ANNAMARIA LUSARDI: Much has been written about millennials—if they are moving back with their parents, whether they are buying cars or homes, how much they are saving for retirement. There may not be consensus on all these issues but one thing is clear: Millennials and debt go hand-in-hand.
Our research using data from the National Financial Capability Study shows that two-thirds of millennials (those aged 23-35 in 2012) have at least one source of long-term debt outstanding—whether student loans, home mortgages or car payments—and 30% have more than one. Among the college-educated, a staggering 81% have at least one source of long-term debt.
Not only do millennials carry debt, but they struggle with it. A majority report having too much debt, difficulty in making payments, and worries about it. Specifically, the ability to pay off student loans troubles more than half of millennials who have such loans. Low-income respondents tend to be more concerned than higher-income earners, but even 34% of millennials with annual household income above $75,000 doubt they will be able to repay their student loans. Moreover, even several years after college, the percentage of those worried about repaying student loans remains high. Fifty-four percent of millennials who are over age 30 and have student loans are worried about repaying them.
Along with long-term debt, millennials also carry short-term debt, most often from credit cards. This debt can be costly. More than half of millennials’ credit-card users say they carried over a balance—for which they were charged interest—in the last 12 months. A sizable share has been hit with late fees (22%), over-the-limit fees (13%), and fees for cash advances (14%).
The use of alternative financial services, such as auto title loans, payday loans, pawnshops, rent-to-own loans and tax-refund advances, represents another significant source of short-term debt. More than two-in-five millennials in the study relied on alternative financial services at least once during the five years prior to the survey. Those turning to these services are not always low income: More than a quarter of millennials with annual household income higher than $75,000—four times the poverty level for a standard household of three—have used alternative financial services.
It doesn’t end there. millennials are tapping their bank and retirement accounts. Twenty-nine percent with bank accounts report occasionally overdrawing them, and 22 percent of retirement-account owners took loans or hardship withdrawals in the 12 months prior to the survey.
While these findings should worry millennials, there is something that should concern all of us: This next generation is not prepared for the financial engagement it faces. Millennials give themselves high marks on their financial knowledge. Yet the data show that only 8% of them could correctly answer five questions used to assess understanding of the fundamental concepts that define financial literacy.
They owe a lot. They know too little. Millennials’ struggle with debt may eventually become our problem, too.