To have and to hold: An analysis of young adult debt

Researchers have long recognized the importance of studying young adults' experiences in labor markets, in the educational arena, and within the family. These three domains are considered key to shaping the transition to adulthood in the United States (Settersten, Furstenberg, and Rumbaut 2005). Young adults' experiences in credit markets have received less attention in the scholarly literature. Given their stage in the life cycle, however, we would expect young people to have much to gain from participation in credit markets. Moreover, we would expect their use of credit to be connected to their experiences in other markets. Credit markets exist to mobilize funds and make them available to individuals who have productive uses for the funds. Uses that are expected to generate a positive revenue stream in the future are one example, but credit markets also exist simply to allow individuals to transfer purchasing power across time so that they may control the timing of purchases of the goods and services they want to attain in life. One obvious link across markets that results is that young adults may find it desirable to borrow when facing a rising earnings profile in the labor market. Young adults typically are at a point in life when their earnings are lower than average. Accordingly, the ability to transfer purchasing power across time may be particularly important to them. For example, an individual who knows that she will have high earnings in a few years once she becomes a practicing physician may not want to endure limited consumption while she is in training as a resident simply because her income is low during that residency. Instead, she can borrow against future income to stabilize or to "smooth" her consumption over time. Similarly, young adults can benefit from credit markets when they want to acquire an item whose purchase price is too large to be paid for out of regular, weekly, or monthly income. A classic example of this "indivisible good" problem is a home purchase. The labor market is not the only market that bears on decisions about borrowing. Credit market outcomes can be tied to individuals' experiences in the educational arena. More specifically, economic theory predicts that it can be advantageous for young adults to borrow for schooling because expenditures on schooling facilitate the acquisition of skills and knowledge, that is, "human capital," which boosts wages. Individuals can then use the earnings stream that higher education gives them access to in order to repay their education loans. This chapter examines young adult debt, with an emphasis on both the total amount of debt that today's young adults have and the types of debt they hold. It compares the situation of contemporary young adults with that of all U.S. households and offers some historical context by presenting data for young adults of the 1960s and 1980s. Largely descriptive, the chapter aims to discuss borrowing patterns and summarize some existing debates about young adult debt. However, it also examines the relationship between debt and the attainment of some traditional markers of adult status. One key theme that emerges from the research is that, as a group, today's young adults do not appear to have an unusual or distinctly troublesome amount of debt. As with most human experiences, however, there is variation within the group.