WSJ Your Money Briefing - Gen Z & the Debt Trap, Part 1: A Wounded Wallet

Episode Date: August 18, 2024

In the first episode of our three part-series “Gen Z & the Debt Trap,” we explore a Credit Karma report that found Gen Z is accumulating debt faster than any other generation. To learn more, we’ll meet Kyle Dillon, a 22-year-old Gen Zer who after leaving home to pursue higher education, accumulated tens of thousands of dollars in debt. We also look at a TransUnion study to see how Gen Zers’ paychecks can’t keep up with inflation, creating dependency on using credit cards. Plus, the St. Louis Federal Reserve shares a surprising advantage Gen Z has over other generations. Tadeo Ruiz Sandoval hosts.  Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

OCI is the single platform for your infrastructure, database, application development, and AI needs. Do more and spend less, like Uber, 8x8, and Databricks Mosaic. Take a free test drive of OCI at oracle.com slash wall street. I owe a lot of money. Well, to me, it feels like a lot. Sometimes I can't even sleep because of it. Thousands of dollars in student loan debt just feels like trying to swim in quicksand. I can only go down.

I'm Tadeo Ruiz Andoval for the Wall Street Journal. And I'm not alone in feeling this way. Every three months, Intuit Credit Karma, a free online financial service that provides users with credit scores, credit reports, and other services, releases a report about the current state of debt and credit through a study of 88.5 million people from its US member base. In each report, the debt held across generations, is stacked up against each other for comparison and broken down. And at first glance, Gen X, the generation born between 1965 and 1980, holds the most debt. And that makes sense. The youngest are in their mid-40s and the

eldest are reaching their 60s. They've had decades of financial experience with bigger expenses like mortgages, car payments, and many are putting their kids through school. But when it comes to accumulating debt quickly, it's young people like me, along with the rest of Gen Z, that are racking up debt the fastest. Born between 1997 and 2012, Gen Zers range from 12 to 27 years old. For now, we'll be focusing on Gen Zers who are 18 and over, since they qualify for loans and credit cards. Despite their short financial experience, I didn't realize just how fast my generation

was racking up debt and I was shocked. So I reached out to Credit Karma for some answers. As their consumer financial advocate, Courtney Alev helps consumers make informed financial decisions. We are seeing a lot of credit card debt and student loan debt as well as some other types of debt. But the credit card debt piece has seen the largest increase overall across our members and that's hitting Gen Z particularly hard. So the financial burden that Gen Z is facing today could really have long-lasting effects on their lives. This is a special edition of Your Money Briefing for

Sunday August 18th. Gen Z and the Debt Trap. A three-part series that looks at why this generation is accumulating debt so fast and what can be done to slow the growth and how our debt could affect everyone else. I spoke to Wall Street Journal reporters, researchers and Gen Zers who are carrying debt to look at three key things. How we got into so much debt so fast, why Gen Z is stuck there and what we can do to get out of it. And at the heart of the series, these are the stories of people who are trying to manage their debt. I can work two, three jobs, but it still probably won't be enough to pay it all down.

So I feel like money to me now is a means of my downfall until I learn how to pay it all down. So I feel like money to me now is it's a means of my downfall until I learn how to use it. In this episode we talk about how Gen Z racked up so much debt. This is part one, a wounded wallet. That's after the break. AI may be the most important new computer technology ever, but AI needs a lot of processing speed and that gets expensive fast. Upgrade to the next generation of the cloud, Oracle Cloud Infrastructure or OCI. OCI is the single platform for your infrastructure, database, application development, and AI needs. Do more and spend less like Uber, 8x8, and Databricks Mosaic. Take a free test drive of OCI at oracle.com slash wall street.

Oracle.com slash wall street. Money means something different to everyone. To some, it means paying for a new vacation or a new house. For me, it's about paying off all those student loans I took out to pay for college. I didn't have the money to go to college and it seemed that debt was the only way to pursue a future in journalism and have a chance at a better life. And for 22-year-old Kyle Dillon, money represented his family's hard work to pay for the food on the table and roof over their heads.

Born in Columbus, Ohio, he grew up with a younger sister, a working mom and a dad who, after an injury, was unemployed. Kyle's mom had to juggle two jobs, going to college and raising a family. I watched her get burnt out by that and I felt terrible because she was busting her rear end for almost 16 to 18 hours a day. For Kyle, this made him determined to change his financial situation for the better. He applied for a credit card at 18 to use for emergencies like car repairs, and with a steady job and budget, he paid more than the minimum monthly payments each time.

Then the pandemic happened. Throughout the year, Kyle says he felt his relationship with his dad deteriorated. He decided to take $2,000 out of a savings account and drive from Ohio to Missouri, where he knew some friends. He would now live on his own. In late 2021, living in Rolla, Missouri, Kyle built a new life for himself. He moved from job to job where he earned between $13 and $15 an hour. His savings dried up, it became harder for him to afford groceries, and in January of 2022, he enrolled at the University of Missouri to delay paying his previous college loans

for longer. Eventually, his overall debt grew to over $57,000. It feels weirdly empty where I just kind of accept it. It's either I'm going to have to find a way to pay all this money off or I'm just gonna not pay it. Like Kyle, Gen Z's debt blew up within the first few years of adulthood. And I asked Credit Karma's Courtney Alev why that is. The last couple years have just been especially challenging for Gen Z.

Because many of them entered adulthood during a very high inflation environment and they've grappled with really high costs for food and housing. Not to mention the rise in higher education costs that likely has Gen Z having to borrow more often and in greater amounts just to get a college degree. So Gen Z is entering a more expensive world, but how does that impact their debt? According to the Bureau of Labor Statistics, inflation has increased by a total of around 32% in the last decade. TransUnion, a credit reporting agency, released a study indicating that inflation is not only raising prices, but it's also

increasing debt balances. One of the biggest problems isn't just that Gen Z's wages aren't keeping up with inflation, it's that Gen Z's wages aren't keeping up with expenses like debt payments. TransUnion's study also found that Gen Zers use more of their income to service their debt. Their debt-to-income ratio is 16% compared to millennials 12%. Credit Karma's Courtney Alev talked about this too. She looked at student loan payments as an example.

We found that 57% of Gen Zers are having trouble even paying off their federal student loan balances each month. And 57% said their student loans are preventing them from reaching their savings goals and their ability to pay off their other debt. When you're tackling big bills like student loans, Courtney says it's harder to pay off other balances you hold, especially when you have to focus on another big expense. have to focus on another big expense. Monthly rent. As of 2023, the median annual wage for recent college grads was $60,000. Yet, at the same time, the median rent in the US as of January was just under $2,000 a month according to

rent, which is an almost 22% increase over the last four years. Financial planning experts usually recommend 30% of your income go to rent, but... In this case, we see that 40% of Gen Z's gross pay would actually be going towards their rent. All these factors, Courtney told me, lead to one thing after student loan and rent payments are made. If your income doesn't allow for you to afford groceries or other day-to-day expenses, Gen Z will be more likely to pay for those things with credit. So this is really a perfect storm of consequences that's leading for these increase in debt rates.

And that's the debt trap. Now, there's another part of this story that needs to be mentioned. More on the pandemic's surprising positive economic effects after the break. Cyber attackers are using AI and creative ways to compromise users and breach organizations. In a security landscape where you must fight AI with AI, the best AI protection comes from having the best data. Zscaler has extended its Zero Trust architecture with powerful AI engines that are trained and tuned by 500 trillion daily signals.

Learn more about Zscaler Zero Trust plus AI to prevent ransomware and AI attacks. Experience your world secured. Visit zscaler.com slash Zero Trust AI. According to data from the St. Louis Federal Reserve, the median wealth of millennials and older Gen Zers more than quadrupled to $41,000 from 2019 to 2022 during the pandemic. That really surprised me. So I got in touch with the St. Louis Federal Reserve. Everything I'd heard so far talked about younger generations going through a rough financial time.

So how come the pandemic led to more wealth for Gen Z? Data scientist Lowell Ricketts and senior researcher Anna Hernandez Kent painted the picture for me. You'll hear from Anna first. We take into account on our models that they're young, so they are not starting out with a lot of wealth. And yet, even with that taken into account, what we saw this increase was much, much stronger than we would have predicted based on older generations at similar ages. Here's data scientist Lowell Ricketts. There were a lot of supports extended during the pandemic to address the impact of the

COVID-19. Some of that was cash support, economic impact payments, expanded unemployment insurance, the expanded childcare tax credit, and also not being able to travel or spend as much on activities that were just not allowed during the pandemic led to a lot of savings. All of those factors led to Gen Z saving more money during the pandemic. But remember Kyle Dillon? His savings didn't last long. They mostly went towards living expenses. And when he was running low on funds, he tapped into more credit.

Just those little treats, the coffee runs, food that I didn't really feel like making at home. those little treats, the coffee runs, food that I didn't really feel like making at home and that probably wasn't a great idea but my mental health was not very good at that point in time either because I was focusing all my energy into school and finding a job again. Kyle's story made me wonder, how long would the savings Gen Z got from the pandemic last, given the rising costs of living? The researchers from the St. Louis Federal Reserve say they aren't sure. They said that while those higher costs do have a negative impact on Gen Z's wealth, it doesn't completely derail the wealth advantage the pandemic gave Gen Z. Here's data scientist Lowell again.

From what we see so far, it does look optimistic that this was a meaningful way for them to build a nest egg that they can continue to build on moving forward. The researchers told me that Gen Zers should think of the long-term consequences of their purchases and investments made now if they want to keep their advantage. However, not everyone in Gen Z is thinking about the long-term effects of their purchases. Worse yet, not everyone is hopeful about their financial future. In part two, we'll hear how Gen Z's financial goals have shifted and how new spending habits helped lead to their debt spiral.

I'm young and I want to actually experience my life. So I took a trip to Thailand. I put it on my credit card. And how it will impact everyone else. The debt that Gen Z is accumulating, those issues are going to come home to roost at some point. And everyone in every generation may bear some impact of that. And that's it for part one of Gen Z and the Dead Trap, a special series of Your Money Briefing. This episode was hosted and produced by me, Today or Recent, Oval, with additional production support from Ariana Aspuru. Sound designed by Jessica Fenton. Jessica and Michael

Laval wrote our theme music. Our supervising producer is Melanie Roy. Aishah al-Muslim is our development producer. Scott Salewin and Chris Sinsley are our deputy editors. And Philana Patterson is the Wall Street Journal's head of news audio. Thanks for listening. AI may be the most important new computer technology ever, but AI needs a lot of processing speed and that gets expensive fast. Upgrade to the next generation of the cloud, Oracle Cloud Infrastructure or OCI. OCI is the single platform for your infrastructure, database, application development, and AI needs. Do more and spend less like Uber,

8x8, and Databricks Mosaic. Take a free test drive of OCI at oracle.com slash Wall Street. oracle.com slash Wall Street.