Generation Y: Modern personal finance

Debt is a serious concern in the UK today. Personal debt stood at nearly £1.5 trillion at the end of November 2011, with average household debt (excluding mortgages) at £7,982, and a report by the Consumer Credit Counselling Service found that the average UK household was paying almost £200 a month in interest payments on credit card and other debt.

And debt is affecting young people. Many forecasters consider the problem of debt amongst young people to be a timebomb. The worry is that young people seem to be living beyond their means against a backdrop of growing youth unemployment, rocketing student loans and stubbornly high house prices: they are entering adulthood with more debt than their parents did, but are also less likely to be able to build up assets, such as homes, than previous generations.

A recent report published by the Centre for the Study of Financial Innovation (CSFI) looked closely at young people’s (specifically 18-25 year olds) attitudes to debt, as well as the types of debt they had, whether they had ever borrowed from a high-street money-lender or pay-day lender, what kinds of payment cards they had and whether they paid off their cards every month. Some of the results were surprising.

For the most part, the 440 young people questioned in the survey were debt-averse and well aware of the pitfalls of falling into debt: many of them admitted that they were frightened of it. Fewer than 4% of those questioned had ever borrowed from a high interest lender, such as a pawnbroker, or a payday lender. As for credit card debt, more than three-quarters were careful to pay the balance on their cards off each month, although there were some who appreciated the opportunities cards gave them to increase their personal liquidity. One reason they were able to pay off debt was parental support. As a rule, young people in the survey were more likely to receive support from their parents than to take on debt – in total, 41% of respondents still received regular financial support from their parents. Of these, 46% received more than £200 per month.

This suggests that some of the people in our cohort were simply too young to have taken on much debt of their own. After all, few people in this age group have mortgages, few have dependents and they tend not to make large purchases. It may be only a matter of time before this all changes though: there was a great deal of support within the age group for home ownership. Getting a mortgage was very important to 71% of respondents and nearly 41% thought they would be still be in their 20s when they got their first mortgage – well below the national average of 35.

But what about student debt? Interestingly, the young people questioned were less worried about student debt than they were about other kind of debt, even though the vast majority (79%) had it. There were several reasons. First of all, many of them felt in control of student debt: after all, it is taken out of gross salary every month, depending upon earnings – which means the individual doesn’t have to to find the payment out of his or her net pay. A couple of those questioned didn’t even think about their student loan for this reason. Another reason was the fact that the interest rate on student debt is modest (currently 1.5% on a post-1998 loan), so some felt that paying down this debt need not be a priority when they stood to gain more in interest on a savings account. Others were even more pragmatic: they felt that the overall return they would derive from higher education would more than make up for the debt incurred. Perhaps this will change: the new interest rate on student debt is 6.6%.

That said, commentators are right to be worried about student debt. Some young people admitted that they had known very little about how the repayment system worked before they had started university. A few had not even known that interest was payable on the loan. Given that these young people were generally cautious as far as debt was concerned, it seems that more, clear and readily available information from the Government and the Student Loans Company might help them make the best financial decisions.

Not all those questioned were comfortable with the idea of student debt: one felt uneasy at what they saw as the ‘normalization’ of debt, especially at the beginning of their adult lives. It certainly seems to be the case that young people are keen not to get into debt – but more needs to be done to improve their chances of avoiding it, whether by making financial information more accessible, or by helping them build up assets more easily.