So Stuck

Student debt has turned millennials into carless, homeless, basement dwellers who can’t borrow

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This week we learned from the New York Federal Reserve that young adults in America (aged 39 and under) now have a collective student loan balance of more than $700 billion.

While some argue that debt levels themselves are not inherently problematic, the Fed thinks otherwise. More than half of all student loan borrowers are now delinquent on their payments, Fed researchers note, and borrowers who left school in 2005 have paid down just 38 percent of their original student debt.

“Some of these balances will likely be forgiven after twenty-or-more years of repayment, depending on which program the borrower is participating in,” they write. “But, in the meantime, the participant may carry an increasing load of non-delinquent debt on his credit file, affecting his ability to secure other types of credit.”

Below we highlight four of the biggest consequences for millennials of their soaring student debt loads.

THEY’VE MOVED BACK IN WITH THEIR PARENTS

As of 2013, nearly one-in-three millennials was living at home with their parents.

living at home

The figure recently stopped increasing, but between 2000 and 2013 increased 31 percent.

Recently, Federal Reserve researchers found that rising student levels are twice as responsible for this phenomenon as economic conditions, like a slack jobs market.

living at home

“Changes in aggregate patterns in young adults’ debt-holding between 2005 and 2013 – characterized by increases in student loan debt and delinquency and declines in credit card and auto debt – can explain 30 percent of the increase in flows into co-residence and 26 percent of the increase in median time spent in co-residence,” they write. “This highlights the importance of financial circumstances in explaining the recent ‘boomerang’ phenomenon.”

THEIR CREDIT SCORES HAVE TANKED

Prior to the recession, 25-year-olds with student debt had higher scores than ones without, and scores for 30-year-olds were about the same regardless of their student debt status.

Since the end of the recession, however, the credit risk scores of 25- and 30-year-olds with no student debt have hit all-time highs, while ones with student debt have tanked. They’ve recovered somewhat in the past couple of years but remain well below their debt-free peers.

student debt

“The increasing load of non-delinquent debt on [a borrower’s] credit file affect[s] his ability to secure other types of credit,” the Fed says.

THEY’VE STOPPED BUYING HOMES

Before the recession, there was a strong correlation between student debt and homeownership — if you had the former there was a greater likelihood of the latter. This made sense: If you had student debt, you probably ended up with a college degree, and thus had higher earnings.

But since the recession, the correlation has eroded: Now people with no student debt (in red) have slightly higher rates of homeownership than individuals with student debt (in blue) — although homeownership rates for both have fallen sharply.

student debt

AND THEY’VE STOPPED BUYING CARS

Like homes, car ownership rates used to be significantly greater for young adults carrying student debt, and lower for ones without. Now it’s vice-versa.

student debt

Higher student debt isn’t likely the sole cause of these phenomena. Banks have become much stingier about lending to anyone, and millennials seem to be changing their car ownership preferences, although many say they still want to own a home.

But the Fed is convinced the debt problems of young adults are having major side effects.

“As a result of tighter underwriting standards, higher delinquency rates, and lower credit scores, consumers with educational debt may have more limited access to housing and auto debt and, as a result, more limited options in the housing and vehicle markets, despite their comparatively high earning potential,” they write.

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