Earlier this month, the in-house magazine at Wealthsimple, a Canadian online investment manager, published an article titled “Debt: A Love Story.” It featured an interview with “Kate” and “Tom,” a pseudonymous, upper-middle-class American couple with positively gruesome personal finance habits. “We have an insurmountable amount of debt. I’m not even exactly sure how much it is anymore,” Kate explains. They’re buried beneath $60,000 in unpaid credit cards, an $18,000 personal loan, two mortgages totaling $360,000, and six figures of student loan bills. They live their lives month to month just trying to pay the interest on an obviously unaffordable lifestyle—their kids are in private school, they spent too much building a house in a neighborhood they can’t really afford, they blow too much on vegan and organic food—while refusing to declare bankruptcy and start again.
Reading the piece is an emotional ordeal; imagine watching a Michael Haneke movie, but the escalating psychic carnage somehow revolves around credit card statements. “Things have gotten really hard, but I don’t think we could even afford to get a divorce. We certainly can’t afford to live apart,” Kate tells us. There are tears. A dead dog makes its way into the mix. The Q&A ends on a surprise note of personal betrayal (it involves a lapsed vehicle lease). Anyway, you may have caught the article on Twitter this week, where the piece was passed around by a number of horrified, enraged, or, in some cases, just wryly amused journalists.
Kate and Tom are not exactly representative of everyday American struggles. They have made extravagantly bad decisions; they claim to have erased $80,000 in credit card debt with the help of a consumer counseling group and a loan from their lower-income parents, then went right back into debt. (“We were in a good place. But then we did it all over again.”) They cashed out a 401(k) early and miscalculated the tax penalty. It’s just one thing after another; their story would give Suze Orman PTSD. But beyond the impulse to rubberneck, I think it’s useful dwelling on their situation, because it does illustrate a few realities about money—and more importantly, the consumer finance industry—in this country.
Point 1: The rules of personal finance are simple in theory. But there are pretty much endless ways corporations will help you screw them up.
To be entirely honest, I didn’t really believe the Kate and Tom story was real when I first read it. It was just too … much, and I figured maybe it was just some clever viral marketing copy. And it might be that. Who knows. But every time I looked into a specific problem that seemed a little implausible, it turned out that, in fact, it was within the legal and technical realm of possibility. Take their student loans, toward which they have allegedly paid almost nothing in 20 years.
Tom: Yeah, I’m at home, but I have no idea how to even look it up. The only time I go on the site is to ask them to push back when we have to start paying it. I know that’s irresponsible and horrible, but that’s really, truly what I do. I think it started at about $90,000.
Kate: Now, with interest, the law school debt is at a hundred and something. It’s either around $120,000 or $140,000, somewhere in there. We’ve almost never paid my law school loans — every year we ask them to put us in a financial hardship status so we don’t have to pay. But the interest keeps building.
What it basically sounds like is that their student loan servicer has allowed them to continually enter what’s known as “forbearance,” which means they don’t pay their debt, but the interest keeps accruing and capitalizing. Forbearance is really meant to be used in temporary emergencies, such as if you lose a job. Loan servicers do have a habit of inappropriately signing borrowers up for it when they’d have better options, basically because it’s relatively quick and simple, and paying customer service reps to actually walk people through their complicated repayment choices costs money. But as someone who writes a good deal about student loans, I had never heard of someone staying in it for decades and wasn’t sure that was even possible. Turns out, it is. There is technically no limit on the number of times lenders can grant forbearance. It’s totally discretionary. And so you can get an outlier story like this, along with many, many more less severe but nonetheless harmful cases.
The personal finance world is full of those kind of trap doors. You can, in theory, fit most of what anybody should need to know about managing money on an index card. But both the government and financial services companies are good at coming up with exotic products and debt repayment options that will, without intervention, lead some people into bad choices.
Point 2: Tom and Kate are basically ideal customers, as far as a credit card company is concerned.
One thing that stands out about Kate and Tom’s story is that, despite their mangled finances, companies keep lending them money. They get loans. They have 10 or 11 credit cards, eight of which are maxed out. This is not terribly surprising, because as far as a bank is concerned, they’re actually ideal credit card customers.
The thing to remember is that banks don’t love it when you pay back your full credit card bill every month. They’d much rather you rack up a balance and tread water by paying the interest each month, because that’s more profitable. That more or less seems to be Kate and Tom’s MO.
Lending money to people with $60,000 in credit card bills they can already barely juggle is, of course, risky. But lenders love risky customers, because they can charge them higher interest. Remember subprime mortgages? Well, for years now banks have been marketing their credit cards hard to subprime borrowers. Part of the reason is that interest rates have been low, which makes traditional lending less profitable. Another is that regulation has crimped some other old lines of business, which has made banks focus more on expanding credit cards. If you tend to borrow too much, there’s probably a credit card company out there that wants to let you borrow more. (We’ll see if that remains the case as interest rates rise, and delinquencies, which have stayed remarkably low, go up).
Point 3: Tom and Kate are not alone.
You might assume that people who live paycheck to paycheck are typically destitute. But you’d be wrong. Most of them look pretty middle class. That was the conclusion of a fascinating paper released by the Brookings Institute a few years ago, in which researchers looked at households that live “hand-to-mouth,” meaning they spend all of their income each pay period. They found that in the U.S., between 25 percent and 40 percent of households belonged in that category (their preferred estimate was one-third). And of that group, two-thirds were reasonably “wealthy,” meaning they maintained significant illiquid assets. These families might spend down their checking account every month and have more credit card debt than savings. They do, however, have money locked up in retirement accounts and their home equity. In terms of marriage, age, children, and education, they look a lot like other middle-class families—though their median income is a bit lower. But as a whole, a lot of them seem like they could be families that are just overextended after buying homes in the suburbs that were maybe a bit out of their price range. In other words, there are a ton of Americans out there living toned-down, less obviously disastrous financial lives that are still versions of Tom and Kate’s.