SALT LAKE CITY — Utah is punching above its weight in a lot of economic categories worth bragging about, but holding down the No. 10 spot in the country for highest per capita debt isn’t one of them.
With a combination of near-nation leading low unemployment, job growth, a burgeoning tech sector and one of the most diverse economies in the U.S., Utah is the envy of many larger, and much wealthier, states. But mounting consumer debt, being driven by huge jumps in outstanding student loans and record-high credit card balances, could become a critical weakness in an otherwise booming time for most Beehive State residents.
Contributing to problems lurking behind headlines touting Utah’s stellar economic bonafides is a backslide in financial acumen among younger residents. Members of the millennial generation, whose collective credit and work histories are the least well-established, might be the most vulnerable to catastrophic failure should the state’s long-running boom times take a turn for the worse.
Data from the Federal Reserve Bank of New York puts Utah in the 10th position in the nation for per capita household debt at $59,320 as of the end of 2018. That’s almost $10,000 higher than the national average and represents an increase of almost $10,000 since 2013. The lion’s share of that debt, currently about 77% on average, tracks back to home mortgages and is a proportion that’s held fairly steady over the last 15 years.
However, over that same time period, student loan debt has grown from just over 2% on average to nearly 8% now. Unpaid credit card balances have dropped a couple of percentage points in that time frame, now about 5.5% of total debt, but Utahns still collectively owed $7 billion on credit cards last year, about $2.5 billion more than they did in 2003.
James Wood, the Ivory-Boyer Senior Fellow at the University of Utah’s Kem C. Gardner Policy Institute, dug into the issue of consumer debt in 2016, when per capita debt in the state was 13th highest in the country.
Wood noted at the time that mortgage debt for Utahns ran higher than the national average for a number of factors that are still true, including the state’s relatively high housing prices (Utah ranks No. 8 in the country with an average home price of around $341,000), homeowners who are younger and have had less time to build equity and pay down mortgage debt, and the state having the third-highest homeownership rate in the U.S., with well over 70% of households that own their homes.
In a recent Deseret News interview, Wood said per capita debt has increased since he released his study and noted characteristics unique to the state’s population continue to contribute to the outsized numbers.
“When you’re looking at the data and related indicators, they’re influenced by demographics,” Wood said. “Utah’s demographics are quite unusual. We have a very young population and a disparate number of our households are younger and they’re carrying student loan debt and taking on other debt, like mortgages.
“Compared to older consumers, they have relatively little equity and larger unpaid balances.”
Carrying that extra debt load is exacerbated by what some researchers have characterized as an appalling lack of financial know-how among those born between 1981 and 1996.
A George Washington University report by Annamaria Lusardi, academic director of the Global Financial Literacy Center, and Carlo de Bassa Scheresberg, senior research associate at the center, found a profound disconnect between millennials’ sense of their own fiscal aptitudes and how sharp those skills actually were.
“While millennials are very confident about their financial knowledge and their financial management skills, their high confidence does not match their actual financial literacy levels,” the report reads.
The researchers found only 1 in 4 millennials were able to demonstrate basic financial literacy and only 8% showed a high level of knowledge. Researchers noted many respondents answered “don’t know” to questions about financial concepts, indicating a low financial literacy.
Other research that has looked at multigenerational financial literacy found millennials trail Gen X members, who themselves fall a bit behind Baby Boomers when it comes to fiscal smarts.
The George Washington study looked at a test group comprised of 5,500 members of the millennial generation and also noted the group as whole is highly educated compared to other age groups. However, they are also heavily leveraged on their education debt, and some 54% told researchers they were concerned about their ability to repay student loan debt.
Even among households in the group with annual earnings in excess of $75,000, 34% said they may not be able to repay their education-related debts.
While still the third-largest segment of household debt for Utahns, student loans are second only to mortgage payments in outstanding debt payments for most Americans. A quarterly report issued earlier this month by the Federal Reserve Bank showed increases in student loan debt, which now stands at some $1.5 trillion dollars nationally, outpaced all other non-housing categories, moving up by $20 billion in the third quarter of 2019.
Lusardi and de Bassa Scheresberg found the combination of heavy debt loads and low financial literacy rates makes millennials particularly susceptible to unexpected expenses and/or an economic downturn.
“Millennials are economically fragile,” the authors wrote. “Data show that many millennials do not have emergency or ‘rainy day’ funds, despite (and perhaps because of) the prevalence of economic shocks during this generation’s lifetime.”
There are some indicators suggesting that the current, record-breaking U.S. economic expansion that’s been in play for more than 10 years is due for a downward adjustment. That event, depending on severity, could test the financial wherewithal of those who have not prepared for the unxpected.
The report notes fewer than one-third of millennials have set aside funds to cover three months of expenses in the event of job loss, serious illness, economic downturn or other unexpected shock. Even midsize shocks could push millenials over the fiscal cliff, researchers found, with nearly half of the group responding that they would not be able to cover $2,000 in the next month to address a surprise expense.
Wood said while he would not be surprised to see an economic slowdown in the next few years but does not believe anything at the scale of the Great Recession was a likely scenario. He also noted Utah’s diverse economy and that most residents should be positioned for resilience amid such a change, but highlighted that millennials could be most vulnerable.
“Utah should be well positioned to weather a slowdown and our economic foundation is much more stable than what we saw 10 years ago,” Wood said. “My biggest concern would be about our cohort of younger individuals and families, particularly with our generally lower wages and higher housing prices.”
The George Washington researchers uncovered numerous red flags associated with personal debt in their research work, but also believe there is still a chance to course-correct for members of any generation that want to upgrade their understanding of financial management.
“How can we help overcome the gap between the amount of financial responsibility given to millennials and their demonstrated ability to manage financial decisions is rapidly widening?” the authors wrote. “By expanding access to financial education with a forward-looking approach to financial literacy. Starting in school provides an opportunity to shift future generations’ financial positions, giving them a solid base from which to make life’s important financial decisions.”