Another Look at Student Debt
by Wells Fargo Securities
Dec. 17: Fears that student-loan debt has crippled the finances of young households have intensified since the Great Recession. The rapid increase in educational debt, estimated at $1.2 trillion, has been pointed to as one factor holding back consumer spending and limiting the ability of Millennials to participate in the housing-market recovery. But are Millennials’ finances as dire as they are often portrayed?
To evaluate the financial position of Millennials, we use data from the Federal Reserve’s triennial Survey of Consumer Finances (SCF). Net worth among young households—not unlike their middle-age counterparts—has deteriorated in recent years. Two major trends, not entirely distinct, account for the decline: the rise in student-loan debt and the decline in residential real estate holdings. However, since a balance-sheet framework captures the liabilities incurred from student loans, but not the asset, we view debt-to-income payments as more telling of the financial burdens incurred from student loans.
We find that young households’ student-loan burdens, while growing, still look quite manageable given longer repayment terms and lower interest rates. That said, longer repayment terms mean Millennials will have to grapple with student-loan payments later into life, while there are also troubling signs that a rising share of college graduates aren’t making any payments.
—Sarah House, Erik Nelson