Breaking the Millennial Debt Spiral

Finding ways to increase an entire generation’s wealth is a
messy business.

That’s probably been the case for decades, but this time
around things are even more complicated because Millennials—those born between
the early 1980’s and early 1990’s—had the unenviable task of coming-of-age in
the wake of the Great Recession. Despite having the distinction of being America’s
largest working generation, Millennials have been entering one of the worst
job markets in recent history while carrying unprecedented
levels of debt and are struggling
to attain the same levels of wealth achieved by previous generations.

“Financial capability is the opportunity to put knowledge
into practice,” noted Dr. Terri Friedline during a recent event at New America,
where she spoke with Parker Cohen of the Corporation
for Enterprise Development (CFED), Sunaena Chhatry of the Consumer Financial Protection Bureau,
and Vox
education reporter Libby Nelson about how Millennials could change their financial
fortunes for the better.

For Dr. Friedline, the best way to accomplish this is by giving
Millennials the chance to practice financial decision-making. In her research,
she has found that “the combination of having received financial education and
being financially included via a savings account” is the most effective way to
improve outcomes and help Millennials prepare for financial emergencies or work
toward long-term purchases. “We see that savings accounts and credit cards
perform pretty consistently [as tools for financial experiential learning],”
Friedline explained.

The “financial capability as key to stability” argument is certainly
an attractive proposal for a generation that has resorted to using the
oft-mentioned “sharing
economy” as a way of circumventing large expenses and unmanageable debt, but
that doesn’t necessarily mean that knowing what an IRA is or having a small
amount of savings will solve every financial struggle. Friedline acknowledged
this tension by explaining that economic inequality adds enormous complexity
the goal of increasing financial capability because it creates larger burdens for
people with lower incomes. When financial emergencies arise, Millennials with
access to higher incomes and family support are often able to use already-amassed
savings to keep themselves afloat while their lower-income peers have to draw
upon things like credit cards and payday loans just to get by. The discrepancy
between high-income and low-income Millennials’ access to resources shouldn’t
mean that pursuing financial capability is a less worthy endeavor, but it does
point to the need for a conscious effort to address the unique challenges
lower-income individuals face in an economy where assets matter.

If financial capability is the gateway to financial
well-being for lower-income individuals and families, how can financial
knowledge be made accessible to the people that need it most? When asked this
question, Cohen identified the education sector as the perfect breeding ground
for increasing financial knowledge and opportunity. “That time when a youth is
starting to get their first paycheck and make different sorts of financial
decisions on their own is an excellent time to get them educated so they make
informed decisions,” he noted, highlighting
Live the Solution’s AZ Earn to Learn
initiative (which supports high school students by using financial
education in conjunction with matching funds in order to teach the importance
of saving money up for college)and the financial
coaching program at New Mexico Community College as examples of how
educational institutions could leverage their influence to improve the
financial futures of students.

But even the fact that education can be a very important step
towards financial stability for lower-income
Millennials lacking an inherited stockpile of assets is itself a distraction from
a paradoxical reality. Going to school isn’t simply a tool for reducing
financial insecurity; it is oftentimes the very factor that exacerbates that
insecurity.

“One of the things
most people don’t realize is that although getting a bachelor’s degree is still
a minority experience, going to college is actually an increasingly universal
one,” Nelson explained, pointing out that
“college is a major financial decision” for students and their families. Less-than-optimal systems of notifying students about their financial aid have only
served to make concerns about rapidly accumulating student loans and
appropriate borrowing amounts even more confusing, especially when they create
scenarios where a student must drop out of school due to insufficient finances.

“I am a financially
capable 28 year old woman, and if someone had told me ‘I am going to give you
your salary for the next six months now, good luck with that,’ I hope I would
still have something to eat in December, but I don’t really know,” Nelson joked
when commenting on the common higher education practice of sending students financial
aid notifications only once a semester.
She emphasized that finding ways to get financial information to
students “at the right time” is an important step in ensuring that Millennials
can keep their heads above water. She commented that Indiana
University came up with a particularly good way of accomplishing this task
when it opted to notify students of their cumulative debt through an annual letter.
While a letter may not seem like much, Nelson
explained that the correspondence gave students a way of monitoring their
borrowing and avoid the pitfall of crushing student debt.

Ultimately, the
panelists agreed that sustainable solutions to debt will require a complete
overhaul of how our society approaches financial education. Dr. Friedline’s
report suggests that a universal system of child savings accounts could be a
catalyst for vastly improving financial capability if account access were
paired with financial education. The panelists were optimistic that building
greater financial capability was possible with the right combination of early
education and access.

“We need to go beyond financial knowledge,” Chhatry urged.
“Young people are developing their understanding of financial matters very
early on.”