Young People and Debt: The New Normal

With a weak job market and uncertain prospects, young people have to make careful choices about how to invest in their futures. 

They’ve put off marriage and having kids. They’re moving back home with mom and dad. But the one expense with which they are not compromising is the high and rising cost of college. 

According to a new study from the Pew Research Center, covered in the Wall Street Journal, young adults have changed their priorities in response to economic instability, but student debt is more common than ever. Pew looked at Federal Reserve data on the debt and assets of American households and found that while young people are avoiding big purchases that require long-term financial commitments—like buying homes and cars—they are increasingly investing in education, with 53 percent more people under 35 carrying student debt in 2010 than did in 2001. 

It makes sense. Unemployment rates have remained frustratingly high even as US businesses have recovered from the Great Recession and young people need an edge in the competitive job market. Despite taking jobs that don’t use their academic skills to the fullest, college grads are still far more likely to be employed than those without a degree. 

That’s why Pew found that “many more younger households were carrying student loan debt after the recession than before: 40% had such debt in 2010, up from 34% in 2007 and 26% in 2001.”

At the same time, young adults are unwilling to invest in the kind of purchases that built assets and provided stability for their parents’ generation. Pew found that the recession eroded homeownership for young households, both through foreclosures and disinterest in taking on new financial obligations.  Moreover, given the doubts about making payments, even buying a car seems out of reach. 

The drop was substantial enough to bring down the overall debt burden for the age group.  Pew offers the following statistics:

The share of younger households owning their primary residence fell sharply from 40% in 2007 to 34% in 2011.

In 2007, 73% of households headed by an adult younger than 25 owned or leased at least one vehicle.  By 2011, 66% of these young households had a vehicle.

Mainly due to declines in home and vehicle ownership, the median debts of young people fell precipitously.  According to the study:

From 2007 to 2010, the median debt of households headed by an adult younger than 35 fell by 29%, compared with a decline of just 8% among households headed by adults ages 35 and older. Also, the share of younger households holding debt of any kind fell to 78%, the lowest level since the government began collecting such data in 1983.

Reducing debt can be a good thing for a society or sector that is overleveraged.  But debt serves an important purpose by allowing people to invest in their future financial security even when they don’t have the wealth to pay up front.  It is that purpose that drives young people to take on college debt, paying tens of thousands of dollars for an education that they predict will pay off later.  The Pew study shows that, increasingly, young people are funneling their dreams into the higher education system—essentially consolidating their portfolios and scaling back on other ventures.  It is a bet on the returns to education over other forms of investment.  

But debt-to-income ratios remain high for this age group—at 1.46 compared to 1.22 for older households—showing that the financial stability of young people is far from secure. And by taking on high levels of student debt—an average of over $26,000 according to the Project on Student Debt—they have compromised savings, other assets, and a great deal of financial freedom for an uncertain return.  

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