Terri Ludwig: Let's Not Make Things Worse for Young Adults

Even before a student loan rate hike, young adults face a perfect storm of economic crises

Unless lawmakers act, interest rates on new federal student loans will double starting Monday, adding to the already-onerous cost of attending college in the U.S. Letting that happen would be a mistake–for reasons that go far beyond higher education.

Among other things, the rate hike would deepen the economic crisis facing America’s younger generation: a perfect storm of unmanageable debt, high unemployment and skyrocketing housing costs.

Student loan debt has nearly quadrupled over the past decade, mostly on the backs of our young adults. According to the Federal Reserve Bank of New York, the share of 25-year-olds with student debt has increased from 25 percent in 2003 to 43 percent last year, while their average loan balance grew by more than 90 percent over the same period.

This mounting debt wouldn’t be much of a concern if incomes were rising at a similar clip, but the opposite has been happening. Average earnings for young college grads have fallen by more than 15 percent since 2000. More than 10 million young adults are either unemployed or underemployed today, as recent graduates are having trouble finding jobs that match their credentials.

The result is a growing class of lower-income, highly indebted grads. Today 40 percent of households with student loans earn less than $37,000 a year, according to the Pew Research Center. And the clear majority of these households are renters, where they face yet another crisis.

America’s renters have seen their housing costs soar in recent years as their average incomes decreased, causing a broad affordability crisis. According to the National Housing Conference, the typical moderate-income renter now spends 55 percent of their pre-tax income on housing and transportation alone, a marked increase from a decade earlier. And if they have student loans, those payments take up another 6 percent of their income, according to analysts at Harvard.

Think about that for a moment. Even if you’re making $37,000 a year–which is actually less than $30,000 after federal, state and local taxes–you’re left with just $220 a week to cover groceries, healthcare, medicine, clothing and other life essentials. And that number shrinks considerably in high-cost markets like New York and Los Angeles, where rents are rising at astronomical rates.

So it shouldn’t be any surprise that mounting debt is altering the spending habits and life choices of younger adults, with profound consequences for the broader economy. Research shows that debt-saddled grads are less likely to go off on their own, instead opting to move back in with their parents or double up with friends or family. Twenty-five-year-olds with student debt are less likely to buy cars than their debt-free counterparts. And indebted 30-year-olds are less likely to purchase their first home, a key buyer demographic for a well-functioning housing market.

Now let’s fast forward to July 1, when the interest rate hike is set to kick in. The typical new borrower will see their costs go up by $1,000 for each year of college over the life of the loan, or about $30 per month on a 10-year loan for four-year degree. To well-off families that’s a minor inconvenience; to others it’s the difference between groceries and medicine, between making rent and losing your home.

America’s young adults face a treacherous road ahead, and it’s clear that student loans are exacerbating the problem. Lawmakers in Washington should be careful not to make matters worse.

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Terri Ludwig: Let's Not Make Things Worse for Young Adults