A recent Pew Research report found that after record high debt-to-income ratios during the booming economy of the early 2000s, young adults have taken a big chunk out of their debt compared to their older counterparts following the Great Recession. But the reasons behind the great debt reduction may be the lack of solid economic foundations among millennials.
After the recession, young adults - those 35 or younger - now own fewer houses, fewer cars and carry less credit card debt than they did during the boom years. Sounds great, but unfortunately it may have less to do with their economic success and responsibility and more to do with economic struggle. According to Pew research, the median debt of households headed by someone younger than 35 fell by 29 percent from 2007 to 2010. Also, the share of younger households holding debt of any kind fell to 78 percent, the lowest level since the government starting keeping records in 1983.
Less debt always sounds good until we look at the reasons behind it - more younger people are prevented from qualifying for loans to buy cars and homes because they don’t have the resources to pay them back. Before the Great Recession young adults were catered to by banks offering ‘no-money down’ loans with 100 percent financing on homes and cars. These loans seemed great to millennials who had seen their parents and grandparents drop as much as 20 percent down for loans with interest rates in the double digits.
Today’s weak job market and tighter lending standards at banks have made it harder to get mortgages - more like the old days. Millennials lucky enough to have a job may be making less than they expected or worried their job won’t last, and if they don’t have a job they can’t get a car loan or buy a house. So the news that young adults have less debt may initially sound great but if we look deeper it shows how far they have to go to get their slice of the “American Dream.”
The concept of saving for things they want may seem foreign to some in the younger generation who grew up in boom times where things were readily bought and given by doting parents. But it’s a concept that may come home to roost as they go out on their own and establish their own families and homes and the debt that inevitably comes along with it.
The median mortgage balance went from $150,000 in 2007 to $128,000 in 2010, perhaps a sign that the younger generation is reeling in their spending.
Many millennials are delaying marriage and forming households later, which reduces their home buying and mortgage debt. But the shrinking debts don’t necessarily mean younger adults are in better financial shape than they used to be - they still owe more relative to their income than older people.
Debt reduction among young adults during bad economic times has been driven mainly by the shrinking share who own homes and cars, but it also reflects a significant decline in the share who are carrying credit card debt, from 48 percent in 2007 to 39 percent in 2010.
Student debt was the only major type of debt to increase among young households during the recession, according to the Pew study. In 2007, 34 percent of young households had outstanding student loans. That figure rose to 40 percent by 2010.
Younger households have pared their credit card balances and in 2010 only 39 percent of them carried a balance, down from 48 percent in 2007 and 50 percent in 2001. And the amount they owe is lessening as well, down from $2,500 in 2001 to $2,100 in 2007.
So our younger generation may have less debt - and it’s never a bad thing to not be beholden to others for credit - but if we read between the lines we see it’s because they are facing challenges many of us haven’t faced in years - the threat of declining access to good, steady jobs with a hopeful financial future.