How Policymakers Can Address the Youth Debt Crisis

Posted February 13, 2023
By the Annie E. Casey Foundation
A young woman, whose face is not shown, sits in a coffee shop with a laptop in front of her. She is holding a credit card and typing on her laptop.

A new brief from the Urban Insti­tute, What Can Pol­i­cy­mak­ers Do to Help Young Adults Cope With Debt?”, explores the harm­ful effects of debt on young adults in the Unit­ed States and pro­vides pol­i­cy rec­om­men­da­tions for law­mak­ers who want to reduce their debt burdens.

The pub­li­ca­tion, based on anony­mous con­sumer data from more than 10 mil­lion Amer­i­cans, as well as race and eth­nic­i­ty data from the U.S. Cen­sus Bureau’s Amer­i­can Com­mu­ni­ty Sur­vey, was fund­ed by the Annie E. Casey Foundation.

Young peo­ple, par­tic­u­lar­ly those of col­or, have lim­it­ed finan­cial assets and often go into debt to pur­sue their edu­ca­tion, start a busi­ness or buy a home,” says Bead­sie Woo, direc­tor of fam­i­ly and youth finan­cial sta­bil­i­ty at Casey. How much they bor­row and the terms on which they bor­row — like the length of loan and the inter­est rate — can have life­long impli­ca­tions, This brief from the Urban Insti­tute not only shows how young peo­ple come to take on bur­den­some debt but also how pol­i­cy­mak­ers can pro­vide bet­ter edu­ca­tion and protection.”

The State of Debt Among Young People

Accord­ing to the brief, 20% of U.S. res­i­dents between the ages of 18 and 24 — or 1 in 5 young peo­ple — have unpaid debt that was sent to a third par­ty for col­lec­tion. These debts can range from unpaid cred­it card bal­ances and delin­quent auto loans to stu­dent loan debt or out­stand­ing med­ical expens­es. ­The authors point to sev­er­al root caus­es of the dis­pro­por­tion­ate­ly high debt among young adults:

  • They have lim­it­ed income. Most young adults are either enrolled in school or just begin­ning their careers. As a result, they often have lim­it­ed finan­cial resources.
  • They haven’t built a cred­it his­to­ry. As young peo­ple have not had time to build good cred­it, they typ­i­cal­ly face high inter­est rates and a lim­it­ed abil­i­ty to borrow.
  • They are unable to save. Giv­en their mod­est finan­cial resources, young peo­ple often find it dif­fi­cult to build sav­ings and may accrue cred­it card debt to pay for bills or emer­gency expenses.
  • They have trou­ble repay­ing loans. Young peo­ple are more like­ly to have unpaid auto or retail loan debt. The brief sug­gests that — giv­en ris­ing auto­mo­bile costs — many young adults are car­ry­ing even more auto loan debt than before.

Dis­par­i­ties in Debt by Race and Region

Young peo­ple who live in com­mu­ni­ties that have a major­i­ty of peo­ple of col­or are more like­ly than their coun­ter­parts in major­i­ty-white com­mu­ni­ties to hold debt. They are almost twice as like­ly to have delin­quent cred­it card or auto/​retail loan debt. Near­ly 25% of young adults in com­mu­ni­ties of col­or have debt in col­lec­tions — com­pared to 17% of young adults in white communities.

Young adults of col­or expe­ri­ence dis­pro­por­tion­ate eco­nom­ic hard­ship due to long­stand­ing poli­cies that dis­in­vest in com­mu­ni­ties of col­or. As a result, many house­holds of col­or often can­not access tra­di­tion­al ways of build­ing assets, such as home­own­er­ship or sta­ble jobs with high wages.

These inequities are par­tic­u­lar­ly evi­dent in the South. South­ern states not only have a high­er con­cen­tra­tion of Black youth from low-income house­holds, but they also do not have poli­cies in place to help young peo­ple avoid or man­age their debt. Approx­i­mate­ly 1 in 4 young adults between the ages of 18 and 24 in states such as Arkansas, South Car­oli­na and West Vir­ginia has debt in collections.

Pol­i­cy Rec­om­men­da­tions to Curb Youth Debt

The brief offers three strate­gies pol­i­cy­mak­ers can use to reduce the debt bur­dens of young adults and encour­age their finan­cial resilience and stability.

  • Bet­ter edu­cate young peo­ple about cred­it card terms and con­di­tions. Although fed­er­al leg­is­la­tion like the Cred­it CARD Act of 2009 pro­vides stricter pro­tec­tions in cred­it card mar­ket­ing and lend­ing for con­sumers under the age of 21, young peo­ple — espe­cial­ly col­lege stu­dents — are tar­get­ed with unso­licit­ed offers for preap­proved cred­it cards. Strong con­sumer pro­tec­tions and enforce­ment of exist­ing laws would equip young peo­ple to make more informed finan­cial decisions.
  • Reg­u­late Buy Now, Pay Lat­er (BNPL) loans. BNPL prod­ucts, pitched by com­pa­nies as an alter­na­tive to cred­it cards, are appeal­ing to young adults giv­en their low-inter­est rates and how eas­i­ly they are approved. Young adults are more like­ly to use BNPL loans than old­er adults and more like­ly to have a BNPL loan in default. The report sug­gests that stronger con­sumer pro­tec­tions are need­ed to bet­ter edu­cate young peo­ple on the risks of BNPL prod­ucts — which include encour­ag­ing spend­ing out­side of a person’s means and late fees due to missed payments.
  • Imple­ment tar­get­ed finan­cial buffers for chil­dren. The report rec­om­mends that law­mak­ers imple­ment poli­cies to pro­tect young peo­ple from debt as ear­ly as child­hood. Specif­i­cal­ly, they sug­gest tools such as pro­gres­sive child devel­op­ment accounts and baby bonds” that pro­vide chil­dren with finan­cial assets which grow over time. These strate­gies would effec­tive­ly reduce racial dis­par­i­ties in the net assets and sav­ings of young adults and enable more young adults of col­or to start their finan­cial lives on firm footing. 

Learn how debt affects house­holds of col­or and the racial wealth gap

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