WSJ Your Money Briefing - Gen Z & the Debt Trap, Part 2: Hemorrhaging Money

Episode Date: August 21, 2024

Gen Z’s debt won’t just affect them. It could be a problem for everyone. In the second episode of our three-part series “Gen Z & the Debt Trap,” we talk with TransUnion and Credit Karma experts to discuss potential consequences of Gen Z’s debt for past generations and those to come. We’ll also get to know 25-year-old Gaia Jacobs, who says she traded her dream career for a steady job in order to pay off her debt. Plus, we talk with a mental-health professional from the American Psychiatric Association to learn how Gen Zers’ spending habits could be making the problem worse. 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

Don't you wish your life came with a warning app? That dog does not want to be petted. Well, life doesn't always give you time to change the outcome, but pre-diabetes does. Take the one-minute test today at doihabprediabetes.org. Brought to you by the Ad Council and its pre-diabetes awareness partners. Hello, I'm Tadeo Rizanoval for the Wall Street Journal. And lately, I've been wondering how I'm going to pay off the nearly $35,000 in student loans that I will owe when I graduate.

When I look to my future, that debt is the first thing I think of. How long will it take me to pay it down? Will I have to delay getting married or having a house? Those thoughts keep me up at night. Facing all these questions, I wanted to know what other genseers like me did when their debt loomed so large. So I reached out to the National Foundation for Credit Counseling, or NFCC, a group that provides financial counseling for people struggling with debt.

Bruce McCleary oversees membership and serves as a spokesman for the NFCC. He said Gen Zers mostly sought the NFCC's help to manage their student loans. But last year, he noticed more Gen Zers requesting counseling for something different. More commonly we're seeing that they're reaching out for assistance with affordable repayment of their credit card debt. And in some cases, they've already fallen behind on their payments and they're getting hit

with late fees, over limit fees. Bruce said if Gen Zers aren't able to pay off their debt, that poses a risk that doesn't just affect them. Turns out it's bigger than that. The debt that Gen Z is accumulating, which includes student loan debt, but also includes very high interest rate consumer credit and other loans, those issues are going to come home to roost at some point, and everyone in every generation may bear some impact of that.

This is a special edition of your Money money briefing for Wednesday, August 21st. This is Gen Z and the debt trap. A three part series that looks at why this generation is accumulating debt so fast, what can be done to slow the growth, and how our debt could affect everyone else. In part one, we learned about the broader economic effects that led to Gen Z's fast debt accumulation. In this episode we talk about the ramifications of that debt and the personal habits that could be making it worse. This is part two, hemorrhaging money. More after the break. The pandemic limited Gen Zers ability to go out, travel, or hang out with friends.

For many, it was a time of social isolation. 25-year-old Gaia Jacobs was in Delray Beach, Florida during the pandemic. She had just graduated from Lynn University as a film major and transitioned from working at a shoe store to a photo studio, where she worked as a manager earning $15 an hour. She says that to cope with the isolation during the pandemic, she found new hobbies that made her happy, but they came at a cost. I decided I was going to pick up learning how to cook and everything and that's kind of where it all started going down because I was walking up the grocery store and buying

whatever I wanted so that I could learn how to cook and like make a bunch of things from scratch. At this point, she had nearly $40,000 in student loans and owed over $30,000 in a car loan. On top of that, becoming a chef at home increased her grocery bill. If she didn't already have the cash to afford it, the cost for the groceries would end up on her credit card. I want to eat better, so I'll typically go for the option of just putting on my credit card and eat a little bit better and healthier for myself.

Little by little, I purchased here and I purchased there. Her credit card usage climbed to $9,000 on two cards. And then, at the beginning of this year, she made a big decision. She booked a flight to Thailand. I just decided that after the pandemic that it's just time to live life. I just decided I've got to go and explore the world. Thailand. While in Thailand, she spent just over $2,300 on a tribal credit card. With that amount, when she returned, her accumulated debt rose to over $80,000. She is currently earning $28 an hour as an office manager at a chiropractor's practice. She is considered options to help repay her debt, but she says it just seems too big of

a number for her to grasp. I only make so much money and yes, I can work two, three jobs, but it still probably won't be enough to pay it all down because the other jobs that I could add on would be like waitressing and then I'm not sleeping. It's like where do I draw the line for what am I going to do to tackle this and handle it? Her situation is exactly why I talked to Wall Street Journal personal finance reporter Oye Nadeh Doyen about Gen Z's relationship with credit.

She said a lot of people saved money during the pandemic lockdown and with extra cash from stimulus check payments they were able to pay down debt but that had an unintended consequence. That helped people's credit scores go up. They were in a much healthier position to get credit cards and get access to more credit and banks took notice of that. So lending standards loosened a bit during the pandemic and young people also got access to credit. In a study, TransUnion, a credit reporting agency, said that Gen Z is using more credit cards now than millennials did 10 years ago when they were the same age.

Part of that is just because of the internet. It's a lot easier to mobile bank today. Most people who belong to a bank have that banking app on their phone, so they can easily with the touch of a finger extend their credit limit or apply for a new credit card. Online banking and tools like Tap2Pay have also changed the way we interact with our money, which experts say can help lead to overspending. Here's WSJ personal finance reporter, Imani Moise. In the 90s, some behavioral economists actually coined this term pain of paying.

And it's just this idea that physically handing over money, there's a negative emotion associated with that. And as the act of paying has become less tangible, like it's gone from actually handing over cash to slapping a card to just tapping a phone, it's become much less painful, so it's easier to spend. According to the New York Federal Reserve, Gen Zers currently max out their credit card spending more than other generations, although this is partly due to lower credit limits. However, the New York Fed says that using credit cards to the point of maxing out

leads to a higher risk of being delinquent on payments. And if delinquency arises by Gen Z, researchers say their debt could affect every other generation as well. And in some ways, it already has. Here's Credit Karma's consumer financial advocate, Courtney Alev. We've seen some interesting trends and actually like baby boomers and the silent generation actually seeing student debt grow. And that's likely driven by co-signing or taking on debt for their Gen Z children or grandchildren.

There are folks who might be closer to retirement who are now directing a lot of their funds towards helping their children become financially stable, which is a huge gift to those children, but also means that there's a lot of folks out there who are now not sure if they can retire or some of their own financial goals are being impacted. Michelle Ranieri, the vice president of research and consulting at TransUnion, said future

generations could also be at risk. If Gen Z is default, she worries banks could make it harder for the next wave of adults to access credit. Those future adults? That's Generation Alpha, the kids that have been born between 2010 and this year. If lenders are concerned that they're not going to get their money back, then GenAlpha could have less choices of what kind of credit that they get. Learning that GenZers were using credit cards so much worried me, and then made me want to learn more about the bad habits that could leave Gen Z to overspend. We Z, I talked to Dr. Lisa Fortuna, Chair of the Council on Children, Adolescents, and Families at the American Psychiatric Association.

She said Gen Z faces a lot of financial anxiety due to the economic hardships that they are going through. And Gen Z can create some harmful ways to cope with their anxiety. For example, some people avoid looking at their bank balance. Which means you won't know how much you're spending or if you're spending too much. One of the things that we do when we're anxious is we try to avoid facing the things that much. and I can swipe and buy this thing that makes me feel happier in the moment, I'm going to do that first. That last part Lisa mentioned is what's commonly called revenge or doom spending. Spending money on excess purchases to cope with anxiety.

We get a little blip of joy when we're actually able to buy something that we want in that moment. Screw the future, screw the economy, right? Like I'm going to get this thing that I want and I'm enjoying it. When Gaia took her trip to Thailand, she says she was fully aware of the debt she would have by taking the trip. But as she explains, I only have one life and I just want to be young and dumb, go out and explore the world. Just for me, it's going to require me being in debt.

We've discussed a lot of things that Gen Z is coming up against, but there's an upside here. Because of their experiences with credit and debt, Gen Z is becoming more and more financially literate. In fact, Corbridge Financial, a retirement and insurance provider, conducted a study that found Gen Z is starting financial planning earlier than previous generations. Terry Fiedler is the head of retirement services at Corbridge Financial.

73% of Gen Zers said they got serious about their finances between 18 and 25 years old. In this study, only 12% of Boomers reported seriously thinking about their finances when they were that age. So it really is impressive to see the younger generation getting a head start on financial planning. So, in our next episode, we'll talk all about financial literacy and how it could help Gen Z how to not only tackle your finances at an early age, but also prevent taking on excessive debt that'll follow you as you get older.

Money was just a means to spend pretty much I did not learn about credit. I did not learn about debt. And so I just went into adulthood thinking, oh I'll just get a good job and have everything that I could possibly ever need. And that was a slap in the face when I actually became an adult and I couldn't really do that. Finally, we'll explore social media movements that aim to make financial literacy available to all. The internet has really democratized financial literacy. You're seeing all types of people from various socioeconomic backgrounds getting on the internet, on Instagram or TikTok to share how they paid down all their loans, how they were able to invest their money, how they're planning to save for retirement.

And that's it for part two of Gen Z and the Debt Trap, a special series of Your Money Briefing. We'll return on Sunday, August 25th. This episode was hosted and produced by me, Tadey Rizon-Laval, with additional production support from Ariana Aspuru. Sound design by Michael Laval, Michael and Jessica Fenton wrote our theme music, our supervising producer Ismal Niroi, Aishah Muslim is our development producer, Scott Saloway and Chris Dinsley are our deputy editors. And Philana Patterson is the Wall Street Journal's head of news audio. Thanks for listening!