Crushed by the weight of student loans, Millennials don't want to take on any more debt. Now they are teaching their kids — Gen Z — to shun borrowing. How will traditional lenders survive if two consecutive generations spurn credit?
When James Truslow coined the phrase “The American Dream” nearly 90 years ago, it meant something different than it does today. Americans face a different financial reality, and in a time where technology shows us all that could be, the American dream is more visible, yet seems less achievable.
Over the past 30 years, the cost of living in the U.S. has risen disproportionately to median wages. The poor are getting poorer, the rich are getting richer, and the American middle class is getting squeezed. This has forced millions of Millennials to contend with a knotted mess of financial difficulties — both early in life and now, at the pivotal coming-of-age moment where they start families of their own.
Many Millennials feel “shackled” by their debts. They’ve developed a sense of mistrust towards financial institutions, having witnessed people — their neighbors or even their own families — losing their homes and jobs during the Great Recession. Their experiences have created what we could call the “Debt Averse Generation.” To be clear, they have already taken on debt, namely student loans that are so large they dwarf their parents’ mortgages. But this has left them with a harsh choice: either become more frugal, sacrifice their standard of living and surrender the “American Dream,” or assume more debt.
This financial ultimatum factors heavily into how Millennials shape their attitudes and emotions about debt. It’s even affecting the way they parent; these debt averse consumers are now trying to raise a debt-free generation. Driven by the idea that a college degree was the only way to ensure a successful life, Millennials took on a massive debt load to finance their education. According to research from the Harvard University Institute of Politics, 79% of Millennials aged 18 to 29 see student debt as a problem. Now, as they age and become parents, Millennials don’t want to their children to assume that the only way to achieve the “American Dream” is to assume a suffocating level of debt.
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For now, the majority of Millennial parents still feel a college education is an essential gateway to greater social mobility and achieving the “American Dream,” with four out of five of Millennials saying they believe it’s important. And as economic inequality grows, receiving higher education could become even more important. Yet the cost of higher education continues to climb. What’s a modern family to do?
For starters, they’re rethinking the “family financing unit.” Millennial parents have become more pragmatic in how they save for their children’s education. Many choose to save early and often in the hopes that their kids will one day live the debt-free lives they themselves dream of. According to research in 2015 fielded by Fidelity Investments, 74% of parents aged 30 to 34 said they started saving for their kids’ college. Contrast that to 2007, where only 58% of parents the same age had started.
This changing landscape has created a precarious situation for institutions, specifically banks and credit unions that offer student loans. The traditional model — graduate from high school, then borrow money to finance at four years of higher education — is fast becoming a thing of the past. It is increasingly likely that Millennials and their Gen-Z offspring will seek alternatives.
Young people today are willing to forego the venerated path through four-year schools, instead pursuing higher education later in life, often in a more incremental fashion, and relying on alternative, less-costly means of doing so. How long until vocational education, apprenticeships, and other disruptive educational channels (e.g., Khan Academy, EdX, coding bootcamps) prove to have a better return on investment?
Having internalized the lessons they learned from their Millennial parents, America’s next generation of college students might not borrow any money to finance their education. What will this mean for traditional banks and lenders? Will this changing consumer attitude exacerbate the already pervasive threat of disruption from new fintech companies and alternative approaches to financing?
What could be painful for some traditional lenders could spell opportunity for others. But capitalizing on these opportunities will require major changes to how financial institutions operate. It requires lenders, academic institutions and individual borrowers to collaborate and to co-create — to discover new perspectives, and find new ways of thinking about- and solving problems.
You could call it “disruption.” But really it’s about finding better solutions (together) than those that currently exist. It has to happen, because the status quo is crushing Millennials’ souls. If there is anything we’ve learned about consumers in the past decade, it’s that they are not afraid of change.