College students trying to build credit by using a credit card have reason to think twice after a study showed they might carry any debt with them to the grave.
A recent study from Ohio State University shows younger Americans are taking on more credit-card debt than their parents — and are taking longer to pay it off.
“If you project out life expectancy, then younger cohorts are not going to be able to pay off their credit-card debt by the end of their life, and they will die with debt,” said Lucia Dunn, an OSU economics professor and co-author of the study.
The study concluded people born between 1980 and 1984 would have approximately $8,200 more debt than their grandparent’s at the same age and about $5,700 more than their parents.
Dunn believes the trend will continue for younger generations, though most undergraduate college students are born after the years evaluated in the study.
The large amounts of credit-card debt will likely lead to action from banks around the country, Dunn said.
“I don’t think [an economic crisis] will happen, because the banks will step up,” Dunn said. “Banks are going to have to get tight on giving credit.”
The study shows if banks raise the monthly minimum required payment by 1 percent, it will help young people pay off debt at a faster rate, Dunn said.
The national total of student-loan debt reached $1 trillion in 2012, as younger generations also are accruing more debt to go to school than their parents and grandparents.
“I think that credit has become such a way of life,” said Julia Heath, director of University of Cincinnati’s Economic Center.
Restaurants did not accept credit until a few years ago, and now almost all businesses take it, Heath said.
“Student loan debt is just crippling kids when they come out of school,” Heath said. “For the individual student with significant amounts of debt they will be unable to do a lot of transitional things, such as go to graduate school, get married, buy a home or have kids.”
The large amounts of debt will hurt consumption spending, which makes up a large percentage of the economy, Heath said.
Like the housing bubble, Heath believes the debt held by young people could bust and cause an economic crisis.
“If you find out your degree is really not worth as much as you thought it might be and took on too much debt, its not like you can give that degree back, like you can a house in foreclosure, you can’t give your degree back and student loan debt is not dischargeable,” she said.
Ironically, some student who use credit cards to improve their credit are instead hurting it by taking on more than they can pay.
“My intent when I got the card was to only use it to pay for gas, but in the end I was using it other things when I was out of money,” said Grant Torok, 21, a former Xavier University student and resident of Clermont County. “In the end, I hurt my credit because I had more bills than I could pay.”
Torok dropped out of Xavier University after one year, leaving with a big chunk of student-loan and credit-card debt.
Students who do not finish college are at more of a disadvantage because they do not have a degree to help pay off their debt, Dunn said.