Money and Milestones: Financial Behavior, Debt and Early Life Transitions Rachel E. Dwyer, Randy Hodson, Michael Nau Department of Sociology Ohio State University Supported by a grant from the Na4onal Endowment for Financial Educa4on 1
Millenials Variable pathways to adulthood. Middle class squeeze US system of financed attainment
National Longitudinal Survey of Youth 1997 Cohort Born around 1981 Oldest Millenials Come of age in the 2000s. Interviewed every year since 1997 teenagers- late 20s
Agenda for today Overview of debt in the transition to adulthood Focus on student loans, the most distinctive youth debt Close with reflections on the institutional context of youth financial decision-making
DEBT ACCRUAL IS LINKED TO ADULT MILESTONES 5
Prevalence of debt by type among the Millennial cohort, 1998-2009 50% 45% Consumer debt 40% 35% Auto debt 30% 25% 20% 15% Student loan Home loan 10% 5% 0% 1998 2000 2002 2004 2006 2008
Young adults have more noncollateralized debt than older adults 60% 50% 40% 30% 20% Age 25-29 Age 40+ 10% 0% Home Loans Auto Loans Student Loans Consumer Loans
Young adults have more noncollateralized debt than older adults Most dis4nc4ve: 60% mortgage debt and 50% student loans. 40% 30% 20% Age 25-29 Age 40+ 10% 0% Home Loans Auto Loans Student Loans Consumer Loans
WHAT IS THE RELATIONSHIP BETWEEN DEBT ACCRUAL AND ADULT MILESTONES? 9
Debt and Life Transi9ons Obstacle Stalled Transi4on Debt - Life Transi4on (educa4on, marriage, fer4lity) Facilitator Financing Family Forma4on An4cipated/Desired Transi4on + Debt + Life Transi4on (educa4on, marriage, fer4lity)
Debt and Life Transi9ons Obstacle Stalled Transi4on Debt - Life Transi4on (educa4on, marriage, fer4lity) Facilitator Financed Transi4on An4cipated/Desired Transi4on + Debt + Life Transi4on (educa4on, marriage, fer4lity)
Opportunity + risk à Debt can be a resource, but also a liability à Debt mazers more for some than others à Different debts
Debt holding before and a\er marriage Educa9onal debt Car Debt - 5-4 - 3-2 - 1 0 1 2 3 4 5 Consumer Debt - 5-4 - 3-2 - 1 0 1 2 3 4 5 House Debt - 5-4 - 3-2 - 1 0 1 2 3 4 5-5 - 4-3 - 2-1 0 1 2 3 4 5
UNSECURED Educa9onal debt SECURED Car Debt - 5-4 - 3-2 - 1 0 1 2 3 4 5 Consumer Debt - 5-4 - 3-2 - 1 0 1 2 3 4 5 House Debt - 5-4 - 3-2 - 1 0 1 2 3 4 5-5 - 4-3 - 2-1 0 1 2 3 4 5
Debt Holding Before and A\er Parenthood Student Loans Auto Loans - 5-4 - 3-2 - 1 0 1 2 3 4 5 Consumer Debt - 5-4 - 3-2 - 1 0 1 2 3 4 5 Home Mortgage - 5-4 - 3-2 - 1 0 1 2 3 4 5-5 - 4-3 - 2-1 0 1 2 3 4 5 15
Temporal Structure of Debt and Consump4on Payoffs Consumer Loans Auto Loans Student Loans Deferred Home Mortgages Immediate The capital bought with student loans can take a while to yield dividends.
STUDENT DEBT AND TRANSITIONS: EDUCATION, MARRIAGE, AND PARENTHOOD 17
Opportunity + risk à Student loans have posi4ve or neutral consequences for many à Student loans have nega4ve consequences for some. Underlying vulnerabili4es, triggered in crisis.
Student loans do help students graduate, but diminishing returns at higher levels 0.1.2.3.4.5.6.7.8.9 1 Ed loans aid gradua4on at lower debt levels Diminishing returns at higher debt levels 0 5 10 15 20 Educational debt (thousands)
Dropouts with loans have financial problems 25% 20% 15% 10% 5% 0% Graduates no loans Graduates loans Dropouts no loans Dropouts loans
Men s probability of marrying: no student debt 2-year college 4-year college Density 0 10 20 30 Density 0 10 20 30 0.05.1.15.2 0.05.1.15.2 Loans No Loans Loans No Loans
Men s probability of marrying: with student debt 2-year college 4-year college Density 0 10 20 30 Density 0 10 20 30 0.05.1.15.2 0.05.1.15.2 Loans No Loans Loans No Loans
Women s probability of marrying: no student debt 2-year college 4-year college Density 0 10 20 30 Density 0 10 20 30 0.05.1.15.2 0.05.1.15.2 Loans No Loans Loans No Loans
Women s probability of marrying: with student debt 2-year college 4-year college Density 0 10 20 30 Density 0 10 20 30 0.05.1.15.2 0.05.1.15.2 Loans No Loans Loans No Loans
Annual Es4mated Likelihood of Transi4oning to Parenthood for Men by Class Background 0.035 0.030 0.025 0.020 Student Loans 0.015 No Student Loans 0.010 0.005 0.000 Lower Income Middle Income Upper Income
Opportunity + risk à Student loans have posi4ve or neutral consequences for many à Student loans have nega4ve consequences for some. Underlying vulnerabili4es, triggered in crisis.
Opportunity + risk for other forms of debt too à Mortgages in economic crisis à Consumer credit causes anxiety, especially for middle class. Underlying vulnerabili4es, some4mes manifested in crisis.
IF STUDENT DEBT IS A PROBLEM, WHAT KIND OF A PROBLEM IS IT? 28
These mixed effects are a necessary consequence of having a credit system embedded in our financial aid system. What is the nature of this credit system?
Student loans embody 2 different visions of attainment in uneasy tension Market vision Collectivist vision
Market vision Higher education as a consumer good, delivered on a market. Individualizes higher education. Students are expected to be calculating, selfgoverning subjects FAFSA classifies individuals and determines how much and what kind of aid they will receive, producing highly complex and differentiated experiences of affordability
Collectivist vision of financial aid Political determination of interest rate, instead of actuarial assessment of risk. Categorical status of student gains entry into loans Provided to students at any institution so long as institution follows certain rules. Can t be discharged in a bankruptcy
Tensions In the most favorable view, students benefit from both worlds. Access to credit insured by the state. In the most jaundiced view, students have the worst of both worlds. Lack the informa4on and equity of segmented loan markets, but must accept state limita4ons. Market failures are blamed on collec4vist system.
2 visions shape debate over policy remedies Market: Make loan disbursal more segmented and individualized. Collec4vist: Make loan repayment more collec4vist and public interest. Even get rid of loans altogether.
Back to individuals No mazer what, increases complexity and requirement of financial capability. But there are limits to what individuals can plan. Our findings suggest that an important policy goal should be to provide insurance against the risks for some.
Rachel Dwyer, Ph.D. Department of Sociology Ohio State University dwyer.46@osu.edu