Cost of Living, Not Debt, is the Biggest Issue Facing Young Adults

It’s easy to point the finger for consumers’ woes with overwhelming debt at credit issuers; it’s even easier when dealing with college students and young adults. This younger consumer demographic – generally less familiar with credit products and often still dependent on parental financial support – make the perfect victim-of-choice for consumer advocates and legislators looking to garner attention about consumer debt and the role credit issuers play in creating a situation where young adults find themselves in financial hardship.

I was recently asked whether or not I would fault credit card issuers and student loan lenders in creating a situation where today’s students graduate from college thousands of dollars in debt. Amid the current economic turmoil and head-line grabbing news of what is now a dramatically transformed Wall Street, this question regarding young adult indebtedness a very serious one, not only for students and their families, but for colleges, lawmakers, and employers.

Yes, issuers do target and extend credit cards to college students and young adults. Yes, student loan lenders do issue loans to college student as a means for them to finance their higher education, in addition to lifestyle while in college. But the question of whether or not the credit card industry and student loan lenders are helping create a situation where college students and recent graduates leave school only to be in debt misses the point.

Student loans, both federally-guaranteed and private, are an enormous financial obligation for young adults that often take many years to repay. But it is important to keep in mind that the underlying problem of rising student loan debt is not in the lending community. The problem of young adult indebtedness and associated financial burden stems more directly from the continually increasing cost of attaining a college education.

From the 2005-06 to the 2008-09 academic year, the average cost of attending a four-year public/private institution increased from $21,235 a year to nearly $27,000 a year, not including room and board. This was an increase of 26.4 percent in three years.

Other indirect educational costs, such as text books – which for years have been the most often-charged and most expensive item on college student credit card accounts – tend to average about $600 a semester, only helping add to the overall cost of attending college. The growth of private student loans, and increasing credit card balances of college students, is a direct consequence of the widening gap between the cost of an education and the amount students and their families are able to receive in federally-backed loans.

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Graduating with student loan debt or with a credit card balance is not inherently negative – young adults need to build their credit histories for later on in life and obviously need to get their educations. But when the cost of a higher education increases to the point of becoming prohibitive, the issue goes beyond one focused on the lenders.

A recent blog entry by Stephanie Eidelman of Kaulkin Ginsberg focused on the difficulties employers now face in recruiting recent graduates at entry-level salaries. According to Salary.com, the average entry level salary is between $10,000-30,000 a year. After taxes – at a 15 percent rate for a single adult making between $8,025-32,550 for 2008 – and deducting a healthcare premium, the average young adult making $30,000 a year would bring home around $2,000 a month. If the average student covers 33 percent of the cost of their education – with two thirds through student loans as reported by the joint Sallie Mae and Gallup study – on average this year’s graduates will likely carry $22,000 of student loan debt. If combined through a Federal Student Loan consolidation at the average fixed interest rate of 6 percent, a recent graduate allocating 4 percent of their monthly income towards a “Standard-Level” repayment plan will see a $720 a month payment.

Though consolidating outstanding federal student loans has been advantageous for many borrowers due to several provisions in the College Cost Reduction and Access Act of 2007, the effects of the recent credit market deterioration have negatively impacted the availability of loan consolidation.

If young adults chose to relocate after graduation to one the nation’s urban/metropolitan areas, an additional concern will be housing costs. For instance, young would-be legislators and those seeking a career path within the public sector will find little respite by moving to Washington, D.C. and the surrounding area. The D.C metro rental market is saturated with potential renters; such high demand proves problematic for areas such as Montgomery and Fairfax County as the state of Maryland allows annual rental increases of up to 10 percent, while Virginia caps such increases at 15 percent annually. If a young adult were to move to the Greater Boston area, they would be met with a cost of living that is 240 percent of the national average, and apartment rental rates that are 48 percent more expensive. Anyone care to guess what these figures are for Manhattan?

One could obviously argue that savings could be found by moving farther away from urban centers. The environmental consequences of urban sprawl aside, the potential savings offered by commuting to work have, for the time being, been eroded by the 34 percent increase in the price of a gallon of gasoline over the past year. Along with potential auto loan payments and vehicle maintenance costs, commuting may not be a suitable option for single young adults making $30,000 a year or less.

Whatever one’s general feelings about credit cards or student loans might be, young adult indebtedness following graduation is a complicated issue for all parties involved that goes beyond the debt itself or the banks that issued it. For those in the accounts receivable management (ARM) industry, the most immediate concern regarding this issue is that of unemployment. Prior years have been kind to college graduates, but as the economy continues to shed jobs — the unemployment rate reached five year high of 6.1 percent in August — there are justifiable fears of what the job market will look like for the graduating class of 2008-09. Most of these young adults will leave school with some form of debt and if they are unable to obtain sufficient employment, then their obligations are obviously in trouble.