The temporary shutdown of many businesses and government policies that allowed people to put off paying off debt so they could save more money during the COVID-19 pandemic contributed to a significant decrease in household debt or a flattening of the debt curve. On the other hand, household debt has grown a lot since then, especially among millennials (people born between 1981 and 1996).
Data from the Federal Reserve Bank of New York, as reported by the Wall Street Journal, shows that consumer debt reached a record high of over $3.8 trillion at the end of 2022, up 27% from 2019. Since the 2008 financial crisis, that was the highest three-year debt accumulation for that age group.
The New York Fed and Liberty Street Economics found earlier this month that people in their thirties have the highest rates of credit card delinquency, defined as payments that are more than 90 days late. According to the Journal, in January, the average millennial credit card balance was $6,750, an increase of about 26% from three years ago.
“robust consumer spending,” “the hottest inflation readings in 40 years,” and “sharply higher credit card rates” have all contributed to “pushing credit card balances to a new record high,” as one Bankrate analyst put it to Fortune this month.
It was hoped that suspending loan repayments and sending out stimulus checks would help ease some of the financial strain on Americans as the pandemic worsened their financial situation. But Morgan Stanley predicted that by 2022, consumers would have spent between 30 and 50 percent of their $2.7 trillion savings surplus.
A rising debt burden affects every person negatively. This could mean fewer opportunities for millennials to save and invest for the future and a wider wealth gap between them and previous generations. Many millennials began working at or around the time the Great Recession began in late 2007, which severely stunted their earning potential from the get-go. Many people born in the 1980s and 1990s have done well financially thanks to the economic and housing boom. Nonetheless, millennials are an exception to this rule.
There has been a doubling of the wealth gap between people over 60 and those under 40 since the 1960s and 1970s, according to a study published just last year. Rapidly increasing debt and the generational wealth gap make it more challenging for millennials to get their feet on the ground and make investments at the same rate as previous generations.
This week, the Supreme Court will hear oral arguments in a case involving the federal government’s efforts to alleviate the crisis through President Joe Biden’s student loan forgiveness program. Debt repayment has been put on hold for about three years due to the spread of COVID-19, and loan forgiveness would be a huge relief for those who are currently struggling to make ends meet. And a sizable proportion of people with federal student loans are in their twenties and thirties.
However, the ongoing debt and wealth trends could be influenced by a number of other factors. One example is how the Federal Reserve’s efforts to curb inflation have also led to higher interest rates on various forms of debt, such as mortgages, car loans, and credit cards. Real estate prices and interest rates have risen dramatically, making it difficult for buyers in their thirties to afford a home.
Young adults’ mounting debt has far-reaching consequences for their future. For example, a person’s debt load may affect whether or not they decide to have children, which can have far-reaching economic effects.