Young Adults and Consumer Debt: The Quiet Crisis Next Time

Ida Rademacher and Genevieve Melford

The balance sheets of young adults in America today look different than they have in generations past. In particular, their overall net worth—defined most basically as assets minus liabilities—is generally lower, due to having accumulated both fewer assets and more debt. These overarching trends reflect the broader economic conditions that are impacting the financial lives of families across the country. The prevailing reality is that a growing share of the population lacks a level of income necessary to cover cost of living expenses, which in turn is keeping families from saving, investing, and building wealth for the future.

As the Federal Reserve Bank of New York recently reported, total non-mortgage debt amounted to $3.95 trillion in 2019, a 47% increase from the previous peak of $2.71 trillion in the fourth quarter of 2008,¹ during the onset of the Great Recession. Defaults on these loan obligations are growing.² Specifically, debt in collection now appears on one-third of credit reports.³ Just as the 2008 crisis reflected structural flaws in the regulation of the economy, including perverse mortgage underwriting incentives and lax enforcement, the rise of consumer debt today reflects systemic issues—a labor market where more people earn low and volatile incomes, rising costs for housing, healthcare, and education, and a fraying social safety net that shifts risk onto individuals. The Millennial wealth gap is one of the results. Compared to generations past, it has become increasingly difficult for today’s young adults to make their ends meet, let alone build wealth.

Eleven years ago, the entire world was staring into the financial abyss. Massive defaults in U.S. subprime mortgages had triggered a global financial crisis; banks, investment houses, and insurers everywhere fell like dominoes, and the economic pain inflicted on ordinary people was intense and widespread, too. Small wonder that just over a decade later there is the temptation just to be glad we avoided Armageddon and to close our eyes to the next crisis now growing: consumer debt.

That temptation should be resisted. Even if it appears less dramatic and doesn’t dominate the news, rising consumer debt has serious consequences. A quiet crisis is brewing. Sixteen percent of suicides occur in response to a financial problem. Financially-stressed people experience higher rates of physical illness and are more than twice as likely to suffer depression and anxiety.⁴ Not all over-indebted people experience catastrophic health outcomes, of course, but it does negatively impact a host of behaviors that benefit society writ large. Specifically, people with poor finances tend to postpone getting married and forming families,⁵ buying homes,⁶ starting businesses,⁷ and other things that make for healthy civic life and a robust economy. A country filled with stressed-out, socially-isolated people struggling under unmanageable debt is not the recipe for a thriving nation.

The Aspen Institute Financial Security Program (Aspen FSP) works to illuminate the country’s critical financial challenges and to make financial security for all Americans a national priority. Given the threat that consumer debt poses, we have devoted a round of our interdisciplinary EPIC (Expanding Prosperity Impact Collaborative) initiative to harnessing the knowledge of experts from various perspectives—nonprofit, academic, government, and industry—who are all working on this issue. EPIC’s assessment confirms that the sources of harmful consumer debt are systemic, and the consequences severe. But we have also been heartened to find examples of committed leadership and innovative solutions which we highlight in our recent report, Lifting the Weight: Solving the Consumer Debt Crisis for Families, Communities, and Future Generations.⁸

Consider student loans. Thanks to the rapidly rising cost of attending college and declining availability of educational grants, the average student loan debt for a member of the Class of 2017 exceeds $39,000. The aggregate sum of all current student loans now exceeds $1.5 trillion, which is $600 billion more than the entire credit card debt of the nation.⁹ A recent development is that employers have begun stepping in, offering student loan repayment as an employee benefit. Early adopters, such as the office supply chain Staples, are ensuring that student loan repayment benefits are available to their lower-paid workers most likely to need the help. Policymakers have begun responding too. In a recent brief, Student Loan Cancellation: Assessing Strategies to Boost Financial Security and Economic Growth, our team reviewed 6 recent legislative proposals introduced by Democrats and Republicans alike.¹⁰ Presidential candidate Senator Elizabeth Warren’s bold proposal to cancel up to $50,000 of every borrower’s debt has generated greater interest in addressing the issue.

Government fees and fines are another driver of onerous debt that is besieging families with lower incomes. Community organizers in Alabama, for example, surveyed residents who owed debt to a court system and found that 80 percent were forced to cut back on food and utilities to pay it off. Advocates nationwide have begun urging policymakers to base fines and fees on ability to pay, to prohibit jail time for unpaid court debts, and above all, to reduce state and municipal reliance on fines and fees for revenue. The San Francisco Treasurer’s Office’s Financial Justice Project is one of the leaders analyzing this issue and working on solutions.

When people fall behind—and more than 70 million adults in this country have debt in collections—the result is higher interest rates, lower income (due to garnishments), penalties, and other responses that make a bad situation worse. There is a growing imperative to identify effective solutions to the snowballing effect of rising consumer debt. One such innovation, LendStreet, pays off creditors directly and then allows repayment of a consolidated loan with manageable terms. Another, run by the collections agency TrueAccord, is boosting repayments by using artificial intelligence to tailor more effective communications to over-extended borrowers.

Our role at Aspen FSP is to lift up solutions like these and others in order to get more leaders to focus on the critical issue of consumer debt. We recognize that the root causes of this crisis—stagnating incomes and inadequate social safety nets—have been decades in the making and won’t be quickly solved. But all stakeholders have roles to play right now in marshaling a response to the emerging crisis of consumer debt, especially as it impacts young households. For instance, nonprofits can help families avoid taking on high-cost debt and pay off what they already owe. Employers can help workers automatically save part of their paychecks, offer student loan repayment benefits, and facilitate early access to earned wages when workers need it. Financial services providers can design early interventions so people who fall behind on debt payments can get back on track. Regulators can crack down on predatory lenders and harmful collection methods. The federal government can expand Pell grants for low-income students and deny federal assistance to institutions with a history of poor student outcomes.

The levels of consumer debt that are impacting young adults today are unsustainable and debilitating—both for the households afflicted and the country as a whole. However, there are promising responses to address this quiet crisis which can be pursued and are worthy of support. It is time to move with a greater sense of urgency. Already 11 percent of the $1.5 trillion in student loans— more than $1.3 trillion of which is guaranteed by the government—are in default. That is the biggest category of consumer debt, but it’s hardly the only one. We have seen what comes from ignoring a burgeoning crisis. Let’s learn from history instead of repeating it.