WSJ Your Money Briefing - Gen Z & the Debt Trap, Part 3: Stop the Bleeding

Episode Date: August 25, 2024

Learn how Gen Z is tackling their debt in the final episode of our three-part series "Gen Z & the Debt Trap." We’ll talk with 20-year old Michenzie Sommerville, who shares how after struggling to keep up with her auto loan, her car was repossessed. We’ll hear from Corebridge Financial on how Gen Zers are using social-media apps like TikTok to learn about financial literacy at a younger age than other generations. Also, financial experts from organizations like the National Foundation for Credit Counseling and the Financial Therapy Association explain how to manage personal debt and prevent collecting more. 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 wallstreet. Hello, I'm Tadeo Rizandoval for the Wall Street Journal. This is a special edition of your money briefing on Gen Z's growing debt for Sunday, August 25th. Each time I look at the $30,000 I owe mostly in student loans, I feel sick. It feels like it's too much to pay off. And I felt the same way every time I saw how fast my generation was racking up debt. I questioned whether there was a way to get out of this debt hole. But when I talked with WSJ personal finance reporter Oyin Adedoyan, everything changed.

Not all Gen Z are cash strapped and spending like there's no tomorrow. A lot of Gen Z are pretty tech savvy, and they're more involved in their finances than ever before. Scrolling through TikTok, Instagram, and other social media, Gen Zers were sharing their debt stories with each other and giving tips on how to budget and invest money. I thought maybe Gen Z has found a way to regain control of their finances. 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 2 we learned about the harmful habits deepening Gen Z's debt and the consequences other generations could face because of it. In our final installment, we'll talk about financial literacy, why it's important, and how Gen Zers can use it to tackle their debt and prevent collecting more. This is part 3, Stop the Bleeding. More on how Gen Z can recover 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 oracle.com slash wall street 20 year old Mackenzie Somerville says she regrets a lot of decisions she's made decisions she says led her to lose her car at 15 Mackenzie got her first job at a sandwich shop, earning $11 an hour. She says that's when bad habits crept up. Every time I'd get a paycheck, I'd be like, okay, what am I going to spend it on?

So I would spend my full paycheck before I got paid next instead of saving it. In high school, she got enough scholarships to cover a full ride at the University of Tennessee Chattanooga to become a meteorologist. But in her first semester in Fall 2021, she says she felt a lot of academic and personal pressure that led to her mental health deteriorating. And a month in, I quit college. And that is my biggest regret to this day. She returned to work at the sandwich shop. Then in early 2022, she got a credit card

to help build her credit history and bought a used car for $18,000. She moved from job to job until she found work at a shipping company where she earned $16 an hour. But after being late to work multiple times due to oversleeping, she says she was let go earlier this year. Now, she's earning $11 an hour as a house cleaner, which she says isn't enough to pay her bills. Her car was repossessed and being put up for auction. She owes $1400 on her cell phone plan which was sent to collections.

Her total debt is now just over $21,000. But she estimates it'll go down to about $15,000 after her car is sold at auction. And because she can't afford an apartment, she's living at a friend's place rent-free. I am not financially literate in any sense. I don't know what investment means. I don't know how to create a budget. I came into this car loan thinking, oh, I'll just make the payments and it'll be fine. But I didn't really think about the long-term effects of it. So I feel like money to me now, it's a means of my downfall until I learn how to use it. Mackenzie's story made me think about the $30,000 I currently owe. It all started when I signed up for my first student loans.

I was 18 years old and I didn't take time to think through the consequences. My tuition was due soon and I didn't have the money to pay up front. I procrastinated until the day before it was due and I didn't have the money to pay up front. I procrastinated until the day before it was due and I rushed my decision. Without looking at many options, I signed up for two private loans totaling $12,000 with a variable interest rate to pay off both semesters of freshman year. That means that the starting rate can change during the loan's lifetime, and it has changed. It's grown from 8% to nearly 12% in the last 3 years. What started as a combined minimum monthly payment from both loans of $80 is now $100.

And these monthly payments are a drop in the bucket for how much money I'll have to pay to settle this loan. So when other people are deciding on a loan they're going to take, what should they think about? I spoke with Bruce McCleary, a spokesman for the National Foundation for Credit Counseling or NFCC. They counsel people with personalized plans to tackle debt. Bruce says people should take the time to understand the loan options they have available.

The choices are more diverse and many of these decisions can't be made based on the simplicity of an advertisement you hear for a credit card or what you hear from people that you know about things like buy now pay later. These programs allow people to make said purchases and pay them off in monthly installments. Plus, what makes some of these lenders appealing is they offer little to no impact on your credit score. But, Bruce advises caution, because these kind of programs too often could lead to juggling multiple monthly payments at the same time. When Mackenzie Somerville talked about her auto loan, she said her $17 an hour job would

have been just enough to cover the payments. Bruce says people should always prepare for the worst when taking on debt. For Mackenzie, her worst-case scenario was losing her job. And there was no backup plan. I was not making enough money to catch up on my car. So I was like, oh, if I just bring in more money, it'll be fine. Which was not the case. Ashley Agnew is the president of the Financial Therapy

Association. The group connects therapists with patients to help work through their financial decisions. That's why she says it's important to take a moment and consider the financial choices you want to make. To do this she says it's helpful to talk things through with a financial professional or an accountability partner. What we know now is that financial decisions are made 90% emotionally and only 10% logically. So inserting human interaction before a financial decision also helps reframe that mindset to get back into logic and out of emotion. And Gen Zers are finding ways to keep each other accountable.

Online. More on how Gen Z has found a support system on social media after the break. to your business, you always want more. More productivity for your line. More capacity for your data center fleets. More efficiency for your facility. But what if you could get more with less? Ecolab Water for Climate combines state-of-the-art technology and expertise to help reduce your water usage, lowering your operational costs, and leading toward more sustainable business growth. Less water, more productivity, more optimization. Less water, more capacity, more growth.

Less water, more efficiency, more performance. Less water, more profitability. Get more for your business when you partner with Ecolab. Results will vary. When I was talking to Oyin Adedoyen, the Wall Street Journal personal finance reporter, she told me how Morgan's ears seek each other out for financial advice. 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. I truly believe this is the reason that I was able to pay off my debt as quickly as

I did. How they were able to invest their money. Here is what my entire investment portfolio looks like as a 24-year-old with a full-time job and a six-figure business. How they're planning to save for retirement. If you ever want to retire one day, you need a Roth IRA. Take for example 25-year-old Bridget Vong. On TikTok, she posted videos about how she paid down $15,000 in credit card debt. She shared how she budgeted to buy groceries and

plant free activities to avoid spending more money. She has over 100,000 followers and her most popular personal finance video got over a million views. It really gave me a sense of fulfillment to know that this story resonated with others and that they felt supported by it and I still stand by that today and the fact that like building that connection that people don't feel so isolated is something that's like really important to me. Online, Jen'sers are also discussing payment tactics like the snowball method, focusing on paying down the smallest balance owed first before moving on to the bigger ones. They also talk about the avalanche method, which prioritizes the balances with the highest interest rates. Terry Fiedler is the head of retirement services

at Corbridge Financial, a retirement and insurance provider. She says that easy access to online resources and discussion have helped Gen Z learn more about financial literacy earlier than previous generations. Her team developed a study that looked at how different generations approach financial literacy. 40% of Gen Zers said they use social media to strengthen their financial planning capabilities. Compare that to 34% millennials, 17% of Gen Xers, and only 7% of

baby boomers. Terry says that because Gen Zers are learning so much at a young age, they're feeling more confident and optimistic about their finances. 72% of Gen Zers surveyed by CoreBridge rank their financial knowledge as either being intermediate or advanced. Gen Z also reports feeling confident about their day-to-day financial skills. This optimism is even more impressive when you consider how many Gen Zers graduated from college in a pandemic and they've had to cope with a volatile market and rising inflation. Debt can be terrifying. In this mini-series, we've heard the stories of three people struggling

to pay back tens of thousands of dollars they've used for things like education, travel, food, and rent. But they're taking steps to chip away at their debt. At the beginning of this series, we met Kyle Dillon. He shared how he accrued more than $57,000 in debt. He plans to join the AmeriCorps Go Fellows program, which connects fellows to East Coast schools to mentor groups of children. He says the program will help him pay off the $50,000 in student loans he took to pursue his dream. Being a high school teacher. I mean, I genuinely hope I get where I need to be. It's just reaching that point that's going to be difficult, but I'm here,

so that's all I'm worried about." In part two, we heard from Gaia Jacobs about her trip to Thailand and the overall debt of $80,000. She says she's sad she set her film career aside and favored the steady job, but that she hasn't forgotten about her passion. For now, she says she hasn't forgotten about her passion. For now, she says she'll continue to work as an office manager to pay off as much of her debt as possible. You gotta have a positive outlook because positivity brings positivity. So if I'm having a positive outlook, my loans will go down.

It won't be bad forever. And we met Mackenzie Summerville. She moved back in with her mom to save money, and she's also looking for a higher paying job to earn more income. She set up an online fundraiser to help pay off her debt and purchase a camper she hopes to live out of. There's so much that I still need to learn from everything, but from this point onward, this is my plan.

As for me, well, I have one more year left in college. In all honesty, I don't know what awaits me on the other side, but now I know to take a pause and talk through my finances with someone to hold me accountable. I plan to attack my debt piece by piece. Personally, I might tackle the balance with the highest interest rate first, just to save more money in the long run. And most of all, I believe that because I'm learning how to manage my finances now, I'm not as afraid of debt anymore. And that's it for the third and final part of Gen Z and the Debt Trap, a special series

of your money briefing. This episode was hosted and produced by me, today Ruiz Andoval, with additional production support from Ariana Aspuru. Sound design by Michael Aval, Michael and Jessica Fenton wrote our theme music, our super pricing producer is Melanie Roy, Aisha Al-Muslim is our development producer, Scott Salway and Chris Zinsley are our deputy editors, and Philana Patterson is the Wall Street Journal's head of news audio. Thanks for listening. 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.