The student loan debt crisis is not exclusive to Gen Y. A new report claims that of the student loans taken out by folks over the age of 60, 40 percent of them are in default. This will turn out to have some serious implications for not only their well-being, but for Gen Y’s ability to become economically mobile in the future.
The Consumer Financial Protection Bureau, or the CFPB, recently reported that the number of consumers age 60 and up with outstanding student loan debt has quadrupled since 2005 from 700,000 to 2.8 million. Though the majority of these loans are to finance their children’s college education, as of 2015, 6.4 percent of all student loan borrowers are Nanas and Pappys.
It isn’t just student loans
The problem many of the older student-loan borrowers are facing is that, unlike younger borrowers, they are experiencing a decrease in earnings as retirement kicks in. With Social Security payments and a small 401(K), the added loan payments are making the retirement years much tougher than expected.
Additionally, older student-loan borrowers are increasingly riddled with other types of debts. In 2013, 63 percent also carried a mortgage, 67 percent lugged around credit card debt, and 45 percent also owed debt from an auto loan. What’s more, over the last decade, the balances they are owing on have increased enough to make you sweat. Straight from another CFPB study, “From 2001 to 2011, the median amount older homeowners owed on mortgages increased 82 percent, from approximately $43,400 to $79,000.”
The financial instability due to increased debt is seemingly foreshadowing a gloomy retirement for members of Gen Y. Although the remaining federal student loan balances get “forgiven” when the older debtholder passes away, private loans do not have the same arrangements. Likewise, the accompanying mortgage, credit card and auto loan debts may be passed down in the form of an unwanted heirloom.
It is natural for people to kick the debt can down the road. Ain’t nobody got time for that! However, the results of this method of dealing with debt will likely produce, for the first time in U.S. history, a generation that will end their careers less wealthy than the previous generation.
Our parents’ wealth (and debt) matter big time
One of the most important factors in unlocking the American Dream, or the ability to move up the socioeconomic ladder, is parental income and wealth. The net worth of Americans across all age groups is paltry, especially when the value of a home is excluded. For example, the median net worth of the “richest” cohort, ages 65 to 69, goes from $194,226 to $43,921 when you take out the equity built from their homes.
With homeownership being such a crucial part of our wealth portfolio, putting off purchasing a home along with the increases in debt across the board is not painting a pretty picture for our financial future and is slowing down economic mobility.
Moreover, the high levels of debt are somewhat terrifying for the economy with its direct relationship between homeownership and entrepreneurship. Successfully starting and running a business is a fantastic method for increasing upward mobility. But, if debt is becoming pervasive across all generations, the rate at which businesses are created will continue to go down, especially for those on the lower rungs of the economic ladder.
High levels of debt lead to a downward spiral for upward mobility. Because of high debt, particularly student loan debt, we push off buying a home. With no home, there is no collateral for a business loan. With no business, there is less upward mobility and ultimately less prosperity for the next generation.
Homeownership is not the end all and be all. In fact, some economists claim that investing in homes is actually worse than investing in the stock market. But, it is a staple of the American Dream and the majority of the household wealth in the United States. It is also the asset most likely used to help upward mobility for their kids.
The fact that our parents and grandparents are struggling with increased mortgages and now student loans will rear its ugly head when all we have to pass down is a pile of debt obligations. Thought we’d give you the heads up.
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