As the Christmas shopping and travel season begins to heat up this holiday season, many financial experts are keeping an eye on how student loans will affect Millennials spending. Surveys have shown that Millennials plan to spend more on Christmas in 2016 than in 2015, but, the concern is if unprecedented amounts of student loan debt will have a “Tale of Two Cities” effect on Millennials and their shopping plans as younger Millennials might not be the same amount as older Millennials with smaller or no outstanding student loan balance. As Millennials are now the largest living generation in the United States, their spending is having more influence on retail trends each Christmas season.
Millennial Christmas Spending Projections
The PwC 2016 Holiday Outlook indicates that the average Millennial, ranging between 18 and 34 years old, will spend $1,053 this Christmas. This is a 25% increase compared to 2015 and 57% of all Millennials say they will spend more this year compared to last year. While this is a sharp uptick in projected spending, Millennials are still spending less than their parents who are more likely to spend approximately $1,500 this season.
One subgroup of Millennials called “hipsters” who tend to have higher-income jobs and live in urban cities like Austin, Brooklyn, and Portland are expected to pay $500 more than the overall average (a third of their holiday budget will be spent on themselves). Another reason for the spending increase is that Millennials are projected to spend $364 in travel and entertainment experiences this holiday season as well.
Older members of the Millennial generation that have repaid all or most of their student loans and started a family are more likely to spend more money on others instead of themselves or their immediate family members. Approximately 81% of Millennial parents plan to donate to their favorite cause this year with approximately $244 in average donations per consumer. The increase in planned spending and giving both indicate that student loans are not crippling Millennial budgets, but, many retailers and financial analysts are still asking how much more they would be spending if it wasn’t for historically high student loan debts and relatively flat wages.
One advantage that retailers do have with Millennials to help capitalize on their projected spending habits is with technology. Millennials are more likely to do their holiday shopping & charitable contributions from a mobile device. The projected rise in Millennial spend might be partially attributed to the convenience of shopping online instead of going to a brick and mortar store. And, Millennials are more likely to begin their Christmas shopping in September and taking advantage of good deals as they can afford them or maximizing the “pre-Black Friday” discounts that retailers have begun implementing lately.
The Student Loan Impact
Student loans and the continually increasing cost of higher education are two defining factors of the Millennial generation. The Great Recession further divided the Millennial generation into an older and younger subset. A college diploma for older Millennials that are now in the late 20s or early 30s cost approximately 34% less than current Millennial college students are paying. The sharp increase is primarily from a large reduction in state financial support stemming from the Great Recession, but, also from inflation and larger college budgets. The unprecedented emphasis for immediately earning a graduate degree or similar professional training immediately after graduating from undergraduate college has also contributed to the total outstanding student loan debt to go beyond $1.3 trillion.
While it has always been expected that a new college graduate will probably spend less at Christmas than somebody that has an established career, the sharp increase in college tuition and student debt has made new college graduates the most indebted group of young adults to enter the American workforce. Older Millennials held the same title when the earned their diploma in the pre-Recession years, but, the average student loan debt for a 2005 college graduate was around $17,233 depending on the source. Compared to the average 2016 college borrower debt burden of $37,173, which is a $20,000 difference. That’s enough money to buy a new car or make the down payment on a house. Assuming a 6% interest rate and a 10-year repayment schedule the estimated monthly payment for a 2005 graduate was $191 while the 2016 graduate will pay $413.
It is also estimated that one-fifth of a young Millennial’s budget is set aside for student loan payments. Relatively flat wages and increasing costs in rent and insurance has prevented Millennials from prepaying their student loans and also spending their income on other purchases. A sizable portion of new graduates have also moved back home to help afford their student loan payments and avoid paying high rent costs. These “Boomerang Children” have a larger disposable income that can be used on Christmas spending and helps account for the 25% projected spending boost.
But, it is safe to say that the large increase in Millennial spending is coming from the pre-Recession college graduates. Their relatively low student debt burdens, which were historic highs at the time of their graduation, has allowed them the opportunity to establish a career and obtain financial security. They still might be paying for graduate school and professional training, in addition to having a car payment or house payment, a sizable portion of their household budget is still repaying student loans. One of the primary reasons they are spending more is because they are becoming parents. They might not necessarily be spending money on themselves, but, are spending to give their own children a similar Christmas experience that they had once enjoyed, as parents of any generation are expected to spend $495 per child in 2016.
It Isn’t All Bad
While Millennials are still spending less than their Generation X parents and some Baby Boomers this Christmas, they still enjoy some financial advantages over these other age groups. While Millennials have record-high amounts of student loan debt, they have significantly less credit card debt and other forms of consumer debt like mortgages and auto loans. While it is safe to assume that most Millennials would spend more this Christmas season if they didn’t have such high student loan balances, the generation as a whole is more debt-averse than their parents and grandparents.
This aversion to debt can be another leading reason why Millennial shopping projections are still relatively low. As Millennials of all ages continue to climb the corporate ladder, receive salary increases, and experience life events like marriage and becoming a parent, they will focus a larger portion of their budget for Christmas shopping. The 25% increase from 2015 to 2016 indicates Millennials future purchase intentions once they minimize their student loan burdens and establish a career.
Author: Andrew Rombach
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