In recent years, the issue of rising student debt has become a significant concern, particularly for millennials and Generation Z. This mounting financial burden is not only affecting individuals' ability to secure their future but is also contributing to the widening wealth gap between these younger generations and their older counterparts. Let's delve into the factors that are shaping this situation and the potential implications for the future.

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Increase in Student Debt

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Student debt, the money borrowed to cover the costs of higher education, has been steadily increasing over the past few decades. Borrowers collectively owe more than $1.75 trillion in total student loan debt, with the average borrower owing $28,950 individually.

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Many millennials and Gen-Zers are leaving college with substantial amounts of debt, often reaching tens of thousands of dollars or more. This financial burden can impact their ability to make major life decisions, such as buying a home or starting a family.

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Additionally, the racial wealth gap is exacerbated by the burden of student debt. According to data from the U.S. Department of Education, the situation is stark: approximately 86% of Black students find themselves taking on student loan debt, a notably higher percentage compared to around 68% of white students. This is bad, but it’s even worse when you consider that Black households hold a mere 2.9% of the overall wealth, in stark contrast to the 86.8% held by white households. This shows that student debt hits minorities harder, making it even harder for them to build up wealth and have stable financial futures.

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Difficulty in Qualifying for a Home Loan

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Owning a home has long been considered a cornerstone of building wealth. However, the rising student debt has made it increasingly challenging for younger generations to qualify for home loans. Lenders consider an individual's debt-to-income ratio when evaluating their eligibility for a mortgage. With significant student loans, the debt-to-income ratio can be unfavorable, making it harder to secure a home loan. In face,  Since 2005, homeownership among recent college graduates has declined by 1.8% for every $1,000 of their student loan debt.

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Increasing Home Prices and Cost of Living

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It’s no secret that home prices have skyrocketed over the past few years. Rising prices combined with high interest rates and low availability has led to a painfully competitive housing market that many millennials are unable to participate in. Low housing inventory hasn’t recovered since the 2008 housing crash which virtually halted new construction. To make matters worse, last month, the Federal Reserve raised interest rates meaning the average interest rate for 30-year fixed-rate mortgages increased to 7.23%.

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We’re about to see a domino effect take place as next month, millions of Americans will be responsible for paying student loans back for the first time in years (the first time ever for recent grads). During the pandemic, the government paused student loan repayment programs granting a much needed reprieve to many. It was unclear when, if ever, people would need to start paying on their loans again. However in June, the Supreme Court struck down President Biden’s student loan forgiveness program putting the final nail in the coffin for many borrowers.

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Now, many Millennials will have to juggle high inflation, rising cost of living, and thousands of dollars per year in debt repayment at a crucial time in their careers. This will without a doubt  increase the wealth gap between younger and older generations.

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The Importance of Owning Property as Wealth Accumulation

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Owning a home has historically been the most reliable way to accumulate and store wealth. Real estate values have generally appreciated over time, allowing homeowners to build equity and potentially benefit from market trends. Gen X and Baby Boomers benefited from low housing prices and low interest rates and now hold substantially more wealth than Millennials. Research shows that millennials owned just 6.6% of the nation's wealth last year, compared to Baby Boomers (50.4%), Generation X (29.9%), and consumers ages 77-plus (13.1%).

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However, the barriers presented by student debt and housing market conditions are limiting the ability of younger generations to tap into this wealth-building avenue.

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The Future for Younger Generations

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The impact of rising student debt on the wealth gap between millennials/Gen-Z and older generations is concerning. The burden of debt is delaying major life milestones, such as homeownership and retirement planning, and even having children. This delay can have a ripple effect on their long-term financial stability, the preservation of the middle class, and the long term success of the country as a whole. The difficulty in qualifying for home loans, combined with escalating home prices and living costs, is impeding the wealth-building potential of younger generations.

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It’s unclear what the next year will bring. Will the housing market bubble finally burst? Will things ease back into normal as debtors settle back into repayment? Or will the strain on their finances push the country further toward a recession? Only time will tell.

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