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Generation Broke: New grads bear heavy load

By ROBERT TRIGAUX
Published November 22, 2004


Ah, to be young, footloose and ... drowning in debt.

That's the grim, new-millennium reality for young U.S. adults who increasingly find themselves entering the job market with unprecedented levels of student loan and credit card debt, zero savings, fast-rising living costs and a tougher road to the so-called American Dream.

Consider the typical college graduate who has managed to get a $36,000 job, which provides $2,058 of monthly take-home pay after taxes and a health care contribution. Now start subtracting the expenses of student loans and minimum credit card payments, rent or mortgage and utilities, food and transportation. What's left?

Just $34 a month. That's not much of a cushion to cover - you pick - child care or entertainment or clothing or furniture or Internet access or some unexpected emergency.

Everyone has his or her own story of how tough it was starting out. That $36,000 job - the average annual starting salary of college grads in 2001 - is four times what I got paid in my first post-college job in pricy New York City. And nobody will argue that many college students are not always the most fiscally responsible. (Maybe they're mimicking our federal government.)

Fresh financial data show young adults are challenged as never before, certainly not since World War II, thanks to debt pressures today that did not exist a generation or two ago.

"This is as bad as it has been for young adults - absolutely," says Tamara Draut, who works for the Demos USA think tank in New York and recently analyzed the financial plight of young Americans.

The impact goes beyond financial.

"The larger social implication is that we will have a whole generation of people for whom this country's social contract does not exist," Draut says. The social contract means that if you work hard and play by the rules, you will get ahead.

That will not happen for this generation, warns Draut, if current trends continue.

In her interviews with young adults, Draut found three common money woes.

First, those who graduated from college struggled to handle their student loans, hefty debts that even compelled many students to pursue higher-paying careers even if they were not their first choice of work.

Second, many graduates moved to start careers in metro areas with higher housing costs. Young adults tend to put rental security deposits and the inevitable car repairs on their credit cards, along with the purchases to furnish a new home. It all compounds their existing debts.

The third gripe Draut consistently heard was a surprise: the burden of travel. "This is not travel for vacations, but the mandatory travel young adults face to visit their often distant families or attend their friends' weddings," she says.

Demos recently released a study of young adults' precarious finances, appropriately called "Generation Broke."

Broke, for some good reasons:

* The average person leaves college with $18,900 in student loans, compared with $9,000 for 1992 graduates.

* College graduates have an average $3,262 in credit card debt. That's a 134 percent increase since the mid 1990s.

* The bankruptcy rate of adults ages 25 to 34 ballooned 19 percent from 1992 to 2001, when 12 of every 1,000 adults in this age group were filing for bankruptcy.

This list could go on and on. Let's just say the evidence is overwhelming that young adults have borrowed too much and have increasing difficulty paying back what they owe.

How did this generation fall into such a money trap? Larger public policy shifts played a prominent role.

The biggest culprit is the rising expense of college. This is the first generation to shoulder the costs of college mostly through loans rather than grants. The Demos study notes that in the 1992-93 school year, 42 percent of students borrowed money for college. By the end of the 1990s, nearly two-thirds were borrowers.

I don't get it. Every politician and business leader bemoans the mediocre U.S. educational system and insists a better-educated population is key to keeping this country competitive in the future. Yet here we are, describing how college educations are getting so expensive that they undermine the financial stability of their own graduates.

Once out of college and working, what did young adults encounter? Slow wage growth - bad news for someone trying to pay their way out of debt - and underemployment. In 1999, for example, one of every four contingent workers (those holding temporary jobs) was between 25 and 34. In addition, young adult workers are more likely to lack health benefits, adding to their physical and financial risk.

Finally, the Demos study looked at housing and transportation costs. Anyone who has bought, sold or dreamed of a home in Florida knows how rapidly housing prices have appreciated in the past five years. Now imagine a young adult, already in substantial debt, trying to buy one of those homes. Young renters in 2001 spent an annual average of $6,815 on rent and $8,423 on transportation.

Unlike established homeowners, young adults are especially vulnerable to a financial fall. That's because young adults cannot tap the cushion of equity in homes that has built up as housing prices have soared, says Ted Janger, a Brooklyn Law School professor and resident scholar at the American Bankruptcy Institute.

The ripples of a generation broke extend well beyond young adults.

Many parents of young adults, already accustomed to their grown kids returning home to live, can find themselves on the financial hook by continuing to subsidize their children. That's money for many aging parents that should be used instead for their own retirements, says Draut. Based on her research, Draut is writing a book due out in 2006 from Doubleday with the working title of Strapped: The New Economic Challenges to Becoming an Adult.

By far the biggest concern is what happens to the young and in-debt if they enter middle age still struggling to pay off ancient loans. That could make the American Dream look more like the American Nightmare.

* * *

Robert Trigaux can be reached at 727 893-8405 or trigaux@sptimes.com

[Last modified November 22, 2004, 11:13:06]


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