Young Canadians are taking on record levels of personal debt just as the world is waking up to the credit crunch.
While she attended Simon Fraser University, Ellie Knight spent her summers helicoptering around the Canadian Shield, searching for minerals. It was a blast, the whole lifestyle: sleeping under a tarp with a gun, out on the tundra with lichen and caribou, and returning to the city with thousands of dollars wadded into her pockets. As a geology student, she was good at earning cash and she was great at spending it: beers at the pub, tuition, books, an apartment with just one roomie, road trips, snowboarding on the weekend, cool clothes, and whole days when she didn’t eat at home.
During school, she racked up about $30,000 in student loans and another $20,000 in credit-card debt. The year after university, she drove a bus in Lake Louise, snowboarded, and partied before knuckling down and getting a “real job”. Living a pretty average tourism-sector life in the Rocky Mountain town, she added another $10,000 in debt.
So now, $60,000 in debt, with two years of well-paid geology gigs under her nondesigner belt, Knight is on a crash course to pay off her debt—so she can assume more of it. In 2009, Knight plans to amass more student loans so she can head back to school for her master’s and, eventually, a PhD, and then buy a house with a mortgage and start a family. It’s time. She’s 31.
“When you get back from [working up north in] the field, you just want to go balls to the wall, man,” she told the Georgia Straight at a downtown sushi restaurant, explaining the thrill of spending. “I don’t regret any of it, because all the experiences shape you, but if I were to do it again, I think I would tone it down.”¦Sometimes I try to put everything [the looming debt] out of my mind. And sometimes I wake up in a cold sweat.”
Knight, like Canada, is not in a credit crisis—yet. She’s always managed her minimum payments, so she’s never been hounded by creditors. Her job pays well enough that she can pay off her credit-card debt within about a year. And she has no dependents. She relies on access to credit to help her pay for a far-from-outrageous life.
Canada, similarly, has been smart about regulating its lenders, and so far the country has avoided a mortgage meltdown. But the sheer volume of consumer debt Canadians carry—$320 billion, not including mortgages, according to the Bank of Canada, an amount that’s more than tripled since 1990—is making them vulnerable to any hiccup. In an era of stagnant incomes, young Canadians such as Knight depend on credit to pursue a bare-bones, middle-class life.
So are Canada’s young borrowers headed for a crisis? Absolutely, according to Douglas Welbanks, the former director of debtor assistance and debt collection for the B.C. government. On the phone from his home in Richmond, Welbanks told the Straight that he was disappointed Canada’s biggest financial issue—consumer debt—didn’t make it into any of the federal campaign platforms and that federal issues such as bankruptcy and student loans didn’t get traction. That’s despite the American crisis, author Margaret Atwood’s high-profile series of CBC Massey Lectures called Payback: Debt and the Shadow Side of Wealth, and Welbanks’s own recently published book, Julius Seizure: Stories From the Secret World of Bankruptcy, Debt Collection, and Student Loans (Chateau Lane).
“We’ve been living in a dream world for many years,” he said. “It’s allowed the middle class to have all these things—houses, cars, camper-vans, and all the toys—without any fear of debt.”¦Governments are, by and large, in denial. They ignore the escalation of dependency on credit. They don’t talk about it. They talk about how great everything is. But the debt levels have been troublesome for those of us who work in the area where we see the effect on the fabric of family life and how it destroys people.”
Debt is bad, Welbanks said. It should be avoided. A third of Canadians score “poor” or “very poor” on their credit ratings, according to Tom Reid, the director of consumer solutions at credit reporting agency TransUnion Canada, and there were 79,796 consumer bankruptcies in Canada in 2007 (double the 1990 number). Clearly, Canadians have a problem.
So many so-called middle-class families are cycling their debt through their credit cards, lines of credit, and mortgage payments, Welbanks noted, that any rise in interest rates or a lost job will send them into financial ruin. Not to mention what will happen if access to credit evaporates.
“Right now, they’re going under the radar screen because low interest allows people to keep going on, borrowing more money and going on truckin’. But if any of that changes”¦”
A one-two punch of Statistics Canada reports this year shed some light on why so many young Canadians, like Knight, are so deep in debt: Earnings in the Last Decade and Changes in Family Wealth. They found that student loans are just the gateway to decades of debt, as folks in their 20s and 30s buy cars and houses, plus get credit cards and lines of credit. Incomes, especially for citizens under 40, the studies found, have remained pretty stagnant over the past decade. Meanwhile, expenses have soared.
In B.C., according to Rene Morissette’s Earnings, average hourly wages grew by just 2.9 percent from 1997 to 2007, by far the slowest growth of any province in Canada. In Changes, Raj Chawla notes that in 2005, a third of families with heads in their 30s earned less than $30,000. Of those with heads in their 20s, two-thirds earned less than $30,000. Unsurprisingly, then, between 1999 and 2005, the average family income increased by just 10 percent, yet the average debt increased by 30 percent.
In addition, a funny thing happens when you look at Canada’s consumer price index from a young person’s perspective. The two biggest debt-incurring expenses, tuition and buying a home, are not included in the CPI. So, the index reports that from 1999 to 2005, the cost of living rose just 15 percent.
However, the cost of buying a home in Greater Vancouver rose from $281,183 in 1999 to $425,745, an increase of 51 percent. Furthermore, the average cost of tuition in B.C. rose from $2,525 in 1998-99, to $4,735 in 2004-05, according to Statistics Canada. That’s an increase of 88 percent, in an era when average family incomes rose just 10 percent.
In other words, the big expenses young people face—housing and tuition—are way up, but salaries are not. Still, there’s a culture of self-blame and so much shame associated with being in debt.
Right out of his small-town Ontario high school, Cameron Stevenson took the coaching-diploma program at New Westminster’s Douglas College in order to become a gymnastics coach. With just four credits left and a $14,000 debt, he took a break. Unable to make the $300-a-month payments, he enrolled back in school to finish his program. But he was denied a loan due to his default. This he found out past the “withdraw” date at Douglas, so he was still charged for the courses: another $3,000 on his debt load and nothing to show for it. Stevenson, because he’s embarrassed by his debt, asked the Straight to make sure he was buried in this story.
“My advice to students is, if there’s a way you can work part-time in high school and save money, do it. Don’t rely on the government. I’m so scared of going into debt again. It’s been such a brutal expense at such a young age.”
The reality is, though, that young people have very little choice about going into debt, according to Armine Yalnizyan, senior economist for the Canadian Centre for Policy Alternatives. Incomes are out of whack with the cost of living; the popularity of contract and part-time work means employees don’t have the wage bargaining power they once did; training is necessary to get a decent job; and buying a home is still a reasonable goal for Canadians.
“Frankly, when people started doing that [overextending themselves in mortgage, student, and credit card debt] in 2004, 2005, 2006, people could be excused for thinking that the economy would just keep growing and they’d be okay,” Yalnizyan told the Straight on the phone from Ottawa. “Why not? It looked like a safe bet. Interest rates were at a 50-year low. Unemployment was at a 50-year low. And what’s your option? Staying in an unaffordable apartment?”
The “big narrative” of the American credit crisis, according to Yalnizyan, is that more frugal living is probably a good idea. But individuals should not be blamed for using debt to make the ends of their middle-class lifestyle meet. So why haven’t Canadians risen up and demanded better wages?
“Canada is not a culture of anger,” she said. “Or a culture of fear. It’s a culture of worry. I think most folks assume that richer folks have the royal jelly, that they do something that they don’t do. But the truth is, after 25 years of just giving more to the people at the top, because they’re smarter than you, they’ll take more risks than you, and that will create better jobs for you, that social experiment is a bust. It didn’t work. The question is, at what point do people start saying, ”˜That’s not good enough’?”
To Welbanks, it won’t happen until there’s a crisis. If interest rates go up and families can’t afford their mortgages. If the American crash starts to trickle job losses into B.C. If lenders start pulling back on whom they’ll extend credit to—as the Canada Mortgage and Housing Corporation did when it halted 40-year, zero-down mortgages.
“Until now, we’ve coped with cost-of-living increases by using credit,” Welbanks said. “But it all [the fix] has to start with coming out of denial, by saying that we can’t pretend there’s nothing wrong anymore. It’s like alcoholism or drug addiction. Let’s call it credit addiction. So you have to realize that this is a terrible thing happening to our country, that it’s leading to separation and divorce, and the student-loans situation. And then we can start to draw attention to it, to get more [debt] education into schools. There’s far too much emphasis on academics, getting into university, getting your BA, MA, PhD, and they walk out on the street and don’t know a thing about life.”
As for Knight, she has avoided the credit crunch so many new graduates face by choosing a field that pays well enough to allow her to manage her debts. But she knows that’s serendipity more than smart planning. When she started university, she said, friends couldn’t understand why she chose to study rocks, because there wasn’t any money in it. That radically changed while she was in school.
“Metals boomed,” she said. “But change could be right around the corner. Commodities are heavily impacted by the economy. I like to think that I’m good at what I do, and when everyone else loses their job, I won’t. But I’m also realistic.”
For many young people, “in the red” is the new “in the black”. That means debt will lurk over their bank accounts from the time they enter post-secondary until they’ve paid off their mortgages, perhaps far into retirement. For experts such as Welbanks, that’s alarming and must change. But for many young people like Knight, the prospect of lifelong debt gives them the freedom to borrow enough to fund a truly middle-class lifestyle, complete with degrees, an owned home, vacations, cool clothes, and restaurants. With massive debt an almost unavoidable reality, a pitcher of pale ale can seem like a solid investment.