offers health insurance benefits and offer a great family health insurance plan as well. For life insurance, it’s better to invest into a policy when you are young and in good health as the cost of a premium will be cheaper. Premiums become more expensive the older you get and the more health issues you have. Make sure to read and call the insurance companies to ask questions on what coverage will be best for you and your family.
I am sure that as a community we can find some more debt traps that were not included on this list. These are some that I personally have been able to avoid or have a plan to pay down. I remember talking to a group of friends about this topic and a common thing that we all noticed was; we do not have these conversations in our homes, among our family, especially in the black community. We seem to get into things without asking the most important question; “How do I plan on paying this off”? Most families do not have a plan and are uncomfortable seeking advice about these financial decisions. This practice is passed down from generation to generation and due to the lack of financial literacy, it has caused a burden on most of us. I hope that this post will encourage those who are planning to make any of these financial decisions to ensure they understand what they are doing and have a plan to break the debt trap. What are some debt traps that you can think of? How can those debt traps be avoided? Please feel free to share! Also, if you liked this post please feel free to share and subscribe. Also follow me on social media!