Study: Recession Left Young Adults With Far Less Debt

They've shed debt but also have stopped buying homes and cars.

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Over the course of the Great Recession, the nation's young adults shed debt far more quickly than their older counterparts, according to a new study.

A new report from the Pew Research Center says debt fell sharply during the downturn for young adults, especially compared to their older peers. Median debt among households headed by people under 35 in 2010 was around $15,473—a nearly 30 percent decline from 2007's nearly $22,000 (all figures are in 2011 dollars). Compare that to an 8-percent drop among people 35 and older, to $30,070. These totals include a broad range of debt, including home debt, auto loans, student debt, and credit card balances.

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That sounds promising, but it's not necessarily good news. While less debt can signal more financial freedom, it can also signal an inability to take on more debt or, more specifically, less ability (or willingness) to make major purchases, like cars and homes.

"I don't necessarily view this as a good news story. For many kinds of debt, it's secured by things. For example, the biggest kind of debt is your mortgage. The reason they don't have the mortgage debt is they don't have the houses," says Richard Fry, an economist at the Pew Research Center.

He says it's particularly notable that debt for young households has fallen even below where it was over a decade ago.

"What surprised me, among the households under 35, is not simply that they've deleveraged," says Fry. "For the median one, they're actually less in debt than they were back in 2001 at the start of the decade."

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While much has been made of the growing student debt burdens that young people are taking on, roughly three-quarters of household debt for these young adults is still residential debt; only 15 percent is student debt.

The Pew study also shows the extent to which this lower debt is accompanied by fewer large-scale purchases. The homeownership rate among households headed by people under 35 was 34 percent in 2010, down from 40 percent in 2007, according to the study. That rate stayed more stable among people 35 and older, slipping only from 74 to 72. The youngest adults also bought fewer cars, with auto ownership falling from 73 to 66 percent among households headed by people under 25. Meanwhile, for all Americans, that ownership rate held steady at 88 percent.

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Other statistics show that this is not simply a matter of young people choosing to sit on their money. While debt may have dwindled for young adults, wealth also took a hit during the downturn. According to the Fed's Survey of Consumer Finances, household debt-to-asset ratios stood at nearly 52 percent in 2010 for homes headed by people under 35, up from 44 percent in 2007 and 34 percent in 2001. Older households also took on more debt post-recession, but to much smaller degrees. For homes headed by people age 45 to 54, that ratio moved only from 16.3 percent in 2007 to 19.7 percent in 2010.

The study contributes to a growing body of work exploring the effects of the recession from a variety of angles. Still, Fry says that some of the trends in the study may be due to demographic shifts that have little to do with the economic downturn. For example, young adults have been showing less interest in driving, as evidenced by the fact that they are getting drivers' licenses in decreasing numbers. Likewise, declines in debt and homeownership also may partially have their roots in new demographic trends, like later marriage, delayed child-rearing, and longer postsecondary education.

"[Young adults] are not married and they're not having kids. Therefore, they don't have the urge to buy the house and get the mortgage," says Fry. "There's sort of a long-run change in what's happening."

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