The Ambition Tax

Why America's young are being crushed by debt—and why no one seems to care


The Kid's a survivor, though, and after five or six years of loans, study, and work, he dons his cap and gown. Handshakes all around, and Dad buys him an engraved Seiko to commemorate the occasion. Now it's time to join the labor force, $20,402 in the red—the average combined education and credit card debt for a recent college graduate, according to the federal loan company Nellie Mae.

Forget about grad school, of course, as that would mean taking on a whole new set of loans. A Law & Order fan growing up, the Kid once imagined becoming a public defender. But then he read an American Bar Association report noting that a J.D. would, on average, raise his total debt burden to $80,000, and that the median salary for entry-level, public-service legal jobs is $36,000. So never mind that dream.

The Kid's at first a bit dismayed to discover that his other dream jobs have been cherry-picked by more privileged graduates who were able to hop from prestigious internship to prestigious internship rather than wait tables. A job is finally found, though the pay's not quite what the Kid had imagined. In fact, real hourly wages for young college graduates actually fell between 2001 and 2002, the last year for which complete data are available. Prior to that, wages for recent college graduates increased an average of 3 percent annually throughout the 1990s. Those modest increases, of course, hardly kept pace with the attendant rise in student debt.

And as the Economic Policy Institute also recently noted in one of its regular "Economic Snapshots," the majority of job growth has been in lower-paying industries. "Nationwide, industries that are gaining jobs relative to industries that are losing jobs pay 21 percent less annually," the report notes.

Of course, a good portion of the Kid's monthly wages go directly toward servicing his debt. Demos, a public-policy group that focuses on inequality issues, is preparing a report on debt hardship among the young. One of the stats the group is using to track debt is "debt service to income ratio," which is debt payment divided by total income. Between 1992 and 2001, Demos found that the ratio increased by 28 percent for Americans in the 18-34 demographic. And for those in the third income quintile—which typically covers recent college graduates—the increase was 43 percent.

In layman's terms, those fatter ratios mean that the Kid and his cohorts are handing over an ever growing chunk of their hard-won cash to creditors. A contrarian might point out that bankruptcies among the young remain a mere blip. But that's largely because student debt, like child support obligations, can rarely be discharged that way.

Another misleading stat is that defaults on student loans have grown increasingly rare. Last year, student defaults hit an all-time low of 5.4 percent, down from a 1990 peak of 22 percent. The downward trend, of course, didn't come about because students are carrying more manageable debt loads. Rather, the federal government got a lot more aggressive about pursuing deadbeats and using collection agencies to force payment. Defaulters were punished with additional fees and sometimes forced to enter consolidation agreements that prolonged repayment until approximately the end of time.

Aside from the debt he accumulated during his college years, the Kid has a new financial bogeyman—health insurance. Premiums are spiraling ever higher, a trend that doesn't fit into employers' cost-cutting plans. Health-care premiums increased 13.9 percent last year, according to the Kaiser Family Foundation; it was the largest single-year increase since 1990, and the third straight year of double-digit upticks. A good portion of that cost was passed along to employees, especially if they were contract or temporary workers, who expect to get shafted on benefits. Just over 45 percent of America's temp agency workers, for example, are between the ages of 20 and 34—well over half a million in total. (That doesn't include another 2.2 million independent contractors and "on-call workers" in the age group.) Barely over 10 percent of these temps receive any sort of health insurance from their employers, according to the latest survey from the Bureau of Labor Statistics.

Given the Kid's low pay and high debt service, there's a good chance he'd join the 17.9 million other 18-to-34ers who lack even the most basic health insurance. His demographic accounts for the single biggest bloc of uninsured Americans—41 percent of the country's total. The Kid enjoys the occasional game of pickup basketball, of course, so he'd best pray that his ACLs are sound. Otherwise, a $5,000 hospital bill could nudge him into the abyss.


Afew years pass, a significant other comes along, and the Kid's elders start badgering him about growing up, getting with the American dream, and purchasing a home. Up to this point, the Kid has been renting in a metro area. It's a drag throwing away that money each month, but at least he's not living in his parents' attic. (According to the 2000 census, 14 percent of 24- to 34-year-olds live at home, a 50 percent increase since 1970.)

Adding yet another fixed cost to his debt load might seem like an unwise choice, especially since the Kid doesn't have much in the bank for a down payment. But the way house prices are going, it feels like a now-or-never proposition. "If housing prices continue to escalate, at least you'll be on the train," says Harvard's Elizabeth Warren. "As the train moves, you'll move with it. But it's also a high-risk proposition if it's going to take your income and your spouse's income to make the mortgage payment every month."

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