Young adults maintained strong credit health during the COVID-19 pandemic, despite the recession in 2020. However, new Urban Institute research suggests they began experiencing increased financial distress in 2023—especially those living in communities of color.
Young adults face employment instability and increased financial distress in the aftermath of recessions, which can undermine their long-term financial stability, ability to achieve life milestones, and ability to invest in wealth-building opportunities.
These effects are often more pronounced for young adults living in communities of color. Because these communities have faced decades of disinvestment rooted in structural racism that have limited opportunities and mobility, their residents are more vulnerable to economic shocks. This often results in increased delinquencies, debt burdens, foreclosures, and significant wealth losses. Communities of color may also recover from recessions more slowly, deepening these structural vulnerabilities.
Given these risks, it’s important to track how young adults living in communities of color fare during recession recoveries. By better understanding these trends, policymakers and other stakeholders can both ensure young adults remain on the path to long-term financial stability and address the disparate effects of recessions on communities of color.
More young adults struggle with delinquent debt now than before the COVID-19 recession
Despite facing elevated financial distress and employment instability between 2020 and 2021, adults of all ages experienced improvements in credit health, likely because of expanded public supports and changes in consumption and spending behaviors. Over this period, credit scores improved steadily, while debt and delinquencies slowed. However, in 2022 and 2023, young adults’ debt and delinquencies started rising sharply, especially in communities of color.
Unpaid debt, such as credit card bills or auto loan payments, can indicate whether consumers are experiencing challenges making ends meet and adhering to existing financial obligations. When consumers carry unpaid debt over long periods, it can undermine long-term creditworthiness, making credit less affordable and limiting their access to wealth-building opportunities.
In August 2023, one in five young adults with credit cards living in majority-Black communities was delinquent on a credit card bill, indicating high financial distress. These delinquencies increased at the same time that young adults faced rising costs of essential goods, lower levels of safety net supports, dwindling savings, and increased costs of servicing debt—fueling a growing sense of economic pessimism.
Increasing delinquencies in 2023 also widened community-level racial inequities in credit health and debt, leaving young adults living in communities of color in a worse financial position than their peers in more-affluent, majority-white communities. For example, credit card delinquencies increased among all young adults between 2020 and 2023, but those increases were larger for young adults living in majority-Black and majority-Native communities. Delinquencies climbed by 22.6 percent and 31.9 percent among young adults in Black and Native communities, respectively, compared with 17.6 percent among those in majority-white communities. These accelerating racial disparities in financial well-being could worsen without policy action.
How can we ensure young adults remain financially stable, even in volatile economic conditions?
Several pandemic policies helped people better weather pandemic-related financial pressures and avoid poverty in the immediate aftermath of the COVID-19 recession. But with nearly 1 in 10 young adults having trouble meeting their financial obligations in 2023, they need additional supports to regain financial stability—and maintain it.
Evidence from Urban research suggests one way to alleviate acute financial hardship is implementing consumer protection policies that ensure families can access essential services like housing and heat, even if they’re struggling to pay for them. However, broader policies are needed to address the root of financial pressures contributing to young adults’ current delinquencies, including those that incentivize building emergency savings, limit the repayment burdens of student loans and other loan products, and boost earnings—among others.
Also essential are strategies for better protecting young adults living in communities of color from the adverse effects of economic shocks so that future recessions don’t undermine their long-term financial well-being or exacerbate racial inequities. Policymakers and practitioners should prioritize strategies to reduce structural disparities in wealth and credit and equitably build young adults’ resilience to recessions.
Targeted credit and banking programs, like special purpose credit programs and postal banking, could reduce structural disparities in wealth and credit between communities of color and majority-white communities by equalizing credit access. In addition, progressive asset-building programs like baby bonds could give young adults of color the resources they need to build wealth that can protect them against economic volatility.
Given that an expanded safety net during the pandemic likely helped young adults financially, policymakers could consider making those policies permanent or automatic to equitably strengthen young adults’ economic resilience. For example, extending eligibility for unemployment insurance programs to part-time and gig workers and increasing weekly benefits amounts and program lengths during economic downturns could better reach young workers who struggle to access these benefits. Further, eliminating Supplemental Nutrition Assistance Program (SNAP) work requirements; expanding eligibility to include underserved young adults, such as college students; and instituting automatic SNAP benefit increases during economic crises would also support young adults’ financial resilience.
Together these strategies could ensure more young adults have the necessary support to withstand economic shocks and preserve their financial and personal well-being.
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The Urban Institute podcast, Evidence in Action, inspires changemakers to lead with evidence and act with equity. Co-hosted by Urban President Sarah Rosen Wartell and Executive Vice President Kimberlyn Leary, every episode features in-depth discussions with experts and leaders on topics ranging from how to advance equity, to designing innovative solutions that achieve community impact, to what it means to practice evidence-based leadership.