Compared to a decade ago, college loan balances in the United States have increased from $833 billion to $1.4 trillion, an unprecedented amount. Millennials are at the center of this increasing figure. Every year a new set of graduates join the workforce, but after getting their diplomas a mountain of debt soon follows. As student debt increases, millennials are being negatively affected after graduating. According to Jessica Dickler, a CNBC journalist, approximately 13 percent of people living in the United States have at least one student loan. After graduating, people typically begin to look for a house, a car, further education or to start a family, which might require them to take out more loans. As a result, the average number of loans in the United States is 3.7 per person. Lenders are usually not inclined to give loans to those who have preexisting loans.
This behavior has taken its toll on young entrepreneurs saddled with student loans. John F. Wasik, a journalist for The New York Times, recounted the story of 29-year-old Catherine Berendsohn who wanted to create a web design business after graduating from Florida State University in 2010. However, her student loans caused difficulties in acquiring capital. Berendsohn planned on renting a storefront to start a roving studio in Monterey, California, but her request for a personal credit card was denied. Unable to pay for personal expenses, business expenses and her student loans, she had to shut down her business within three months and move back home.
There is a direct connection between the lack of entrepreneurship among millennials and student debt. According to Arnobio Morelix, a senior research analyst with the Kaufmann Foundation, the increase in student debt correlates with the decline in new businesses. “From buying a car or a home to getting married and even having children, many millennials are putting off life’s major milestones because of their record debt,” according to CNBC.
Credit is also a means for lenders to exclude millennials with student debt and other loans from taking out additional loans, which limits their ability to make important purchases. Without auto loans and mortgages, buying a car or a house is not as financially feasible. Millennials with good credit face another problem—recent graduates have more difficulties paying for multiple loans, particularly in an economy with rising costs and stagnant wages.
Millennials are responsible for at least part of the problem with rising student debt. Some common mistakes they make when managing their loans include failing to research more information about student loans, taking out additional loans to pay prior loans and mismanaging credit. Knowing what repayment options are available can considerably help. For example, if a graduate is not earning enough to pay the monthly balance for a typical 10-year plan, they may want to consider switching to an income-driven repayment plan for federal student loans. This plan, which consists of four different types, will reduce monthly pay and stretch the payment period to over 20 to 25 years, depending on the plan.
In desperation, some millennials have resorted to bad financial practices to alleviate the pressure of their debt. It has become popular for them to incorrectly treat a 401(k) as an emergency fund. Millennials are taking cash out from their 401(k) to help pay their credit card bills or help with home repairs. Although drawing money from 401(k)s may look attractive because of the low interest rates they pay, millennials might lose tax benefits or the chance to make more money if they do so.
Meghan Murphy, director for Fidelity Investments, told USA Today, “some people don’t realize that the money must be paid back if they lose their jobs or take a job at another company. The rules vary by 401(k) plans, but the payback time might be 30 days to 90 days.”
Nowadays, eight out of 10 millennials own a credit card, according to USA Today. Young adults are using credit cards far more frequently than cash. If millennials replaced their credit card usage with cash, it might limit how often they used their cards, and lessen the amount of debt they have to pay monthly. Additionally, millennials often do not take advantage of the six-month grace period after graduation to save up money. If they used this grace period wisely, they would be able to pay off their loans somewhat faster or at least establish an emergency fund.
If one wants to pay back student loans quickly, it could be useful to get a job in a company that helps its employees with their student debt. According to Susan Tompor from USA Today, “Fidelity Investments rolled out its Step Ahead student loan assistance program in early 2016 for employees with more than 6 months on the job. The employees can receive $2,000 a year toward their student loans up to $10,000.”
Another option for paying off student debt would be to find a government job. The Public Service Loan Forgiveness program forgives any remaining debt an employee may have after 10 years of making steady payment while working full time in a government or nonprofit job. Under current law, this program is tax-free.