'Generation Debt' is going deep into the red

Credit card and college-loan crunch
Between 1983 and 2001, credit card debt for 25-to-34 year-olds nearly tripled, according to the Federal Reserve, from $3,989 to $12,000.

So have college loans. Soaring tuition prices combined with decreasing federal student aid means that college students are graduating with close to $20,000 in debt. Grad students can count on approximately $45,000 in combined loans, while doctors and lawyers will be lucky to escape with less than $100,000.

The result, said Tamara Draut, author of Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead and director of the economic opportunity program at the New York City-based think tank Demos, is a young generation whose income is swallowed up by paying off debt.

“It’s much more difficult for this generation to work or educate their way into the middle class,” she said. “They’ll probably never match their parents’ standard of living because of big loans, low income growth and a cost of housing that’s much more expensive than for a generation ago.”

Draut, age 34, knows what she speaks of since she and her husband had to resort to selling their CD collection for food four years ago when they were out of cash, a week away from payday, and more than $75,000 in the hole due to credit-card and student loan debt.

Carmen Wong-Ulrich, author of Generation Debt, a how-to financial guide for young adults, and a former editor at Money magazine, said twentysomethings’ financial knowledge and saving habits are both equally nil.

“Many personal finance issues are completely foreign to them, even more if they’re not interested in it. For young people, debt is the norm and the mindset is ‘I’ll deal with it later.’ Many of them don’t start panicking until they have completely maxed out.”

Robert D. Manning, author of Credit Card Nation and professor of finance at Rochester Institute of Technology, now teaches personal finance classes because he is appalled at his students’ lack of financial literacy skills. “Young adults have nearly no knowledge of investing so they’ll have a negative savings rate and no assets outside their home, yet they’ll be retiring later than ever before," he noted.

“Economic insecurity historically leads people to save more and spend less, but this generation is different. The credit card industry has been extremely successful in marketing the message ‘You earn it so you deserve it,’ so people use their credit card as a reward to justify their purchases.  On the surface, they’ve got a nice house, car and furnishings to make them look good, but the bad news is they’re borrowing from their future.”

But Draut argued that the young get a bad rap for consumer consumption. “Consumer pressures are definitely greater but since three-quarters of this age group do not have bachelor degrees, the idea of living this lavish lifestyle with iPods and $5 coffees does not really hold true.”

She said many of the people she interviewed for Strapped are working diligently to lower debt and increase savings. “Some people created spreadsheets telling them when they get out of debt down to the month or day. They know they need to be saving for retirement, and they’re trying to tuck away a couple of hundred here and there for emergencies so they don’t need to use the credit card.”

Even though many elders look at Generation Xers' and Yers' financial attitudes with disdain , Draut said she is surprised by who feels most for this generation. “When I do radio interviews for the book, most of the sympathetic callers are from people over 65 who lived through the Depression. When they look at what young people are up against today, they feel a lot of empathy.”

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