While student loan debt is still a big challenge for millennials, there is evidence that it is becoming more manageable thanks in large part to an improving economy, expanding job market and rising incomes for the demographic group.
That’s the gist of a study recently completed by Sarah House, senior economist with Wells Fargo. She discussed details of her report – “Student Debt: Does a Rising Economic Tide Lift All Boats?” – in a virtual conference call on Tuesday.
Prompted by the lowest overall unemployment levels in 20 years, House decided to research whether there was a measurable impact on the millennial segment of the $1.4-trillion national student-loan debt behemoth. She primarily used federal statistics from 2016, the most recent figures available, to examine student loan activity for millennials, who by the Pew Research Center’s definition would have been ages 20 through 34 in 2016.
Among the study’s key findings:
· Although graduating into a recession has weighed on earnings growth for millennial workers now in their late 20s, income prospects have begun to strengthen for millennials younger than them entering the labor market. In 2017, for example, median weekly earnings of those ages 20-24 surpassed those ages 25-34, although both age brackets saw a rise.
· Over the past two years, the strongest job growth has been among millennials, with the 25-34 age group followed closely by the 20-24 age bracket showing by far the greatest gains among all employment populations.
· The educational debt-to-income ratio of millennials overall was 42.4 percent in 2016, a steady decline from a high of about 47 percent in 2013. The 30-34 age group has seen a steady decline, though not as sharp, while the debt-to-income ratio increased for ages 25-29 to about 45.6 percent.
· Student loan repayment as a percent of monthly income is edging down, and increasing numbers of students are taking advantage of income-based repayment plans – up from 12 percent in 2014 to almost 33% this year.
· Loan default rates remain historically high, but over periods of two and three years into repayment, default rates began decreasing from 2011 through 2014.
· From 1995 to 2016, household incomes remained highest for households headed by someone with a college degree – and that has been the only education level to see a meaningful increase in earnings over that 20-year period.
· Around June 2018, for the first time in 40 years, hourly earnings outpaced college costs. Meanwhile, education debt for millennial households grew from just under 25 percent of those households with average education loan debt of less than $6,000 in 1989, to nearly 45 percent of those households with an average of $18,500 in debt in 2016.
The numbers indicate that millennials are “shaking off the effects of graduating into a recession.” House said. “Younger workers are finding it easier to get in the door. Underemployment has fallen more quickly than unemployment for this group. Earnings growth has followed, and it helps them pay back loans better.”
The debt-to-income ratio for millennials is likely to show continued improving numbers for 2017 given the economic expansion, she said.
“The dynamics are improving. We are moving in the right direction.”
But the signs of improvement are not without caution:
“While debt burdens for the typical millennial are beginning to look a little less troublesome,” House wrote in the report, “student loans continue to challenge this generation’s ability to spend, save and accumulate assets.”
A look at default rates, particularly on private student loans, provides more insight.
High student loan default rates impact federal programs more than private loans provided by Wells Fargo and other banks. Private loans – which are more difficult to qualify for and are a last-resort source of funding – are only about 7 percent of all student loans while federal loans comprise about 93 percent, noted John Rasmussen, who oversees education financial services as head of the personal lending group at Wells Fargo.
Throughout the recession, he said on the call with reporters, Wells Fargo saw only a slight increase in delinquency and loss rates with student borrowers. He attributed that to factors such as greater assistance from the student’s co-signer and some millennials staying in school longer, earning an advanced degree and then entering an improved job market.
Since the end of the recession, “delinquency and loss rates have inched down to the lowest levels since we have been in business,” he said.
Socioeconomic information such as gender, race and income level were not collected in the research. But there are implications for underrepresented groups such as first-generation students and ethnic minorities.
In particular, for Latino students – the fastest-growing racial group on college campuses – understanding how to access and complete college with a job and unburdened by major student loan debt is more important than ever, especially for first-generation students who are unfamiliar with the process.
Fidel Vargas, CEO and president of the Hispanic Scholarship Fund, said the agency is able to award a scholarship to only one out of every five qualified applicants. So, part of their mission is to educate Hispanic students and their families in high school about college programs, career pathways and funding options that will increase the chances of employment and economic success.
“The most critical piece of that puzzle is, in fact, education, and, more specifically, demystifying the cost of college as well as some of the access to financial aid,” he said. “We’re making an impact with scholars and their families.”
LaMont Jones can be reached at firstname.lastname@example.org. You can follow him on Twitter @DrLaMontJones