Center on Assets, Education, and Inclusion

Debt is an important component of young Americans’ balance sheets, in part because the effects of different types of debt can vary widely: while some types of debt can contribute to lifetime economic mobility, other types can drain resources. This paper used data from the 1996 Survey of Income and Program Participation to consider the role that a savings account might play in the use of secured and unsecured debt by young adult households. While a savings account was related to more accumulated debt overall, the type of debt accumulated was less risky and potentially more productive. Owning a savings account was associated with a 15% increase, or $7,500, in the value of secured debt and a 14% decrease, or $581, in the value of unsecured debt. Thus, a savings account may help young adults “invest in their debt” by entering better, healthier credit markets and protecting them from riskier ones.

The effects of different types of debt can vary widely: some debt is considered productive by advancing young adult households' financial health while other debt can be unproductive, pushing their financial health out of reach. A savings account may help young adult households reduce their reliance on unproductive debt and increase their access to productive debt that can facilitate wealth building and economic mobility. This study tests the association between a savings account and debt in the lives American young adults during periods of macroeconomic stability and decline. Owning a savings account in 1996 is associated with a 14% decrease ($844) in young adult households’ accumulated unsecured debt, while closing an account in 2008 is associated with a 12% increase ($1,320) in this type of debt. Overall, a savings account may help young adults “invest in their debt” by entering better, healthier credit markets and protecting them from riskier ones—especially during bad economic times. Policy interventions are needed that increase access to savings accounts and help young adult households to use debt productively.