A Millennial’s Guide to Getting Out of Debt

Millennial DebtMillennials are stereotyped in a lot of different ways — black-rimmed glasses, ear buds attached at all times, designer haircuts, watching cat videos and taking selfies – but there is one indisputable fact about this generation: Millennials have a lot of debt.

Millennial Debt Statistics

According to a report by UBS, Millennials owe $1.1 trillion of the country’s $3.6 trillion in consumer debt. Two out of three Millennials have a source of long-term debt and the average balance owed is $40,000. Much of that is thanks to the shocking amount of student loan debt. At last count, 44 million Americans owe $1.4 trillion in student loans or about $466 billion more than the total U.S. credit card debt.

Student loans aren’t the only type of debt dragging down those currently in the 19-35 year old braket, but they are the most pervasive source and on a level only Millennials have encountered.

The average college graduate in 2016 has $37,172 in student loan debt. Their parents might remember the old days when they worked at a pizza shop in college and graduated debt free, but that hardly seems possible in today’s economy. When you take a closer look at the cost of attendance, it becomes clear why student debt has become so common.

Let’s do an apples to apples comparison of generations, and adjust all the numbers for inflation.

The year is 1976, and the tail end of the Baby Boomer generation is entering college. The price of attending a public university is $8,160 in 2016 dollars. That gets you tuition, fees, and room and board for a year.

Flash forward to 2016, and the cost skyrockets to $20,090 for a year of tuition, fees, and room and board. The difference is an extra $11,930 per year and $47,720 per degree, if you finish in four years.

And, what are Millennials getting for an extra $50k? The universities would claim they’re getting a better, more valuable education. With a more educated and capable student body entering the workforce, one might think they earn better wages too.

Think again!

Let’s go back to 1976. Adjusted for inflation, the median income for a 25-34 year-old was $33,168. In 2015 (most current year available), the median income for the same age group is $32,481.

Millennials are paying more and earning less!

Why You Should Get Out of Debt ASAP

There is more to debt than a monthly bill. For starters, you pay interest on that debt, and the interest is capitalized. Every month, debt grows by a percentage of the balance, and is then added onto the total. The longer you take to pay off the bill the more it will cost.

There are other and more far reaching consequences for being in debt, like affecting your ability to make long-term investments.

Back to the Baby Boomer vs Millennial comparison: In 1976, the 50k difference in college costs – and little or no student loan debt — enabled them to save for a down payment on a mortgage and take on a car payment. Today, young Americans start off in the hole, which delays saving for a mortgage and leads to amassing even more debt.

The homeownership rate age among 35-and-under was 43.6% in 2004. That number has dropped to 34.6% in 2015 because Millennials are having trouble coming up with the 20% down payment. That comes as no surprise with the amount of debt they start off with. In fact, it’s wise to hold off on a mortgage until you can really afford it.

Cars, on the other hand, are a more immediate need, and while mortgages are down, auto loans have taken off in a risky way. In 2005, only 5.1% of car loans were considered deep subprime, which means the borrowers have weak credit histories and high risk of default. Deep subprime borrowers have a credit score below 550. Today, six times as many  auto loans go to deep subprime borrowers. These are loans with extremely high interest rates averaging around 15% with some higher than 20%.

With the average loan term now 5-6 years, borrowers can end up paying nearly twice the value of the car by the end of the loan because so much is going to interest.

With student loan debt, auto loan debt and credit card debt thrown together, saving for retirement seems like an afterthought. That’s the danger of staying in debt during your 20s. But just as interest works against you in terms of loan debt, it can work for you in retirement. That means the earlier you begin investing – and let the return on investment plus interest work for you – the better off you’ll be later on in life.

Believe it or not, that idea isn’t lost on Millennials.

Despite their debt, 82% of Millennials are investing in a retirement savings accounts. That is a higher percentage than either Baby Boomers or Gen Xers. That just goes to show Millennials understand money as well as or maybe even better than previous generations, but forces beyond their power are dictating their financial wellbeing.

“Today’s young people have confronted the steepest economic challenges,” Tom Allison, the deputy director of policy research for Young Invincibles said. “Their situation is no fault of their own. The foundations of our economy were really shaken to its core a decade ago, and that was a time when the first Millennials were just entering college or the workforce.”

Previous generations might have created this situation, but  only Millennials can get themselves out. It starts with financial literacy, and then the decisions they make.

“The financial system is complex,” Allison said. “I study student debt for a living, and I get tripped up all the time. Fortunately, there is a lot of information out there, and information is your best friend. You have to confront the situation and develop a plan.”

10 Steps Toward Getting Out of Debt Before You Turn 30

  1. Set financial goals.

Setting financial goals will give you something to shoot for and benchmarks to monitor your progress. Start with your overall goal: becoming debt free by (insert a date). That could be by age 25, 30 or even 35, but targeting a certain date will keep you on track. Then start with incremental goals. Getting a job in your chosen career, earning a full-time salary, starting a savings account, buying your first car and getting your first mortgage.

  1. Tackle the debt with the highest interest rate first

It’s best to pay off debts one by one, starting with the debt with the highest interest rate. Concentrate your payments on that one, finish it off and then move on to the next one. That will save you money in the long run.

  1. Research student loan repayment options.

There is a six-month grace period after leaving college before repayment begins. Use this time to look into alternative repayment options. You are automatically enrolled into the 10-Year Standard Repayment Plan, but the payments might be too high.

“One thing to think about in terms of repaying student loans is how it inhibits someone’s financial well-being,” Allison explained. “One of the problems is that you don’t have a lot of money early on in your career, yet you have a lot of bills due. So, if you’re making $25,000 a year out of college, those $300 monthly payments toward student loans are a lot more difficult than if you are making $70,000 when you’re 35.”

There are income-based repayment plans that adjust your monthly payment to a percentage of your income. Look into your options and decide what is best for you.

  1. Limit credit card usage to 30% of available credit limit

Not only will this help improve your credit score, but it will ensure that you have more manageable monthly payments. When you are already in debt, it is important to never add to it. You still need to buy essentials like gas and groceries, but you need to have money left over to pay down debt.

  1. Housing should be less than 30% of your income.

If it is more, cut costs by living with roommates and sharing expenses. Consider moving back home, if that’s an option. You can use the time as a debt destruction strategy by taking the money that would go toward rent and use it to pay off debt. Many Millennials are already taking this route – 32% of 18-34 year-olds move back in with their parents, and for the first time it’s the most common living arrangement in that age group.

  1. Avoid additional credit

Don’t open more lines of credit. Opening another credit card, taking on a mortgage, personal loan or auto loan will only put you further into debt. If you absolutely need a car, buy used.

  1. Make your own meals and limit eating out

Cheapism conducted a study that found the average chicken entrée with a vegetable side cost $13.41 at a restaurant. The same meal could be cooked at home for $6.41. That’s less than half the price, and that doesn’t include the tip. Cook your own meals and save a ton of money.

  1. Get a side-job

Consider a part-time job and use the income from that job solely for paying off debt. There are plenty of traditional part-time jobs available like waiting tables or delivering pizza, and there are a host of new jobs like driving for Uber or PostMates.

  1. Make a monthly budget

Budgeting your monthly income should really be priority number one, but you need to develop a strategy before you make a concrete plan. Using the advice above, calculate what your expenses will be month-to-month. Expenses include rent, utilities, groceries, gas and anything you spend money on. Subtract that number from the amount of income you earn each month. There needs to be enough money left over to pay bills and pay off debt. If there is not, you need to cut some of your expenses or get additional income.

  1. Adjust your Goals

Now go back and reconsider your goals. Do they line up with your budget and the strategy you are taking to get there? You want to have achievable milestones to mark your path toward becoming debt free.

Sources:

Herandez, R. (2017, April 29) Millennials owe a record amount of debt, and it could become a huge drag on the economy.  Retrieved from http://www.businessinsider.com/record-millennial-debt-a-drag-on-the-economy-2017-4

Student Loan Hero (2017 August 7) A Look At the Shocking Student Loan Debt Statistics for 2017. Retrieved from https://studentloanhero.com/student-loan-debt-statistics/

Federal Reserve (2017 August 7) Consumer Credit. Retrieved from https://www.federalreserve.gov/releases/g19/current/

College Board (2016) Trends in College Pricing 2016. Retrieved from https://trends.collegeboard.org/sites/default/files/2016-trends-college-pricing-web_0.pdf

United States Census Bureau (2015) People by Median and Mean Income. Retrieved from https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-people.html

Scully, M (2017 March 28) ‘Deep Subprime’ Auto Loans Are Surging. Retrieved from https://www.bloomberg.com/news/articles/2017-03-28/-deep-subprime-becomes-norm-in-car-loan-market-analysts-say

Value Penguin (2017) Average Auto Loan Interest Rates: 2017 Facts & Figures. Retrieved from https://www.valuepenguin.com/auto-loans/average-auto-loan-interest-rates

Abrams, A (2017 August 1) The Simple Reason Millennials Are Saving More for Retirement. Retrieved from http://time.com/money/4882463/millennials-saving-retirement-genx-baby-boomers/

Fry, R (2016, May 24) For First Time in Modern Era, Living With Parents Edges Out Other Living Arrangements for 18-to-34 Year-Olds. Retrieved from http://www.pewsocialtrends.org/2016/05/24/for-first-time-in-modern-era-living-with-parents-edges-out-other-living-arrangements-for-18-to-34-year-olds/

Lampert, T (2016 May 16) Is Cooking at Home Really Cheaper Than Eating Out. Retrieved from https://blog.cheapism.com/eating-at-home-vs-eating-out/