The statistics are in and if you’re a millennial, you have every reason to worry. It’s a well-known fact that student loans are a burden to the current generation. This is despite the millennials owning bachelor’s and master’s degrees. On the other hand, it’s these loans that made it possible for them to acquire tertiary level education.
A recent release showed student loans are now just shy of $1.5 trillion ($1.48). To put this into perspective, it is 1.5 times the credit card debt owed by Americans.
With this in mind, it’s easy to see why millennials are unable to find that ever-elusive financial freedom. According to a study done by MagnifyMoney, a millennial with a student loan is worth a mere 25 percent of what a fellow millennial without a loan is worth.
With such disparity, it’s also clear where their income disappears to. Graduating may bring lots of joy, but the journey to the top of the hill is only beginning. Take a look at how fellow millennials struggle with student loans.
The Net Worth Divide
The rift in the net worth of people with student loans and those without continues to widen as the years go by. For example, in 1989, less than 35 households with student loans had only 13% less in net worth, compared to their counterparts without the burden.
Fast forward to 1998, and this figure is almost triple, with the rift widening to 36%, which means the household with a student loan averaged at $68,687 in net worth while those without averaged at $108,146.
Almost two decades later, the gap between the two households stands at a whopping 75%. Those with student loans average $29,087 while millennials without average $114,376. This means those without loans pocketed more than $85,000 than those shackled with loans.
While a college degree can command a lucrative salary, the income will only go toward clearing the debt thereby hindering you from achieving financial freedom.
A Dry Bank Account
Student loans are great since they finance your dreams. However, reality checks in after graduation. If you’re lucky, you’ll get a job, and the income will go toward offsetting the debt. This is the point where your dream of financial freedom dims.
According to studies, those with student loans use a huge chunk of their paycheck to pay off their loans, thus drying their bank accounts. These graduates have an average of $5,500 while those without holds almost double that amount, $10,180.
This creates a chain reaction where these millennials end up taking on more credit card debt as a result of reduced liquid cash. In fact, they form 55% of those with student debts, while those without makeup 32%. Furthermore, they also have huge balances, $2,888 compared to $1,476 for those without.
Reduced Retirement Savings
The chain reaction continues. Since the millennials have less money in their bank accounts, it’s only logical for them to cut down spending on various household items. Even doing so may not be enough to cover the monthly expenses.
This means no left-over to put away as savings for your retirement. The debt-free millennials have an average of $39,905 stashed away on retirement savings. This is $18,745 more than their counterparts with $5000 quick realistic loans, who have $21,160 saved.
However, you can change the narrative by starting to save for your sunset years as early as possible. Remember, these savings work like compound interest. Even a small contribution toward your IRA or 401(k) has the power to grow over time.
If saving for retirement is a struggle, then you can already imagine what kind of effort a millennial with a student loan will need in order to own a home.
The Joint Center for Housing from Harvard revealed that close to 21 million households used over 30% of their income to pay rent.
This is even as income remains stagnant, and rent costs continue to soar, making it difficult for one to realize the dream of owning a home. With student loans, the dream is even further away than expected thereby reducing the number of millennial graduates owning homes—34 percent compared to their counterparts at 36 percent.
Even if they managed to buy a home, their value is much lower, and a massive mortgage is staring right back at them. Those without loans have home values standing at 5% more than those with them. In figures, this $165,000 versus $157,000.
Since it’s difficult to raise the down payment required to pay for a home, these homeowners end up taking on more debt to finance their dream. According to the research done by MagnifyMoney, this translated to an average mortgage of $104,000 compared to $98,000 for those without debts.
Taking on loans at a young age may not be the best strategy. However, the best way to tackle this problem is by finding ways to clear the debt as soon as possible. Here are some:
- Make extra payments. Take a deeper look at your budget and cut down on expenses. The excess money can go towards making extra payments. This will save you the money you’d have paid in interest.
- Ask for a raise at work. Sometimes, the solution to your woes lie in a salary increase. If this doesn’t work, you can change jobs altogether. You can also consider starting a side job to supplement your main income.
- Apply for the loan forgiveness program, This is a viable option, especially if you work in the public sector, for example as a teacher.
- You can also look for private and state-based programs, which can help you repay the debt. Some employees also offer student loan matching programs, which can help you clear your loan.
- Student loan refinancing is also a worthy option. With this method, you have the chance to repay the loan at a reduced interest rate. However, this will only work if you have good credit and income. This will, in the long run, save you the money you’d have paid in interest. Moreover, you’ll be able to clear the loan faster.
While student loans may help you get a college education, the aftermath may be more difficult to handle when the government starts demanding what you owe them. Nevertheless, it’s not the end of the road because there are methods you can use to achieve financial freedom, as highlighted in this article.