Why Gen Y is losing the debt battle
Huge student loans, more education to fund, and easy digitized purchasing are among the problems plaguing this generation.
This post comes from Angela Colley at partner site MainStreet.
Generation Y — those born between 1981 and 1995 — carry less debt than the national average. But that isn’t necessarily a good thing.
Most of Gen Y’s members hold “bad debts” — like credit card debt and other loan products that don’t build assets. No one can conclusively answer why. Maybe it’s the job market. Maybe impulse buying and a digitalized consumer-driven society are to blame. Whatever it is, experts are wary those debt woes aren’t going to get better anytime soon.
While more than 60% of Gen X’s debt is good debt, such as student loans and mortgages, Gen Y is heading in a different path — 48.4% of Gen Y debt comes from non-asset building loans — bad debt — according to a recent study of over 20,000 users by the financial reward site, Saveup.com.
Results found Generation Y-ers had an average total debt load of $28,930, including $4,113 in credit cards, $7,358 in lines of credit and $12,410 in car loans on average.
Some experts blame Gen Y’s losing debt battle on a slow-to-recover job market. Paul Golden, CEO of the nonprofit organization the National Endowment for Financial Education, says, “More education typically translates to more pay. However, the job market has been hard on Gen Y and has forced some to delay repaying their student loans, take a lower paying job, or remain in school longer.”
A recent analysis of government and university data for the Associated Press backs up Golden’s concerns. In 2011, 53.6% of workers under the age of 25 who held bachelor’s degrees were jobless or unemployed.
Changing patterns in education could also be to blame.
“Generation Y has accumulated more bad debt than good debt, because they spend more time in the higher education system,” says Greg Brooks, founder of Textbook Assault, a textbook search engine. Brooks believes Gen Y’s tendency to pursue education beyond a bachelor’s degree delays the beginning of careers and “creates a severe imbalance, because the individual isn’t making money, but also spending a ton on education.” To finance their cost of living, “they rely on credit cards and loans as a way to pay the bills,” according to Brooks.
What’s just as alarming — possibly even more so — we can’t learn from our own mistakes.
“Studies are showing younger generations are more likely to continue to accumulate debt — even into their 70s — some could even die in debt,” says Roger Cowen, a financial planner and founder of Cowen Tax Advisory Group. It’s like some of Gen Y-ers are addicted to debt, like being in the red is some kind of high score in a debt video game. And maybe our almost cybernetic fusion with electronics is helping us pave the way to a debt-filled retirement.
“I think the digitalization of merchant services had a big impact on producing debt for the younger generations. The ability to pay for something with one or two simple clicks on a smart phone means people are now more likely making rash purchasing decisions,” says Soren T. Christensen, CFP and CEO of Advanced Wealth Advisors, LLC.
Christensen thinks Gen Y’s ability to buy instantly, any time, without having to shop in-store or purchase with cash encourages a kind of depersonalized reckless spending. “The more we distance ourselves from having to fork over actual money, and from the physical in-store purchasing process, the easier it is to accumulate bad debt such as credit card debt,” says Christensen.
But what about those Gen Y-ers with the so-called good debt? Jonathan Bunt, a 29-year-old insurance agent in New Milford, Conn., recently bought a home, putting him in the minority of Generation Y with good debt — but he doesn’t see it that way. To him, there is no such thing as “good debt” or “bad debt.” It’s a strain on his life and a cause for concern for his future whether it comes in the form of credit cards or a mortgage.
Bunt became discouraged after he had his home reappraised a year after moving in and found out it’s worth less than his total mortgage loan. His dream of home-ownership started to darken.
“The model doesn't work anymore, not when people don't have the money,” says Bunt.
So what’s a generation to do? Saveup.com CEO Priya Haji believes it breaks down to two important, basic fundamentals: saving more and spending less.
Haji recommends that everyone, not just Gen Y, try to “closely monitor the level of debt they are taking on, particularly consumption-related debt.” In other words, taking on debt should be a considered action — such as financing a return to school to finish a degree rather than a non asset-building purchase like a new car. Ideally, debt should be used “wisely for education, which can drive future earnings or for purchasing a long term asset like a home at a non-inflated price.”
Breaking online impulse-buying habits is also a good way to avoid unnecessary debt.
Haji says that “while consumption early in life is most tempting,” it could also breed bad habits that will hurt the long-game approach to being financially stable with long-term savings.
For those with debt already, Cowen believes Gen Y-ers need to take a more direct approach. “Focus on paying off those credit cards, one at a time, starting with the one with the highest interest rate. Invest in your future — participate in a 401(k) or Roth IRA.”
More from MainStreet:
- Can you dig yourself out of debt with an iPhone?
- Can the student debt crisis outshine the housing bubble?
- Reducing your student debt (or Why you shouldn't go to law school)
Thought I'd toss this little turd out there:
In 1991, the Median Annual Income for a person with a BS degree was $40,906 and in 2010 it was $64,000.
In 1991, the college I went to had in-state tuition and fees of $2,248 per semester. In 2010, the in-state tuition had risen to $7,418.
Another way of looking at this is $1 of education in 1991 earning $18.20 in income, but that $1 in education in 2010 gets you $8.60 in income. The results would be even more skewed if I took into account that without college education, one would still earn some income.
One can glibly talk about "responsibility" for the generations younger than us, but the fact remains that the deck is stacked against them before they even get out of the starting gate.
Unlike my roommate in college, I did NOT take out loans for all my school while working and foolishly spending all my money on stupid stuff, put spring break trips to Mazatlan, South Padre Island, and Panama City Beach on my credit card, or get a degree in a totally worthless major. I even got him a great job and he was making over $2000/week. What did he do? Pay off his debt before doing anything else? Nope. He went and bought a new Jeep Wrangler and a pair of jet skis.
Some people just make stupid money choices. It's their fault. If you get a degree in photography, interior design, or a doctorate in playing the sitar while racking up $200K in loans, you are dumb. If you let your kid do this, you are both dumb. And in that case, thanks for passing on your "stupid gene".
Now that I have addressed what I say is the biggest part of the Debt problem for folks, here the other part. Parents for the most part, don't do a good job of educating their Kids about how to handle Money, early in life. Far too many kids don't know anything about managing money until after the FACT, by then, it's usually too late.
Then there is the part about teaching life lessons by our so-called leaders. The Global Feds are teaching everyone that not being responsible is good. The Big Banks all failed yet were bailed OUT. Nobody went to Jail and they all kept their Jobs and Huge Salaries. They were rewarded for failure. However they expect you to NOT Notice. These are the types of lessons that Leaders in America and the rest of the World are Teaching. So why would anyone expect folks to be responsible about DEBT when our leaders aren't responsible about DEBT!
I'm sorry but a house is not good debt no matter how you spin it, debt is debt, it's all bad, there is no such thing as good debt. That is one of the many, many reasons we are in the mess we are in, we're told that house, cars and education are good debt. And most are rewarded because of this debt through the tax code. Shameful if you ask me, what do people who have no debt get, nothing but more taxes, even though we are trying to live right and responsible. A house is not a need, as is a car, and there is no reason you can't pay as you go for school.
Stop preaching that any debt is good. Yeah that house you paid 100k and 30 years later bad 200-350k sure is a great deal isn't it.
Monkey see, monkey do. When parents can't control their own spending, or when they let their kids have everything they want, how do they expect their children to learn financial discipline?
If Gen-Y are a bunch of idiots, I guess we need to ask who raised them.
Although in fairness, we may be seeing the results of the modern liberal (Clinton-era) "it takes a village to raise a child" philosophy and 2-income households & (poor) single parent households.
It takes a village to raise a village idiot.
Old people started a war that has cost billions.
Old people require funding called Social Security that costs billions.
Old people sent our jobs oversees or are otherwise hiring foreign labor and paying them less than American Gen Yers.
Old people raised the cost of education - hugely disproportionate against the naturally gradual rise in cost of living - until it's untenable for the majority of today's youth (without high interest rate student loans).
Old people chose to bail out Wall Street and accept widespread and hugely expensive banking fraud.
Yes - those damn Gen Yers are so irresponsible. Wonder where they learned that from!
Oddly enough, the individual solution for Generation-Y'ers of saving more and spending less will reduce economic activity as a whole.
And now we get back to the basic question of financial austerity vs stimulating by spending.
The truth is that it is a matter of balance between the two and the pendulum swung too far for too long in the direction of spending and now everyone has to pay the price. The only solution for the down economy is time.
Individual and government debt is saturated, which is why the usual fiscal stimulus of spending more is not pushing the economy as it would have in different circumstances.
It doesn't help that with the Obama economy we're seeing too few jobs and pay increases while the cost of living is raising faster than anyone can keep up with. 40 years ago a man could provide for his stay at home wife, two kids, a dog and a cat, maintain one car, pay their mortgage, and keep their property nice and maintained all on one salary...today two people struggle to afford to live without children in that same house...
Here's your hope and change...
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