We nerds are committed to financial literacy and education, and young adults are historically a bit shaky on personal finances -as we’ve seen, they’re knee-deep in credit card debt. But now, with the help of an expert, we can shed some light on how young people can square away their finances. We spoke with Deborah Thorne, Associate Professor and Wagner Teaching Professor of the Department of Sociology and Anthropology at Ohio University. Professor Thorne is an expert in stratification and inequality, negative wealth (debt), and consumer bankruptcy, and she was the Project Director of the Consumer Bankruptcy Project at Harvard University from 2001 to 2002.
Simply put, young adults are, by and large, deep in debt. As we found out from speaking with Professor Dunn previously, credit card debt is increasingly high among young adults, many of whom are projected never to pay it off and to eventually end up bankrupt. Though credit card debt affects everyone, college-educated or no, those who go on to higher education often face student loan debt as well. In a big way. According to a recent report by the Consumer Financial Protection Bureau, student loan debt from both government and private loans totals over $1 trillion. These loans are made available with this general idea in mind: “We lend you the money to go to school, you graduate and get a good job with a good salary, you pay us back in 5, 10, 20 years with some interest and everybody’s happy.”
Problem is, graduates aren’t getting the jobs, or the salaries, that will enable to pay off their loans. Young adults who attend college are practically forced to accrue debt, but lack the means to pay it off in a reasonable timeframe, or even at all. Consequently, repaying these loans can take decades. Their financial situations can become difficult to the point that they turn to high interest credit cards or even consumer bankruptcy (although student loan debt is non-dischargeable in bankruptcy). According to Thorne, despite these financial risks many lenders continue to provide loans that are appearing to some as “sub-prime,” similar to those that spurred on the housing crisis. “Private lenders are giving loans, often very large loans, to people who do not have jobs,” says Thorne. Obviously these prospective students wouldn’t be expected to have a job when they receive the student loan, but now it’s looking as if they shouldn’t be expected to have their previously projected salary after graduation either. “If you were a lender, would you loan someone $10,000, or $20,000, or more if they didn’t have a job? Seriously, who would do that? The only reason this continues to occur is that student loans are guaranteed by the government and they are non-dischargeable in bankruptcy – so they are a very safe investment for lenders.”
Beyond student loans
Just like student loans, Thorne notes that credit card companies continue to be eager to issue cards to these young adults as well. You’ll be able to see this all over the country in the fall, where banks will have tables set up at college orientations offering credit cards to incoming students: “Many people who file bankruptcy and default on their credit card debt have, prior to filing, repaid the principal. And sometimes, because of interest and fees, they have repaid that principal multiple times. As such, regardless of bankruptcies and defaults, credit cards are still highly profitable for lenders.” The many young people deep in debt with terrible credit or in bankruptcy end up facing further hardships, and the consequences aren’t limited to just them. These individuals have trouble getting loans, buying houses, buying cars, and providing for families. These barriers create yet another unneeded drag on the nation’s economy. Bankruptcy especially has become an incredible barrier for getting a loan in the future, and even denies some people from employment. Thorne and Porter’s article and research from 2006 showed approximately one-third of debtors reported being as bad or financially worse off one year post-bankruptcy than the day they filed. This is indeed a depressing find, as declaring bankruptcy is supposed to your downward spiral and offer some upward mobility. This lack of purchasing power is not only hard on them personally, but it slows down economic recovery for the entire country. Says Thorne, “when people are drowning in debt, be it student loan debt or credit card debt, it hampers the personal spending that would help get our national economy going again.”
What to do
Reducing unemployment would certainly help the situation, but it wouldn’t address all the issues that young adults are being hit with. Many face underemployment, thereby earning less and not being able to pay off their student loans as expected. Thorne anecdotally remarks that some of her students would even suggest that they wouldn’t consider marrying anyone with $20,000+ in student loans: “They are just too much of a risk.” One potential solution is making student loans more affordable, and for states to once again invest in higher education. Student loan debt appears to be the compounding factor in young adults taking on credit card debt and defaulting on payments, so mitigating this issue will likely have positive effects for young adult debt and economic mobility. The CFPB’s national report will hopefully direct some attention to this need, but who’s to say when exactly the relief will come. Even if this reform does come soon, it may not be enough to spare the country and future generations some more pain. According to Thorne, “These individuals, who are often repaying their own student loans well into their 40s or even their 50s, are the same people who should be saving for their kids’ college tuition. But they can’t do both; the income isn’t adequate and the costs of higher education simply too high. And so, unfortunately, the cycle continues.” Finding the right student loan may be the first step towards getting young adult debt under control.
“Many of today’s college students grew up in households that were relatively financially sound,” says Thorne. “Sadly, they are not graduating into similar financial security.”