Millennials Have Less Debt — More Debt Burden
Composition of Debt Matters, and May Connect to Urban Migration Patterns
The New York Fed released a report last month on the “graying of American debt.” The flagship graph is here:
That’s a really neat graph. It’s not one you see every day. So we owe the NY Fed a debt here: they did some research not a lot of other people are doing.
Unfortunately, the conclusions we should reach from this graph are less than intuitive. You’ll notice that debt burdens are essentially the same for 20- amd 30-somethings, substantially lower for late-30s and early 40s, and much higher for people over 50. But we keep hearing stories about Millennials buried by debt. So what gives? Are Millennials just entitled kids whining about the same debt borne by previous generations?
Uh, no. And the answer why is fairly obvious.
What’s Driving Changes in Debt?
Demographics vs. Behavior
The NY Fed presentation helpfully decomposes changes in the cumulative debt burden by age into two components: debt aging (i.e. people from previous period just carrying old debt forward) vs. behavior changes (i.e. people of a given age choosing to take on more debt). Here’s that chart:
So. For people 20–23, debt burdens are rising entirely due to increases in debt-increasing behaviors. For those 24–37, however, there appears to be a behavioral turn away from getting into debt, even as demographics cause the total debt burden to grow in some cases. Then from age 40 to 80, there’s a general trend towards behaviorally-driven indebtedness, and from 50 to 80, additional demographically-driven indebtedness, i.e. baby-boomers.
So okay. From this, we can say that the younger millennials (under 25), do indeed seem to be taking out more debt in total. But those a bit older, 25 to 35, are keeping debt burdens low: either by taking on less debt, or by repaying it faster.
That means that the “horrible student debt burden” story only applies to Millennials under 25, right?
Wrong. Let’s dig deeper.
Fewer Mortgages, More Student Loans
What We Borrow For Is Changing
We can also break down the change in loans by type of loan. The research does not show us each loan type decomposed by demographic vs. behavioral changes, which would be nice. But maybe just the loan type data will be enough. So here’s two charts, the one on the left showing mortgage + HELOC lending, the one on the right showing auto, consumer credit, and student loans.
So we can see some neat trends. From the left, young people are not taking on as much housing-related debt. This may correspond, as I’ll explain more below, to a generation often noted for its propensity to reside in rented urban housing. But don’t lose sight of this fact: housing-related debt has declined for 20-somethings and 30-somethings by about $10,000 per person. That’s pretty substantial. Meanwhile, it’s risen among the oldest groups by well over $10,000 per person.
On the right, we can see some non-housing loan types. Auto loans haven’t changed radically it seems; sure young people maybe are a bit less likely to get car loans, but that’s a small change. Meanwhile, credit card debt has fallen dramatically, by about 50%, for people under 40. This may be because young people have a harder time getting credit, or may be because they simply choose to take out less debt. But one way or another, Millennials seem to be a generation that is collectively eschewing credit card debt.
But then there’s student loans. Now take note: the housing and non-housing graphs are not on the same scale. The entire non-housing graph tops out at $12,000 per person, so just slightly above the first hash mark on the housing graph. Even so, student debt for the average 20-something has risen between $2,000 and $8,000 since 2003. That’s pretty substantial. In fact, student debt has more than doubled for many ages.
So yes, we’re seeing unprecedented student debt. But it corresponds with a generation taking out much less mortgage and credit card debt. And that, my friends, is concerning.
Good Student-Borrowers Are Bad Home-Buyers
Student Loans Crowd Out Other Debt
Student loan debt is a unique creature. You can’t escape it nearly as easily as auto or housing debt, where a physical asset is involved. Student loan debt follows you your whole life, immune from virtually any restructuring. It also has fairly high payments versus principal: it’s fairly routine to get a 30-year mortgage. Student loans default to a 10-year payment.
If I were to take out a mortgage to buy a $300,000 house, I might pay between $800 and $1,200 a month. Meanwhile, if I have $60,000 in student loans, I will probably pay something like $500 to $2,000 a month in loans, depending on the structure of those loans. Let’s go ahead and make an assumption here that $1 of student loans is, say, 4 times as burdensome, in terms of repayments due “now,” as a home loan. Well then, that $2,000 to $8,000 increase in student loans is equal to something like an $8,000 to $32,000 increase in home loans. Home loans decreased about $10,000. So the “central estimate” here should be that the actual immediate payment burden of loans has risen for young people, because, in terms of my budget today, $1 of student loans is not equal to $1 on my mortgage.
And in the rise of student indebtedness, we find the source of declining credit card and mortgage debt.
Graduates shelling out on student loans face a serious liquidity constraint on their budget. To be a bit personal here, I’m fortunate enough to be in the top few percent of earners for my age bracket, with good credit, accumulated assets, a graduate degree, and ultimately just a mid-level amount of debt… yet the idea of taking out a home mortgage seems extremely unlikely. Why? Because whatever happens in the future, I can leave my apartment, cut ties, and be done. If I lose my job, moving to a cheaper rental unit is easy. But mortgages are harder to escape in a financially viable fashion. In other words, households facing liquidity constraints and uncertainty about future earnings may prefer renting to owning. On the margin, increasingly tight household budgets will tend to constrain home-buying. Not because managing $300,000 in debt over 30 years is so crazy (it’s not), but because managing $800 in monthly payments over the next 30 months is crazy.
Why’s it crazy? Because I have a non-productive debt that is large, long-lived,and inescapable.
Auto loans can be expensive, but they’re fairly short-term, and you acquire a car, which lets you do new things. Home loans are long-term, but relatively “cheap,” and they replace rent for you. Credit card debt can be very expensive, but allows you to defer payment on consumption (even just 30 days for those of us who pay fully).
But student loans? Useless. Don’t get me wrong; the degree is useful. But you can’t take that from me now. I’ve got the asset, and you can’t take it. But this isn’t short-term uselessness. This is long-term uselessness. I’ll be flushing my money down the drain for years for an asset that has no value beyond what I’ve already received. When I pay off my house, I have equity. When I pay off my car, I have (admittedly much reduced) equity. But my student loans? I have… nothing. I could sell a car, get home equity loans for a house… but student loans? Nothing.
I’m hammering this home to point out a key feature of young peoples’ debt burdens: we have less productive debt. Not just wage stagnation is at work here, but the reality that our debt mix of less housing and more education means we spend our 20s and 30s accumulating fewer assets.
It’s not because we’re lazy or frivolous. We’re not. Despite crushing student loan burdens, we’ve managed to hack our credit card debt in half versus a decade ago. We’ve avoided worsening auto debt. We’ve prudently reduced our housing spending. This debt scenario is a picture of a fiscally responsible generation managing an unproductive and inescapable liability.
But there’s a nifty twist to all of this. It may just be that these student loan debts create some unique Millennial behaviors.
Urban Wage-Price-Debt Bubbles
Why I Can’t Go Home to Kentucky, Yet
This bit is highly speculative, and I’ll admit I have little data to back it up. But it’s something I’ve mulled over in my head for a while. It definitely is a conscious rationale for my migratory decisions, and I know has been for (non-economist) friends. I call it the Urban Wage-Price-Debt bubble. I mean “bubble” here not in the sense of an “asset bubble,” but in the sense of something like an “urban heat bubble,” an urban geographic effect of sorts.
Much has been made of the alleged Millennial preference for urban living, and how that’s driven re-urbanizing migration patterns. I’ve been skeptical of this process, instead arguing it was a fluke of the financial crisis. I stand by this. But that fluke has a fun side effect: the recession induced a large amount of continuing education. With no jobs available, we just stayed in school. Many people returned to school. This means increases in student debt.
That move to schools, especially graduate schools, is inherently urbanizing, as higher education tends to be fairly urban. But even after graduation, we have to wonder: how do you pay for the debt?
Paying debt means maximizing cash available beyond cost of living. So you want to get high wages, low costs. But crucially, what matters is not the ratio of wages to costs, but merely the nominal difference. If I’m deciding between two residence options, I don’t care if Wages in Area A are 20% above cost of living, versus Area B where they’re just 10% above cost of living. I care that in Area A, that wage-cost gap is equal to just $5,000, whereas in Area B they’re $7,000 above cost of living. My student debt is the same wherever I live.
Now, here’s a fun experiment. Local wages and local prices tend to be correlated with each other. In 2013, there was a 62% correlation between metro-area average income and metro-area price levels, according to the BEA.
Let’s assume that for every 10% increase in local prices, there’s a 10% increase in wages.
So say a given borrower could earn $35,000 in Cleveland, with a $30,000 cost of living. Or, she could work in Chicago. Chicago is 27% more expensive on average, so let’s guesstimate same-skill-level wages are 27% higher. That’s $45,000 in wages, $38,000 in cost of living. So by choosing pricier-Chicago, our example borrower boosted her cash-available-to-pay-loans from $5,000 to $7,000.
If our hypothetical borrower intended to spend that money on restaurant meals, a house, movie tickets, entertainment, the choice would be a bit of a wash, financially speaking: this things are generally more expensive in Chicago. But our borrower wants to spend that money on student loans, which have a fixed nominal value. Given that student loans have a fixed nominal value, they are often easier to pay off in high-wage, high-cost cities. As a bonus, these cities often have amenities young people like, public transit (allowing fewer car purchases), and more convenient and varied rental housing stocks. And I already explained why the student-debt-constrained borrower would prefer rental housing to ownership in many cases.
In other words, the recent (and much exaggerated) Millennial preference for certain trendy cities may partly stem from the need to pay off student loans.
This also suggests that rising local prices may not dissuade migration as much as would otherwise be the case. These migrants can’t buy a house in any short-run obtainable range of prices. And if high prices are offset by comparatively high wages, then they don’t mind being stuck in small apartments and shut out of homeownership and being forced to pay $12 for a gosh-darned hamburger. These welfare losses are acceptable if it means escaping student loans in 6 years instead of 15, because that’s 9 years of freedom from inescapable crushing debt peonage.
Conclusion
Slightly lower debt among some older Millennials does not prove that Millennials are whining about nothing, as regards student debt. Rather, the evidence shows that Millennials have been frugal, and fairly aggressive, debt-payers. Lower credit card and mortgage debt reflect budget constraints in Millennial households, alongside aggressive strategies to limit indebtedness and lack of access to credit. The combination of these factors is a generation likely to be hostile towards indebtedness in the future, and one whose primary experience of debt has shifted from an asset-management model of homeownership, to the purely extractive creditor relationships of student lending. Finally, it is possible that Millennial migration into cities is partly driven by the favorable debt-repayment economics of high-wage, high-cost cities.
See my previous post, about out-migration as a poverty solution.
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I’m a graduate of the George Washington University’s Elliott School with an MA in International Trade and Investment Policy, and an economist at USDA’s Foreign Agricultural Service. I like to learn about migration, the cotton industry, airplanes, trade policy, space, Africa, and faith. I’m married to a kickass Kentucky woman named Ruth.
My posts are not endorsed by and do not in any way represent the opinions of the United States government or any branch, department, agency, or division of it. My writing represents exclusively my own opinions. I did not receive any financial support or remuneration from any party for this research. More’s the pity.
