Squared Away Blog

February 26, 2013

Millennials in Debt: Is It a Big Deal?

Young adults, when asked if they have college loans, often just sigh or groan quietly.

But how much does this debt really matter to their lives?  Conflicting trends make this difficult to answer.  College graduates have ample time – decades of employment – to pay off their student loans, economists argue, and they’ll bring in more earnings to pay them back.  A college education is worth $1 million in extra earnings over a lifetime.

Behind the student-loan sigh is anxiety that the post-Great Recession job market makes it tougher for many graduates to earn what they need to pay their loans back.  Indeed, the rate of delinquencies has risen in tandem with increased borrowing.  Payments on half of all student loan accounts are now being deferred, the consumer credit firm TransUnion reported last week, and these deferrals are the first step to still more delinquencies.

Some researchers are warning about the additional financial risks facing graduates with large loan balances.  “That didn’t happen in previous generations,” said Ohio State University’s Lucia Dunn, whose study published last month in Economic Inquiry found that young adults are on a path to having far more credit card debt in middle age than did their baby boomer parents.  Credit cards, student loans – debt of all kinds – she said, “is just an overwhelming burden for many young people.”

Michael Collins, faculty director of the Center for Financial Security at the University of Wisconsin, identified another issue: young adults in debt are in a more precarious financial situation.  When life’s inevitable disruptions do hit, it becomes more difficult to keep up with financial obligations.

“They might get sick, not get a job, might experience a breakup,” Collins said.  “All those things are riskier when you owe debt than when you don’t have debt.”

But a report last week by the Pew Research Center indicates the debt problem may not be as bad as some fear.  It shows that debt overall for young adults has actually fallen over the past decade, indicating that outsized student loan balances are confined to only a segment of the population.  Households under the age of 35 had $17,938 in debt of all types in 2001.  It spiked to $21,912 in 2007 and fell to $15,473 in 2010, according to Pew’s study.

Pew’s study did find that the composition of their debt is changing dramatically.  Student loans are a growing share of young adults’ debt, and mortgages are a smaller share.  Yet Richard Fry, a Pew senior research associate, wasn’t troubled by that and put it in perspective.  He noted that the median student loan debt for households under 35 is a manageable $13,410.  That compares with the $128,000 median mortgage for those young adults who own a house.

“Your mortgage is much, much bigger than what you owe on your student loan debt,” Fry said.  “So I don’t necessarily embrace the idea that student debt is squeezing out other debt.”

Ohio State’s Dunn uncovered another issue: this generation is paying their debts at a slower pace than prior generations.  The problem may come when they are in their mid-40s.  That’s when families reach their peak borrowing years and life really hits: kids in or closing in on college, a big mortgage, and 401(k)s begging for more.

Dunn estimated that when young adults born between 1980 and 1984 reach age 45, they will have nearly $11,000 in credit card debt – their parents had about half that, or about $5,200 at 45.

What will young adults face when they reach their peak debt years?  And what implications will this have for when they retire?

Readers, what’s your perspective on the changing debt situation for young adults?  Feel free to post a comment on our Facebook page.