A combination of increasing student debt, tighter lending standards and high levels of unemployment and underemployment has hampered young adult’s buying power.
A recent article from CNN Money audaciously claims that low debt levels among young adults is bad for the economy. The author, Nin-Hai Tseng, suggests that “young people are less willing to take on credit card debt and auto loans” as if they are doing that by choice. Tseng claims that debt is necessary for a healthy economy. This may be true in the consumer driven American economy however I am not convinced that young adults are choosing to have less debt.
If you really dig into the data you will find that lower debt and spending levels among young adults is a result of the economy instead of an increase in frugality and/or savings. As the article mentions (and the report from Pew states) student loan debt has increased while all other forms of debt have decreased for people under the age of 35. The author is perplexed by this:
What’s maybe most perplexing is that student debt has increased while all other consumer loans fell.
This isn’t perplexing at all; the decline in other loans is directly tied to the increase in student debt and the great recession. Acquiring student loans is still relatively painless while it is much more difficult to secure other types of loans or lines of credit, especially for young adults.
Consider this: in 2007 it was extremely easy to get loans and credit while student loan debt levels were much lower than they are today. In fact the average student debt level for people under the age of 30 in the first quarter of 2007 was $15,848; however by Q1 of 2012 the average student debt level had grown to $20,835 among adults under 30 . Average student debt levels are accelerating with reports for recent graduates showing a staggering rise to $26,000.
During this time the country went through the financial crisis and is still struggling to climb out of the great recession. Banks are now stingier with their money and as a result it became much more difficult to get a loan or other forms of credit. This has the highest impact on young adults as they have growing student debt balances, stagnating wages, rising rates of unemployment and the shortest credit histories.
All of these factors have compounded into a perfect storm that will severely suppress the buying power and spending levels among young adults for years to come. The decline in non-student loan debt among young adults is not a product of delaying marriage or unwillingness to take on credit card debt; it is a product of the inability for young adults to acquire credit.
Falling wages and increasing student debt effects young people’s cash flow. High debt to income ratios and short credit histories effects creditworthiness. This means that banks are less likely to lend money to young adults and young people have less cash at the end of each month. The economy has forced frugality onto millennials.
I am a living, breathing example of this. In 2007 all it took was my e-signature to get a $30,000 student loan, and that was just for my first year. By 2009 I no long qualified for that same loan thanks to tightening lending standards; I had to find an alternative way to finance my education. Fast forward to 2013 and another $70,000 in debt and I don’t even qualify for a loan to consolidate debt that I already have. I probably wouldn’t even qualify for most credit cards given my wacky debt to income ratio and my short credit history.
Right now I am paying about $2,000 per month in regular and extra student loan payments. I can only speculate that if I graduated without debt I would just be spending that money.
Prior to finding MMM and NMHD I had a pretty bad case of lifestyle inflation. Without student loan debt I would have gotten a nicer apartment, I would have financed a new car; I would have spent even more money at the bars. I used to be the typical materialist.
Luckily I did find those bloggers and now I am well on my way to being debt free in a few years. I will be living more frugally and I will be putting off large purchases (such as buying a home). Having this large debt has also taught me that I hate being in debt. I will never again carry a balance on my credit card. When the time comes, I will buy a home with a 20% down payment or larger. I will never finance a car.
That is the difference between me and other young adults. Whereas I will be continuing the frugal lifestyle long past my student loans my peers will jump at the opportunity to lease a new car or only put 3% down on a house. Through a combination of advancing in their careers and paying off their student debt (albeit much more slowly than me) they eventually will start to qualify for more credit and they will be good American consumers and utilize it.
So as much as we can hope that young adults have a new found respect for frugality that will lead to a more prosperous future I am afraid that I am an exception. However that shouldn’t stop us from reaching out to as many people as we can and showing them a different path; a path that doesn’t include life-long debt and decades of working unfulfilling jobs.
My student debt is actually a blessing because without it I would have never discovered this alternative path.
1. Data from the New York Fed.
Photo from thisisbossi.