September 4, 2022

Not your parents’ economy. The effect that has on college debt.

 

For one thing, college debt has increased in recent decades. The average borrower who graduated from a four-year public college emerged with $26,700 in debt in 2020, according to the College Board. That was up 18 percent from the average level in 2000 (again, adjusted for inflation).

But the bigger change is not in these loan amounts. It’s in the broader economic conditions facing young workers. Over the past two decades, the U.S. economy has become much harsher for adults under 40.

This chart shows how incomes have changed for different age groups since the late 1980s. As you can see, a typical 40-year-old today earns only slightly more than a typical 40-year-old three decades ago, while typical seniors have much higher incomes than their parents’ generation did at the same age:

Chart shows median family income, adjusted for inflation. | Source: Federal Reserve

The changes in wealth are even starker. Americans in their 20s, 30s and even 40s are poorer today than younger adults were three decades ago:

Chart shows median net worth, adjusted for inflation. | Source: Federal Reserve

A study by William Gale of the Brookings Institution and three other researchers concluded, “As for the millennial generation, their median wealth in 2016 was lower than the wealth of any similarly aged cohort between 1989 and 2007.”

That’s a remarkable — and grim — development, given how much G.D.P., stock prices and home values have grown over the same period. How could this be? One factor is that stocks and homes have risen so much since the 1980s that younger adults can’t buy into those markets as easily as their parents and grandparents could.

Many millennials also had the bad fortune of graduating into an economy weakened by the financial crisis of 2007-9 and the Great Recession that followed. Many companies have not expanded or raised wages much, creating fewer opportunities early in people’s careers.

Gale and his co-authors — Hilary Gelfond, Jason Fichtner and Benjamin Harris — note that millennials are also more racially diverse than earlier generations. People of color, especially Black Americans, have historically accumulated wealth less rapidly than white Americans for a complex mix of reasons. Among those reasons is intentional discrimination from the government during past decades that kept Black families from receiving subsidized mortgages, owning homes and passing down wealth to later generations, which could then build on itself.

Susan Dynarski, a Harvard economist who specializes in education issues and who grew up in a working-class family, was long skeptical about proposals to forgive college debt. She thought that people who had gone to college generally didn’t need government help, given the huge value of a college degree. But the emerging data has changed her mind, as she explains in a Times Opinion essay published this morning.

The people struggling to repay their loans tend to be those who attended a few semesters of classes at a public college or for-profit vocational programs and didn’t graduate, she explains. Often, these borrowers suffered because of funding cuts at community colleges or because of the government’s failure to regulate for-profit programs. And they suffered because of how weak the economy has been for most Americans over the past two decades.

Biden’s debt-relief plan focuses its benefits on these middle-class and lower-income borrowers rather than on white-collar professionals who are doing just fine, as another recent article by Jim Tankersley explained.

The case against

These factors obviously don’t end the debate over Biden’s plan. There are still arguments against it.

The plan will benefit some young professionals who really don’t need help but will gladly accept it, as I would have. The plan will also do nothing for the many Americans who never attended college (although Biden has signed or proposed several other big policies aimed at the working class). There are also thorny questions about whether debt cancellation encourages colleges to keep raising their prices, under the assumption that more debt cancellation may follow in the future (as Megan McArdle of The Washington Post has argued).

Yet before anybody tells millennials to toughen up and follow the same path as previous generations, it’s at least worth remembering that they have never really had that option. Their economic prospects have been worse than those of their parents and grandparents. Biden’s plan won’t erase that reality, but it will narrow the gap for millions of people.