Student Loan Debt, High Rental Prices, and Automation are Removing Those Aged 18-34 From the Economy

We’ve known for awhile that student loan totals are increasing at an unsustainable rate. At the same time, automation in the workplace has affected potential new hires much more than those who are firmly entrenched in their position within a company.

Together, they are doing a good job at removing Millennials from the U.S. economy. Not in the sense that Millennials do not spend money, but more of their income is going towards debt payments and housing than any other generation.

When incomes do not match expenditures, you either need to cut back on what you spend, find a way to bring in more money, or do what many Millennials are choosing to do – take on consumer debt. This extra debt, on top of everything else, is unsustainable in the long-term. Other than further reducing your income via high interest rates, it makes you look like a risky bet when it comes to lending.

Millennials’ average credit score is around 625, which results in very high interest rates for auto loans and credit cards and will preclude you from getting just about any kind of mortgage. You can look at your own score while keeping in mind even a modest amount of credit card or student loan debt can hurt your credit (though on-time payments of this debt will help your credit score).

Since 1960, inflation adjusted average rental prices in the U.S. has climbed about 65% while inflation adjusted income has risen about 20%. More 18-34 year-olds are either renting or staying with their parents now than at any point since at least the 1940s. In some cities, especially on the east and west coasts, more than half of all renters are paying more than 30% of their income to their landlord.

Nationally, the median percentage of income going towards rent is about 21%, which is the highest it has ever been. Most Millennials are going to be above the median due to demographics in high cost of living areas (where Millennials like to live) and lower starting salaries.

This means that you’re looking at taking off about 21% from every paycheck (likely quite a bit more in urban areas) and essentially kissing it goodbye. That’s not to say that renting is a worse financial option than buying a home in many areas, but at the end of the day, what you pay in rent is always going to be gone forever.

After that 21% is gone, it’s time to repay student loans. The federal government does offer a variety of repayment plans to make payments more affordable, but you’ll always end up paying more overall by making use of those programs. Still, in a pinch, it’s probably worth it to look into income-based repayments. Most people with a student loan balance are going to be paying about 10% of their take home income towards the loans.

31% just in student loans and rental payments, off of every paycheck. All of a sudden, the $55k/year job is looking more like a $30k/year job after taxes, rent and student loan obligations. You’ve got a roof over your head but a limited amount of money for everything else. Factoring the average price of necessities such as groceries ($275), phone/internet ($120 if you’re careful with your data), transportation ($415), insurance ($310), and utilities ($120), you end up with around $1,300/month for everything else. If you have a retirement account, pension or other forced savings, you’re going to end up with far less.

Much of the consumer economy depends on everyone having enough disposable income to be able to afford products and services that do not fall under mandatory monthly expenditures. When a younger generation is expected to move out of their parents’ house immediately, it can create pressure that puts them under enormous financial stress. That stress can result in bad financial decisions which have effects far into the future.

Compounding the problem is the fact that the workplace is becoming increasingly automated. For many Millennials, the entry-level positions that existed five years ago, when they started college, no longer exist. One can hardly blame businesses for wanting to be more efficient, but it is a situation that will need to be addressed by the government at some point in time. Automation will continue but the way that society deals with it will have to change. It’s leading the younger generation into jobs that may pay less, offer fewer benefits, or have fewer opportunities for advancement.

What it comes down to is that as a Millennial, you’re ahead of your peers if you have a decent job, a credit score above 625, and can afford your own place without needing to go into debt (mortgage debt excluded). For most Millennials, this simply isn’t the case.

Sources: Census ACS data, Consumer Expenditure Survey, ApartmentRatings.com
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