By Annie Lowrey
The anemic economy has left millions of younger working Americans struggling to get ahead. The added millstone of student loan debt, which recently exceeded $1 trillion in total, is making it even harder for many of them, delaying purchases of things like homes, cars and other big-ticket items and acting as a drag on growth, economists said.
Consider Shane Gill, a 33-year-old high-school teacher in New York City. He does not have a car. He does not own a home. He is not married. And he is no anomaly: Like hundreds of thousands of others in his generation, he has put off such major purchases or decisions in part because of his debts.
Gill owes about $45,000 in federal student loans, plus another $40,000 to his parents. That investment in his future has led to a secure job with decent pay and good benefits. But it has left him with tremendous financial constraints, as he faces chipping away at the debt for years on end.
“There’s this anxiety: what if I decided I wanted to get married or have children?” Gill said. “I don’t know how I would. And that adds to the sense of precariousness. There’s a persistent, buzzing kind of toothache around it.”
The Federal Reserve Bank of New York, in a new study, found that 30-year-olds with student loans were now less likely to have debts like home mortgages than 30-year-olds without student loans — even though most of those with student loans are better educated and can expect to earn more money over their lifetimes. The same pattern holds true for 25-year-olds and car loans.
“It is a new thing, a big social experiment that we’ve accidentally decided to engage in,” said Kevin Carey, the director of the Education Policy Program at the New America Foundation, a research group based in Washington.
“Let’s send a whole class of people out into their professional lives with a negative net worth. Not starting at zero, but starting at a minus that is often measured in the tens of thousands of dollars. Those minus signs have psychological impact, I suspect. They might have a dollars-and-cents impact in what you can afford, too.”
The weak economy and tight credit standards remain the main culprits preventing young people just establishing themselves from making major purchases. But millions now face putting a substantial share of their take-home pay toward past debts rather than present needs. Student loan debt leaves them with less money for things like clothes and restaurant meals. And it is even more likely to suppress purchases of more expensive items that need to be bought with credit.
A poor job market is compounding the problem: the educational debt burden of many so-called millennials has sharply increased even as they are being forced to get by on significantly less income than the previous generation — a decline of about 15 percent in real terms since 2000, with much of that drop coming from the recession.
According to calculations by the Pew Research Center, the measure of debt to income for households under the age of 35 has ballooned to about 1.5-to-1 in 2010 from about 1-to-1 in 2001. The composition of that debt has shifted, too: more is tied to student debts, and less to homes.
“Having a lot of student loan debt makes it harder to qualify for a mortgage and harder to save for a down payment,” said Jed Kolko, the chief economist at Trulia.
With the interest rate on some federal student loans set to double on July 1, House Republicans and Senate Democrats have both put forward proposals to try to hold them down. Rep. John Kline, Republican of Minnesota, has proposed tying the rate on several federal student loans to the government’s borrowing costs. Democratic senators, including Dick Durbin of Illinois, have made a similar proposal.
Some have suggested going further: Sen. Elizabeth Warren, Democrat of Massachusetts, has proposed letting students borrow at the same “discount rate” that the Federal Reserve charges to banks, currently 0.75 percent.
Student loan debt is not only constraining young adults, but also, at least in the near term, holding back the recovery itself, some economists say. The shadows might remain even as the economy picks up, by making young workers more cautious when it comes to decisions about their careers and their finances. Millennials might end up buying less expensive homes or more often choosing to rent than previous generations.
“The debt is shifting how much young people can spend, and it can also be a powerful psychological thing as well,” said Selma Hepp, an economist at the California Association of Realtors.
On the other side of the equation, many college graduates now in their 20s and early 30s should eventually be able to make up for lost ground. Students who take on debt to pay for higher education commit themselves to paying off huge sums, but they usually lift their lifetime earnings by substantial amounts. And they are in a better position to insulate themselves against economic bad times, given the profound rewards the job market provides to the college-educated.
Indeed, the economy is far more punishing to workers without a college degree. The college-educated earn, on average, 80 percent more than those who only completed high school, a premium that has widened over the last 30 years. Unemployment rates for the less educated are higher, too.
For most young workers, gaining a college degree remains well worth it in the long run, even if it delays some purchases in the near term.
“For an individual going to college and ending up with a lot of debt — you’re still better off,” said Chris G. Christopher of the forecasting firm IHS Global Insight.
There might, however, be a slice of young workers who paid huge sums for degrees that prove less valuable on the job market, saddled by a debt burden that could end up holding them back for decades.
Gill said his education remained a vital investment, even if the debt overhang has for now put white picket fences or a condo with a gleaming view out of reach.
“Sometimes I think: ‘What if I were to buy an apartment?’ ” he said. “It is like asking: ‘What am I going to do when I first land on the moon? What’s the first thought that I will have when I see Earth from outer space?’ ”