Why less debt among young adults is bad news

February 25, 2013, 8:57 PM UTC

FORTUNE – Since the Great Recession, countless Americans have shunned the idea of taking on more debt. Homeowners discovered that stretching to buy bigger houses would result in years of financial turmoil. Jobless college grads unable to pay down their student loans now wonder if their degrees are really worth it. And as Europe grapples with its own debt problems, Washington lawmakers struggle to find a way to reduce the U.S. deficit.

Indeed, many have learned a few harsh lessons. But debt isn’t always a bad thing. More of it can reflect a healthy economy — one where consumers, as well as lenders feel comfortable taking on more risks.

Young adults, however, haven’t taken on nearly as much debt as their parents. It’s uncertain if the trend will continue as the economy improves, but for now, those under 35 years old have shed debt faster than older ones, according to a report by Pew Research Center released last week. The study doesn’t say if this is a good or bad development, but many signs suggest the drop means Millenials are more anxious than responsible about their finances.

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It’s a negative sign. The Federal Reserve’s policies to keep interest rates super-low has spurred more home and car sales by getting consumers to borrow more, but it appears young adults have benefitted less from the central bank’s bond-buying program.

Across households headed by people under 35 years old, median debt fell by 29% to $15,473 in 2010, compared with $22,000 in 2007, according to the report. That compares with a much smaller 8% drop at households headed by those 35 and older during the same period.

To be sure, the decline partly reflects a fall in home loans and purchases by young adults. This doesn’t necessarily signal that younger people aren’t able to afford a house, since many have been delaying marriage (which is typically followed by homeownership) for various reasons. However, the share of first-time homebuyers typically comprised of young adults has fallen. And young people are less willing to take on credit card debt and auto loans, suggesting they aren’t in financial positions to commit to monthly payments. Compared with 50% in 2001, only 39% of young households in 2010 had credit card debt. When it comes to vehicles, 73% of households headed by an adult younger than 25 years old in 2001 owned or leased at least one vehicle. By 2011, that share fell to 66%.

What’s maybe most perplexing is that student debt has increased while all other consumer loans fell. Still, roughly three-quarters of household debt for young adults comes from home loans; student debt makes up only 15%.

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The study’s results are similar to other research looking at the finances of young adults. In a 2012 Rutgers University survey of college graduates, 40% said student debt was making them delay large-scale purchases, such as a house or a car. Faced with big monthly payments, recent college graduates aren’t earning as much as graduates before them. The median salary for those graduating between 2009 and 2011 was $27,000 — $3,000 less than 2007. The difference is significant. It could mean having enough to help with a down payment on a home or spending money for everything from clothes and furniture.

For now, the no-debt Millenials have spawned a generation that rents most everything.