How Policymakers Can Address the Youth Debt Crisis
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.