A new study suggests that millennials are getting serious about paring down their debt. But a closer look at the numbers shows some troubling signs.
Last week, Pew Research released a new study showing adults younger than 35 reducing their debt levels faster than older generations. Millennials cut their overall levels of debt by 29% from 2007 to 2010 (from $21,912 to $15,473) while Americans 35 and older only cut theirs by 8% ($32,543 to $30,070). In fact, according to Pew, the share of younger households with debt of any kind fell to 78%, the lowest level since the federal government started collecting that data in 1983.
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All that sounds great — until you realize that the biggest contributor to this dynamic is that millennials aren’t taking out mortgages, which generally make up the biggest piece of household debt. From 2007 to 2011, the percentage of young households who own their own homes fell from 40% to 34%. “Young adults don’t have the mortgage, but they also don’t have the house,” says Pew senior research associate Richard Fry, who authored the report. “Young adults probably have less debt, but they also have less assets. This is troubling.”
A number of factors seem to be driving lower levels of home ownership. One is that millennials’ incomes are down and they can’t afford to take on a mortgage. Another may be that they want to buy a home but banks have tightened lending standards and made it difficult for them to do so. Student-loan burdens also appear to be playing a crowding-out role: In 2007, 34% of young households had outstanding student debt in 2007; by 2010, the rate had risen to 40%. (Note that those numbers are the exact inverse of the mortgage figures.)
Another reason debt levels have fallen for millennials is a decrease in car ownership. It’s unclear if this is more of a cultural or economic shift, but millennials appear less inclined than previous generations to own a car, drive or even get a driver’s license, opting at times to take public transportation or intercity buses. So it’s not surprising that vehicle debt has fallen. Only about a third of those under 35 owed money on a car, compared with 44% in 2007.
In the end, it’s difficult to distinguish the causes and effects of these changes, but they do seem to be tied to a gradual delay of adulthood: more than any previous generation, millennials go to school longer, get a job later in life and delay “adult” milestones like marriage, starting a family and buying a home.
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The one piece of unambiguously good news in the report is that credit-card debt among millennials has fallen considerably. According to Pew, 39% of households under 35 carried a balance compared with 48% in 2007 and 50% in 2001. That not only shows a downward trend since the Great Recession but also a longer-term move to pay down credit cards that stretches back more than a decade. Fry says millennials are less inclined to carry a balance each month, and when they do, those balances are much smaller than in previous years.