Inequality, student debt and millennials

Three hot topics of discussion these days are the millennial generation, student debt and inequality. But how do they relate to each other? A new look at Federal Reserve data sheds light on this interesting question.

Millennials are the most highly-educated generation of young adults in our nation’s history, attaining college degrees at record-high rates. Yet despite their greater educational attainment, they appear to have less wealth at this point in the lives than prior generations.

If not for a sharp increase in student debt since 1989, young working- and middle-class Americans would have actually slightly higher net worths than their counterparts had a quarter century ago. This is a surprising finding in an analysis of the Survey of Consumer Finances by my colleagues at the Center for Economic and Policy Research (CEPR).

Let’s be clear: most young working Americans have never had much wealth. In 1989, the net worth of the bottom three-fifths of 18- to 34-year-olds averaged only $3,300. But by 2013, their net worth dropped by $11,000, to an average of $7,700 in net debt. A chief factor in this flip in fortunes is that the average educational debt among this group shot up more than eightfold, from $1,900 in 1989 to $16,300 in 2013.

{mosads}Much of this debt seems to be burdening those who have the fewest resources to pay it off. For the middle quintile of 18- to 34-year-olds, student debt averaged $3,300 in 2013, while their net worth averaged $11,000 (a drop from $14,400 in 1989). Meanwhile, the student debt of the bottom fifth was almost 13 times larger, averaging $42,700, while their average net worth was a negative $35,400.

When you look at how completely differently this is playing out for those at the other end of the wealth spectrum, you can see how student debt is likely exacerbating inequality among millennials. In 2013, the top two-fifths of 18- to 34-year-olds averaged $6,700 in educational debt — just one-sixth of that of the bottom fifth — while enjoying over $200,000 in net worth. In fact, the top 5 percent of 18- to 34-year-olds saw their average net worth rise from $988,700 in 1989 to $1 million in 2013, while the other 95 percent saw their net worths drop.

The CEPR report looks at other age groups as well: retirees, near-retirees and mid-career workers. It shows that most households had less wealth in 2013 than in 2010, and much less than in 1989. And that doesn’t even take into account the fact that younger generations are much less likely to have defined-benefit pensions to rely on in retirement.

This analysis draws a picture of an economy where the bulk of the benefits of the economic recovery have been going to those who already have the most wealth. For millennials who aren’t lucky enough to be at the top, educational debt seems to be emerging as the largest obstacle to creating wealth. If policymakers wish to address inequality among this generation, it seems that they have no choice but to address their student debt burdens as well.

Woo is the director of domestic policy at the Center for Economic and Policy Research.