A new generation of Americans wrestles with rising interest rates

For Max Egan, an MBA student at the University of Alabama, the idea of buying a home after graduate school was never his first option. Now, it’s not an option at all.

“It is definitely out of the question right now with interest rates so high,” he says. Even in Kansas City, Missouri, where he’s got a job lined up after graduation, housing costs are high. “They’re higher than I would expect,” Mr. Egan says.

The combination of high inflation and rising interest rates is increasingly straining the resources of U.S. consumers. Young workers in particular are feeling the pinch, and experiencing a spike in borrowing costs unlike anything that has happened in their lifetimes. Everything from car loans to mortgages and home equity lines of credit has become more onerous. Credit card interest rates have risen higher and faster than anyone in Generation Z has ever seen.

If the Federal Reserve continues to raise interest rates to combat inflation, a wider swath of households, young and old alike, could reach a breaking point. Businesses, too, are being affected as rising interest rates make it costlier to borrow for big projects or smaller needs. In the past week, two U.S. banks have failed: one of them in part because rising rates caused the value of its long-term credit investments to plunge.

Those failures, although they were met with prompt federal efforts to prevent a banking panic, are sparking new questions about whether the Fed will continue raising rates and whether banks will make fewer loans in this period of uncertainty. So far, however, consumers have proved remarkably resilient – buoyed by plentiful jobs and by their own efforts to cut expenses and trim back expectations.

“With just regular finances, I would say it’s fine at the current rate,” says Natasha Szulczewski, in Franklin, Tennessee. “If we go up to [buying] a car, it would be pressing it, it’s a little tight. And if we go up one more step with a house, it is not feasible,” says Ms. Szulczewski, a junior Web developer.

The housing market has hit Americans looking to buy their first home especially hard. The double-whammy of rising home prices and then rising mortgage rates has pushed homeownership far beyond their means. Applications for mortgages fell to a 28-year low a couple of weeks ago. And while they have risen a little since then, the normally busy spring buying season could take a hit until rates moderate, Bob Broeksmit, president of the Mortgage Bankers Association, has warned.

Applications for home equity loans are also far below year-ago levels. Many homeowners have used these lines of credit to consolidate their other debt, which is a good move unless it prompts more credit card use, warns Anastasiya Ghosh, a University of Arizona marketing professor. The debt didn’t disappear, but “it creates this false sense that ‘I’m doing well financially.’”

Car loans have proved particularly vexing. In the last three months of 2022, nearly 16% of new-car buyers who financed their vehicle committed to pay $1,000 or more a month for that loan, according to Edmunds, an auto-market research firm. The average now stands at over $700 a month.

“Even if you do make a decent income, that’s still a lot of money just going towards a car,” says Jessica Caldwell, Edmunds’ executive director of Insights. Worse for some consumers, as interest rates have risen, car prices have been dropping as supply chain problems have eased. The result is that the owners of 1 in 6 new vehicles sold last quarter (with a trade-in) now owe more on their cars than the cars themselves are worth.

One big factor behind the increase in debt is young people. Credit card debt overall reached a new record last quarter, surging 18.5% to nearly $1 trillion compared with the same period a year ago. But credit card debt for Generation Z – born in 1997 or later – rose 64% during the same period, according to a report last month by TransUnion. Nearly half of millennials – the next-youngest generation (born 1981 to 1996) – carry credit card balances that are larger than their savings or emergency funds, according to a report released last month by Bankrate. The high cost of living is one reason young people are so indebted.

“I am not in a very sustainable situation,” says Alex Baker, a Gen Zer in Birmingham, Alabama. Despite working as a paralegal at a local law firm and holding down a second job as a barista at Frothy Monkey, an all-day café, “I barely have enough money to put money in savings on top of day-to-day” expenses, he says. 

He’s looking for a new job in hopes of a better salary.

So far, young consumers have been able to take on more debt because they’ve enjoyed healthy pay raises since the pandemic. As long as that pay continues to rise at the same rate or faster than their debts, Gen Z and millennials should be able to service their loans, economists say. But various surveys of the economy suggest that last year’s robust pay growth is slowing a bit in 2023. 

Employment will also play a key role in determining how many consumers get pushed to the financial breaking point. It’s a key factor in whether debts get repaid. “The best predictor of whether people will pay their bills is their unemployment status,” Michele Raneri, vice president of research and consulting at TransUnion, said in a recent podcast.

Like consumers, the job market has been showing resilience. On Friday, the Labor Department reported that employers added 311,000 jobs in February, more than expected, although unemployment ticked up slightly.

Still, pressures are mounting.

“As a college student, I am on a pretty tight budget that I can’t alter for inflation,” says Amanda Bugos, a senior at the University of Alabama in Tuscaloosa. “Things on the job front have been really hard, too.”

To make ends meet, Ms. Bugos has started tutoring some 15 hours a week. She’s also searching for a full-time job in marketing after graduation. “It doesn’t seem like as many companies are hiring,” she adds. “I’ve been looking for jobs since August and there aren’t a lot of things popping up every week. So it’s been really difficult.”