WITH ONE-FIFTH of their ranks having $10,000 or more of consumer debt (not including college loans), Millennials are becoming known as the ‘debt generation,’ says Ian Hudson of the new England College of Business.
Ian Hudson is chairman of the master’s degree program in finance at New England College of Business in Boston. He has implemented curriculum changes that include the development of courses in financial derivatives, financial modeling and investment management. His financial industry experience includes wealth management and trading positions at Morgan Stanley and Southern Energy. Hudson has a doctorate in business administration in finance from Nova Southeastern University and a bachelor’s degree from the University of Alabama at Birmingham.
PBN: What have you found most striking about the financial situation of Generation Y, or The Millennials?
HUDSON: The 80 million people of the Millennial generation are the most highly educated generation in the history of America. Yet their strong intellect has not translated to gainful employment. The unemployment rate for Gen Y is 12.4 percent, compared to about 8 percent for the remainder of the workforce, according to the U.S. Bureau of Labor Statistics.
What’s also surprising is the number of young adults living at home has doubled since the 1980s. During the 1980’s, 80 percent of 18-year-olds possessed a driver’s license. That number has dropped to 65 percent. Even bicycle sales are lower now than they were in 2000. The mobility of labor is a key factor in the productivity of our economy. For such a large number of potential workers to have such limited mobility does not bode well for the future. What these numbers tell us is that the average Gen Y person is highly educated, but underemployed. These are disturbing statistics for what is essentially 25 percent of the American population.
PBN: How do these financial patterns differ from their parents and grandparents, and why do think this has developed?
HUDSON: Millennials matured in a culture based not on thrift, but rather on instant and conspicuous consumption. They are early adopters of new technology. With easy access to credit, they are a shopping force to be reckoned with. They purchase big ticket items very quickly, which is a lack of impulse control that retailers value. This is in direct contrast to the financial habits of their grandparents, who are more likely to spend with cash instead of credit. The shopping habits of Gen Y are good for the economy in the short-term. However, there are negative future consequences associated with the accumulation of such a large amount of debt.
PBN: How much impact does the cost of college tuition and student loan debt have on the ability of Generation Y to spend on buying homes, cars and other of the usual goods and investments?
HUDSON: Generation Y has become the “debt generation.” On average, they hold three credit cards and 20 percent of them have balances of $10,000 or more. This is in addition to an average student loan debt of $23,000 upon graduation. One of the most important metrics utilized in the loan decision making process is the debt-to-income ratio. The higher the ratio, the less likely the loan is to be approved. If it is indeed approved, it will be at a high interest rate, further exacerbating the existing financial situation.
PBN: Are there programs or initiatives you think banks and financial services firms might offer to encourage more investment and saving for retirement?
HUDSON: Since they are the youngest members of the workforce, Millennials are the least likely to have accumulated cash reserves. Financial institutions can target this group with a variety of financial literacy information, including introducing the time value of money and the power of compounding. These two simple aspects of investment finance will encourage Millennials to start saving today, even if they have only a small amount of money to begin with.
PBN: As Generation Y matures and moves into influential roles in business, how do you see their personal financial situation affecting the decisions they will make at work?
HUDSON: As this generation matures, it will fully realize the effects of credit, both positive and negative. I don’t believe they will duplicate their impulsive spending habits in the business world. What we may see 10 years from now are companies with highly educated managers and workers who are technologically savvy. But corporate investment decisions will be more on the conservative side. After years of living at home and carrying a high debt burden, these future managers will reflect on this experience in making business decisions.