According to a story published recently in USA Today, fewer American millennials are able to buy cars and homes because they are burdened with high levels of student debt.
This problem is well documented. The Federal Reserve Bank of New York reported that declining home ownership is partly due to student debt, and the American Enterprise Institute published a paper last December showing that student loans partly explain declining birth rates in the United States.
The USA Today story began by spotlighting Amanda Hill, a 27-year-old college graduate who amassed $90,000 in student-loan debt to get a bachelor’s degree from Hampton University in Virginia. Ms. Hill said she is reluctant to take on any more debt because she owes so much on her student loans. Instead of buying a new car–the first major purchase for most college graduates–Ms. Hill bought a used Saturn for $500.
As USA Today reporter Susan Tompor reported, many millennials are constrained by their student loans from buying big-ticket consumer items. “Plain and simple,” Tompor wrote, “many young consumers just aren’t ready to consume.”
But the plight of millennials is much worse than USA Today portrayed it. Not only are many young Americans unable to buy consumer goods, cars, and homes because of their student loans, millions will never pay off their debt.
Let’s look more closely at Amanda Hill’s situation. She enrolled in an income-based repayment plan that set her monthly loan payments at only $200 a month. USA Today didn’t report whether Hill is in a 20-year or a 25-year repayment plan, but it doesn’t really matter. If interest accrues at 5 percent (the current rate for federal student loans), Hill will have to pay $4,500 a year just to cover accruing interest.
But Hill is only paying $200 a month–or $2,400 a year. Thus, with each passing month, Hill’s debt is growing larger. In three years or so, Hill will owe $100,000 even if she makes every payment on time.
USA Today did not disclose Hill’s college major, her current salary, or her job title; but clearly, she must be working in a low-paying job to be making payments of only $200 a month on a $90,000 debt.
Of course, Hill might find a better job that will allow her to make larger monthly loan payments. But that will have to happen soon if Hill is going to be in a position to make payments large enough to cover accruing interest and pay down some of the principle on her debt.
The chances are very good that Amanda Hill will make regular monthly payments for 20 or 25 years under an income-based repayment plan and owe far more than she does now when her payment obligations come to an end. Her remaining debt will be forgiven, but she will get a huge tax bill because the IRS considers forgiven debt as taxable income.
In short, Amanda Hill’s problems are a lot more serious than an inability to buy a new car. She very well may be looking at a lifetime of indebtedness. That’s a high price to pay for a bachelor’s degree from Hampton University.