College students and graduates are carrying a tremendous load of student debt, and credit cards are only adding to the pile.
The Class of 2017's student loan total isn't in yet, but college and scholarship site Cappex put the Class of 2016's student loan debt at an average of $37,172 per student. That's a 6% increase from 2015, with debt carried by 70.1% of all graduates. That's also up from $12,759 two decades ago, when just 54% of all students graduated with debt.
In May, the Federal Reserve Bank of New York announced that total household debt increased by $473 billion within the last year to $12.73 trillion during the first quarter of 2017. That's above its previous peak of $12.68 trillion in the third quarter of 2008 and includes increases across the board. Student loan debt increased $83 billion to $1.34 trillion. Roughly 11% of student loans are past due, with 7.5% of credit-card debt similarly unpaid. In March, credit bureau Equifax noted that than 1.2 million student loans were taken out in the first three months of the year, accounting for $10.17 billion -- a 22% increase over the value of those loans at the same time last year.
While the job market has markedly improved since, say, 2009, it's improving the most slowly for those just getting out of school. The Bureau of Labor Statistics puts the current unemployment rate at 4.4%, that jumps to 8.2% for people ages 20 to 24 -- or roughly the age of most recent college graduates. Only 70.4% of people that age are an active part of the workforce, compared to nearly 81.7% of those between 25 and 54. All of that is actually an improvement on what older Millennials faced just after the recession.
Now, financial site NerdWallet notes that checking account and credit cards could be costing the average student up to $1,016 in fees and interest over four years of college. That's more than $795 million a year on overdraft and late payment fees alone Those university-affiliated banks charge average overdraft fees of $35, which isn't great when the average student overdraws their account 2.2 times per year (more than the 2.07 times for the average American. With more than 11 million full-time undergraduate students in the U.S. last year, that's an estimated $722 million in overdraft fees alone, up $19 million from the year before.
Meanwhile, nearly a third of this year's graduates have paid a credit card bill late. With an average late-payment fee of $35, that's $73 million in late payment fees alone in the last year. In 2015, the Consumer Financial Protection Bureau told universities how to approach partner banks to get the best deal for their students, but there's been little benefit beyond a $0 maintenance fee. Median overdraft fees for those accounts increased from $34.50 to $35 within the last year, putting the average annual overdraft fee at $77 a year, or $308 for a four-year college career. However, a 2014 CFPB report, notes that 10.7% of 18- to 25-year-olds incurred more than ten overdrafts per year, easily eclipsing that four-year average total in just one year. This is why it pays to shop beyond the university-affiliated bank.
"Online banks are what all banks should be, which is more friendly to consumers," says NerdWallet columnist Liz Weston, author of the book Your Credit Score. "They have fewer fees and minimum balance requirements, and they pay higher interest rates. You can't step into a branch, but fewer and fewer of us are doing that, and we're discovering online banks meet our needs just fine."
If you prefer a location, try a credit union instead. NerdWallet notes that university accounts we looked at that were affiliated with credit unions had lower overdraft fees on checking accounts and higher interest rates on savings than university accounts affiliated with major national banks. They were less likely to have monthly maintenance fees, as well.
You could always just opt out of overdraft fees as well. That means your card will likely be rejected if you try to buy something or make an ATM withdrawal without enough money -- which can incur similarly priced insufficient funds fees -- but it also gives you good reason to sign up for text alerts for low balances.
It's somewhat tougher with a credit card. Student-specific credit cards from Bank of America, Citibank, Discover, Capital One and Wells Fargo carry an average late payment fee around $35 and an average interest rate of 18.64%. Interest rates vary from 14.51% to 22.76%, depending on your credit score, but with 33% of graduates making late credit card payments, even a low rate may not stay that way for long. With 2 million students making a late payment, that's almost $73 million spent on late fees. That doesn't include the penalty interest rate of up to 30% that you'll incur by paying late. That's twice the average minimum interest rate and more than 7% higher than the maximum.
It's little wonder that an Experian survey found that soon-to-be graduates had an average of $2,573 in credit card debt. Assuming they built up that debt in equal amounts each month through four years of college, made minimum payments of $25 each month and paid the average interest rate on their account, this would add up to $569 in interest accrued before graduation.
So what's the good news here? Well, those students are still doing better than their parents. NerdWallet's annual survey of household debt in 2016 found that the average household with credit card debt has a balance of $16,061. That household pays a total of $1,292 in credit card (assuming an interest rate of 18.76%) interest per year on $7,941 in debt.
If you think those student loan debt numbers look imposing, consider how long revolving credit card debt can follow you. Households that bring in more than $157,479 per year pay almost four times more in credit card interest than households that make less than $21,432. However, when a household making $150,000 a year has $10,036 in credit card debt, that's less than 7% of its income. Unfortunately, when a person who makes $20,000 a year owes $3,611 in credit card debt, that's 18% of their annual income. Meanwhile, households led by self-employed individuals spend $1,631 in credit card interest annually, while heads of household who work for someone else pay only $1,211 to finance their credit card debt each year.
None of that debt is helping households that are already being squeezed by other costs. According to the Bureau of Labor Statistics, the consumer price indexes for medical costs increased by 57% and food and beverage prices by 36% between 2003 and 2016. During that same span, NerdWallet found that median household income has only grown 28%, from $43,318 to $56,578 in 2003 and 2016, respectively. As a result, according to NerdWallet's projections based on data from the Federal Reserve Bank of New York, total debt in the U.S. will hit $12.5 trillion by the end of 2016. That surpasses the total debt of $12.37 trillion in December 2007, just before the recession, and suggests that credit card debt is being used to mask a whole lot of other financial shortfalls.
"Taking on debt to cover the gap between income and expenses is a short-term fix with costly long-term results," says Sean McQuay, NerdWallet's credit and banking expert. "Instead of taking on debt, try to increase your income by finding freelance work or a part-time job you can do on the side, or cut back on expenses where you reasonably can, before adding to your credit card's balance."
The better news is that debt-laden Millennials are less tolerant of credit-card debt overall. As credit agency Equifax discovered, about 70% of college students have one or more credit cards, but a slightly higher percentage pay their balances in full each month. In a survey of more than 600 college students ages 18 to 24, 16% of respondents using credit cards for emergencies only and 72% pay off their credit card balances each month on their own -- while only 18% said their parents helped pay off their balances every month.
Even if they haven't paid their balances off within the month, more than half with outstanding balance (59%) plan to pay it off within a year. They're one of the biggest reasons why the percentage of U.S. households with credit cards carrying revolving debt has decreased from 44% in 2009 to just 34% today, according to the National Foundation For Credit Counseling.
Though 67% of Millennials hold a credit card, according to Experian, 71% have never maxed one out a credit card, 77% have never had their credit card interest rate increased and 58% pay the full balance instead of the minimum each month. That isn't exactly suprising, considering that the average 2016 college graduate is carrying $37,172 in student loan debt, according to college and scholarship site Cappex. That up 6% from last year, with debt carried by 70.1% of all graduates. That's also up from $12,759 two decades ago, when just 54% of all students graduated with debt. If there's a way to bite into that debt and avoid its repercussions, they're going to ask about it. It's time all U.S. consumers did the same.
"Contrary to society's perception of Millennials and their financial characteristics, Millennials have learned from their parents' mistakes and are more cautious when it comes to saving for that rainy day," said Greg McBride, Bankrate's chief financial analyst. "Their aversion to credit cards may have also played a part in helping them grow their savings accounts."