Mounting student loan debt is eating away at the paychecks and independence of millennials, resulting in a generation of U.S. consumers between the ages of 25 to 34 who earn and save less than their parents did a generation ago, and many are now turning to bankruptcy protection to avoid perpetual financial disaster.“We’re definitely seeing this, particularly over the last three years,” said Tom Becker, Hanscom FCU’s senior vice president of lending.
A typical scenario, he said, involves a consumer between the ages 25 to 34 who owes about $30,000 in undergraduate loans and about $10,000 in credit card and other unsecured debt. “They file for bankruptcy protection to discharge the unsecured debt so they can pay more on their student loans,” he said, adding that bankruptcy protection generally does not discharge student loan debt.
The New Financial Reality
This increase in bankruptcy reflects a new financial reality for young adults. The median household income among millennials is $40,581, about 20 percent less than people who were in the same age range in 1989, after adjusting for inflation. They also have fewer assets — 56 percent fewer, according to an analysis of Federal Reserve data by Young Invincibles, an advocacy group.
Student loan balances are the primary reason. Forty percent of millennials age 25 to 34 carry a student loan balance. That’s up from the 27 percent who did so in 2005. The average amount of those loans also has increased, from $5,363 in 2005 to $12,951 in 2015.
As a result, more millennials are living with parents than with spouses or partners, according to Pew Research Center. And while millennials are carrying less credit card debt ($2,925 in 2015 vs $4,174 in 2005), and less mortgage debt ($38,665 in 2015 vs $51,182 in 2005), student loans are filling that void.
What’s the Solution?
Earning more money helps alleviate some of the financial stress, but only to a point. Among millennials with an annual household income greater than $75,000, one-third doubt they’ll be able to repay their student loans, according to The Wall Street Journal.
There are several strategies young consumers can take to prevent their debt from mounting, Becker said. Among them:
- Consider transferring high-interest revolving credit card balances to a zero-percent interest credit card. A consumer who pays $75 per month on a $4,000 credit card balance with a 16 percent interest rate will spend nearly eight years paying off the balance — and an additional $3,000 in interest. That same consumer who moves the balance over to a card with a promotional zero percent interest rate for 21 months could pay $1,575 toward the principle during the promotional period.
“People can be really surprised at how much interest they actually pay while they carry that credit card debt, and how long it takes to pay it off,” Becker said.
Can’t qualify for a zero percent interest rate? Try paying just a little bit more per month. Paying $120 per month on that $4,000 balance would enable you to pay off the balance in 3.5 years, with $1,250 paid in interest.
- Carefully research the true earning potential of your chosen undergraduate major. Too often, students finance a major with an earning potential or job market that simply can’t support their post-graduation debt. Majors with the highest earning potential include engineering, computer science and finance. Those with the lowest incomes include early childhood education, social work and psychology, according to com.
- Focus on paying down your highest-interest balance first. These loans cost you the most money, so the sooner they’re paid off, the more you’ll save. Try to pay at least twice the minimum amount due on your highest-interest balance, while paying the minimum due on the remainder of your loans. Once it’s paid off, employ the same strategy on your second most-expensive loan, and so forth.
- Take time to create a financial strategy. This includes analyzing where your finances are today and your financial goals. To help you make a plan, Hanscom FCU recently published a Money Management Planner, a free workbook with steps and tips to help create a strong financial plan. You can download a copy here.
At Hanscom FCU, we care about your financial wellness. That’s why we’ve partnered with the financial counselors at BALANCE to provide you with free access to financial counseling services. For answers to your financial questions, contact a BALANCE counselor at 888-456-2227 or visit the BALANCE financial resource center.