Millennials likely to take debt to their graves

A new study suggests Gen Y borrowers shows their repayment patterns don’t match up with past generations. (And that’s not a good thing.)

April Lesho in her recently purchased Washington, D.C., home.

If you want to talk to someone about credit card debt, talk to April Lesho, she's had her fair share. And she's got the collection of financial planning books to prove it.

She shows me her bookshelf with titles like "Debt Free by Thirty," "Suze Orman's The 9 Steps to Financial Freedom" and "Idiot's Guide to 401k Plans."

Those books seemed to have worked for Lesho. She's now the proud new owner of a house in Washington, D.C. But she hasn't always been so careful with money.

“By the end of college, I had about $30,000 in debt,” she tells me. “I mean, I spent at will. So you know if I felt like taking a trip, I took a trip. If I felt like getting a new stereo system, I did.”

This was at the University of South Carolina, where Lesho graduated in 2001 with a degree in sociology.

“Didn't you think it was going to catch up with you someday?” I ask her.

“I just figured,” she says, “when I got a job, I would be able to pay that off. I didn't realize how far behind I was getting. And how long it would actually take to climb my way out of it.”

“You know, for a sociology degree, 30,000 sounds about right,” says Lucia Dunn, professor of economics at Ohio State University. Dunn says the scary thing is that Lesho's circumstances are pretty typical for millennials coming out of college.

“They just have a lot more debt than previous generations had,” she adds.

Dunn recently published a study on how people manage their credit card debt. She found that younger people today are also paying that debt back at much slower rates than previous generations.

“And based on what young people are telling us,” she says, “if we project that out to the end of their life using life expectancy tables, we will see that they will die with credit card debt.”

Dunn calls that taking debt to your grave, and her study finds the average young person going down that path. So what would that look 30 or 40 years from now?

“It's hard to predict,” she explains. “It would probably mean that banks are going to curtail their lending.”

Dunn says banks need to stop giving out credit cards so generously. That's because millennials aren't paying back debt the way the current credit card system expects them to. They're not accumulating a little bit debt and paying it off as they get older, they just keep racking up more debt.

“I think we're going to see that the banks have to tighten up,” Dunn says. “So it could mean that credit is harder to come by. You could predict a doomsday scenario and say well at some point there's gonna be a big crash in the credit card market.”

But Dunn doesn't actually think that's going to happen. Her study found an easy way to get people to pay off their debt faster. Right now, credit cards have really low minimum monthly payments. Dunn saw that when companies raise those minimums, even just slightly, people seem to pay back an even higher amount.

“So when you begin to raise the rate on people,” she tells me, “it sends the message that you know you've go to take this debt seriously.”

Dunn says banks will have to make those kind of rate changes soon. And that could prevent the credit disaster we've been talking about.

I asked April Lesho if higher payment rates would have made a difference for her debt-wise.

“I think so,” Lesho replied. “Probably in the beginning. Because I would have been held accountable for it earlier on. Because it was just too easy, getting in debt was just way too easy.”

Lesho finally managed to pay off her debt in 2009. She says she actually still uses a credit card today, in order to take advantage of reward points. But this time around, she pays off her credit card balance every month.

About the author

Audrey Quinn is a reporter in New York City.


Log in to post3 Comments

One might think that in the wake of the Great Recession -- when millions got bit by high debt levels and no savings to fall back on -- people would have been more cautious about amassing debt.

They are. Reports are showing that there's fewer people taking up loans. Meanwhile, most people under 30k have any debt at all, especially not credit card debt. The companies are using softer tactics: no longer offering free stuff in colleges if you "just sign right here for this card" and less able to offer minimum payments that will literally never pay off the loan.

Thing is that we still have an entire generation who, from 1990-2005 racked up a massive amount of debt and are trying to figure out what to do about it. Those are the ones that will probably be the ones that take the debt to their grave (the ones who didn't use bankruptcy).

We haven't SOLVED the issue of massive debt use, but it's a lot better than the mess that helped bring us the recession. Now we have the long road of figuring out how to live with the much smaller spending we have now.

Reminds me of that old German saying:

He who owes, loses his freedom.
I for one have never been in debt in my 62 years.
Fortunately I had a smart grandmother with a 7th or 8th grade education back in Eastern Europe who taught the family how to save money and not waste it foolishly.
The ruling class likes to have its slaves in debt. They are easier to control that way.

With Generous Support From...