NEW YORK — The economic security of younger Americans is eroding at an alarming pace as a result of slow wage growth, underemployment, rising costs and mounting student loan and credit card debt, according to a new report, "Generation Broke: The Growth of Debt Among Younger Americans," released today from Demos, a nonpartisan, public policy group based in New York City.
"This is an age when you set credit and finance benchmarks for the rest of your life," said Tamara Draut, Director of the Economic Opportunity Program at Demos and lead author of the report. "Young adults starting off in the red will find that it impacts their financial security for years to come. This report should set off alarm bells for every American."
The report's data and findings, based on in-depth analysis of the most recent Federal Reserve's Survey of Consumer Finances as well as dozens of other sources, paints a troubling picture of the financial health of America's population of adults aged 18-34, who are entering the period in their lives when financial responsibilities begin to expand. Ironically, this coveted demographic for advertisers and marketers are slipping into a downward debt spiral that is unmatched in modern history.
Among the report's key findings (all figures are in 2001 dollars):
* Average credit card debt among young adults (aged 25-34) increased 55% between 1992 and 2001, to $4,088.
* The average indebted young-adult household (aged 25-34) now spends almost a quarter of every dollar earned on debt payments.
* Among the two-thirds of young-adult households (aged 25-34) with incomes below $50,000, nearly one in five with credit card debt is in debt hardship — spending more than 40% of their income servicing debt, including mortgages and student loans.
* Americans aged 25-34 have the second highest rate of bankruptcy (just after those aged 35 to 44). The bankruptcy rate among 25-34 year olds increased between 1991 and 2001, indicating that Gen-Xers were more likely to file bankruptcy than were young Baby Boomers at the same age.
* The youngest adult households (aged 18-24) with debt spend nearly 30 cents of every dollar earned servicing debt, twice the amount spent on average in 1992.
* Credit card debt among the youngest adults (aged 18-24) skyrocketed 104% during this same period to $2,985.
Factors Fueling a "Perfect Storm" of Debt
The report finds that major costs associated with adulthood that begin to mount between the ages of 25 and 34 — such as housing, child care, and health care — have all increased dramatically over the past decade. Coupled with rising unemployment or under-employment, slow real-wage growth, and sharp tuition hikes that have led to larger student loans, a massive debt burden has been unleashed on America's young adult population.
* Growing numbers of Gen-Xers carry a balance. 71% of credit cardholders aged 25-34 revolve their balances, compared to 55% of all cardholders.
* Generation-Y may be the most at risk. Three out of four 18-24 year-olds carry a credit card balance, due largely to unregulated, aggressive marketing by card issuers on campuses. Between 1990 and 1995, one survey found credit debt had shot up 134%, from $900 to $2,100. By 2001, a Nellie Mae study found college seniors graduated with an average of $3,262 in credit card debt.
* More young Americans now face debt hardship. 13% of those aged 25-34 are in debt hardship (using 40% or more of their income to service debt), up from less than 7% in 1992.
* Student loan balances have doubled in the course of a decade. The average 2002 graduate carried $18,900 versus $9,000 for 1992 graduates.
* Young adults pay a price for being uninsured. One in three young adults lacks health insurance, compared to one in six Americans overall.
* Unemployment/underemployment. Unemployment rates have risen faster for younger workers than other demographics: 1 in 10 was unemployed in 2003.
* College degrees also offer less job security than before: as of March 2004 there were 1.17 million unemployed college graduates, surpassing the number of high school dropouts.
"During the tech bubble of the late 1990s, Gen-Xers were thought by many to have the brightest of futures as beneficiaries of an Internet-driven economic boom," said Draut. "But just five years later, after the bubble burst, the economic situation for many Gen-Xers has deteriorated gravely. What's even more frightening is that Generation-Y members may find themselves in deeper trouble as they turn even more desperately to high-interest rate credit card debt as a means of survival."
Roadmap for Policy Changes and Industry Fairness
As the economic insecurity of younger Americans continues to erode, the need for change has become obvious. The report cites several steps to help alleviate the hardship faced by younger Americans, including raising the minimum wage, broadening health coverage, expanding higher education grants to offset student loans and extending the deferment periods on existing student loans.
To address credit card industry practices, the report calls on Congress to pass a "Borrower's Security Act," which would ensure that borrowers are protected from the excessive rates, fees and capricious changes in account terms, which are all legal and common industry practices today. Such legislation would also require, among other things, that lenders provide a five-day grace period on late payments before fees can be assessed, that lenders disclose to consumers how long and how much they will need to pay if only minimum monthly payments are made, and that lenders ensure that those under 21 years of age have a co-signer for a card or prove they have an independent means of support.
Demos is a national, nonpartisan, nonprofit public policy organization based in New York City.