Millennials Aren't Stuck With Student Loan Debt Forever

Editors' pick: Originally published Nov. 3.

Millennials will be able to pay back their student loans. It's just going to take a while.

According to a survey by Citizens Bank, 75% of all Americans and 80% of Millennials (ages 18 to 34) worry about their ability to pay back their student loans. There's a reason that the latter is having so much trouble. 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. That said, Millennials have plenty of company. According to the Federal Reserve Bank of New York, total student loan debt reached $1.26 trillion by the end of June. That's up $69 billion from a year earlier and is the second largest pile of U.S. consumer debt behind mortgage debt (at $8.36 trillion, up $246 billion from a year ago). More than one in ten (11.1%) student loans are past due. That's a worse delinquency rate that for credit card bills, of which 7.2% are past due.

A job market that's been slow to recover from the recession hasn't helped, either. Though the Bureau of Labor Statistics puts the current unemployment rate at 5%, that jumps to 9.2% for people ages 20 to 24 -- or roughly the age of most recent college graduates. Only 70.7% of people that age are an active part of the workforce, compared to nearly 81% of those between 25 and 54.

That's left Millennials a little strapped and in need of a lot of help. As Fidelity Investments found in its own survey, nearly half (47%) of those 18 to 34 have let their parents pay for certain items at some point since being on their own -- including cell phone plans, utilities, movie and TV streaming services and cable. Meanwhile, 21% of Millennials report they are currently living under their parents' roof.

It's a big reason why, as HSBC discovered in a recent survey of more than 6,200 parents in 15 countries, 60% of parents would be willing to go into debt to pay for their child's college education. This is especially true in the United States, where 74% of parents younger than 34 would take on that debt, compared to just 56% of those over the age of 35.

That's no small burden, as American parents pay an average of $14,678 per year to fund their children's college education. That's double the global average of $7,631 per year, and doesn't include the 37% of college costs that students pay themselves. By comparison, only students in Canada (39%) pay more, while students in India (1%), Hong Kong (4%) and Singapore (5%) pay far less.

"The financial sacrifices that parents are willing to make to fund their children's education are proof of the unquestioning support they will give to help them achieve their ambitions," says Charlie Nunn, HSBC Group's global head of wealth management. "However, parents need to make sure that this financial investment is not made to the detriment of their own future well being."

That's putting parents in significant financial peril of their own. As 98% of U.S. parents tell HSBC they're considering a college education for their child, many are already having a tough time figuring out how to do it. Roughly 60% say that college payments make it tough to keep up with their financial commitments, but many prioritize paying for college over long-term savings (40%), credit card repayment (37%), and retirement savings (37%).

That said, shifting the burden has definitely helped Millennials save. A recent survey by Bankrate found that 62% of young Millennials (ages 18-30) are saving more than 5% of their income, up from 42% last year. Meanwhile, 29% of Millennials are saving 10% of their income, up from 22% last year.

That's far better than the percentage of working Americans saving 5% or less of income, which from 28% to 21% since last year. Americans saving more than 10% of their incomes, meanwhile increased from 24% to 28% since last year while still trailing Millennials.

"The good news is that many working Americans, Millennials in particular, are saving, and saving more than last year," says Greg McBride, chief financial analyst for Bankrate. "The bad news is that 21% of employed Americans claim not to be saving any of their paycheck - nothing for retirement, nothing for emergencies, and nothing for other financial goals."

In fact, Fidelity found that 85% of Millennials say they have some form of savings in 2016 (up from 77% in 2014). About 59% of Millennials put aside an average of $9,100 in an emergency fund, more than older generations (Gen X-ers have $8,700, while Boomers have $7,100). Millennials report this amount will cover six-and-a-half months of living expenses.

It's little wonder that Millennials are so tight with their parents, with 65% of Millennials saying their parents have provided good examples of how to build a successful financial future.

"The study suggests that's exactly what this forward-thinking generation is doing," says Kristen Robinson, senior vice president, Fidelity Investments. "Developing sound savings habits at an early age provides a number of big advantages. The impact of saving early and consistently is powerful, whether for short-term goals like buying a car or booking a dream vacation or for larger goals like buying a home or saving for retirement."

Besides, it isn't as if Millennials have been the only group struggling with both debt and savings. While Voya Financial notes that retirees will need 70% of their annual income to continue their current lifestyle in retirement, GOBankingRates survey responses, J.P. Morgan Asset Management data and Census Bureau data on median incomes by age range, indicated a 30-year-old making the median $54,243 should have about $16,273 saved. However, roughly 67% of workers that age are well behind that goal, 23% have less than $10,000 saved and a third of workers have no savings at all.Yet Millennials are already learning how to dig themselves out of that hole. According to Bankrate, 52% of Americans have more emergency savings than credit card debt. That's down from 58% last year, but up from 51% in 2014. Still, it's only part of the story. Roughly 22% of Americans have more credit card debt than emergency savings and another 21% have neither credit card debt nor emergency savings. Interestingly, Millennials are more likely than any other age group to have more emergency savings than credit card debt.

"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 McBride. "Their aversion to credit cards may have also played a part in helping them grow their savings accounts."

Joe O'Boyle, a financial advisor and retirement coach with Voya Financial Advisors in Beverly Hills, Calif., notes that one of the best strategies his Millennial clients employ is a fairly simple one: making a plan, setting a budget and sticking to it. John Diehl, senior vice president of strategic markets at Hartford Funds, suggests actually writing out that budget, doing a quick cashflow analysis just so you can see how much is coming in and how much is going out and even auditing just a week's worth of income and expenses to get a bigger picture.

"Many people tell me that they cannot believe where money 'leaks' out of their daily budgets," he says. "Coffee shops, fast food, gym memberships you don't use, premium cable you never watch, a cheaper mobile phone option, etc., should be looked at to see if you can make small incremental changes to free up cash flow."

According to a survey of 850 Millennials by The Principal, their three largest budget items - mortgage/rent (65%), food (38%) and car/transportation (30%) - are seen as obstacles to saving for retirement. Roughly 57% reported having emergency savings in place, with a third of all surveyed believing their emergency savings could cover basic expenses for three months. As a result, 63% of those surveyed reported saving before 25, though less than a third of that group are saving at least 10% of their salary.

All of the above is why O'Boyle starts financial conversations with Millennial clients by asking three simple questions:

1."What is your monthly income?"

2. "What are your monthly expenses?"

3. "How much are you saving each month?"

While he says the majority don't have answers to those questions, breaking down fixed costs such as rent, mortgage or car payments helps. If they can avoid recurring expenses like car payments and credit card balances, they're in good shape. From there, it's a hard look at three expenses that can be easily reduced. The first is restaurants and eating out. The second is clothing and accessories.

"The third is one that they almost never plan for, which is travel for weddings and bachelor or bachelorette parties," O'Boyle says. "We have some clients who go to two, three or four of these events a year and it can cost a couple thousand dollars once everything is factored in. They never plan for that."

However, those surprises provide the opportunity to structure savings by forcing Millennials to save a little bit each month for such unexpected expenses. It helps automate savings plans and, as Diehl says, puts you in the habit of paying yourself first.

"Try to carve off some amount to transfer to your savings even before you begin to pay the monthly bills," he says. "It's not so much the amount, but the discipline that you develop that matters. Utilize your bank's automated transfer feature if you can to automatically transfer some amount to savings to create a sort of buffer fund for yourself."

Melinda Kibler, a certified financial planner with Palisades Hudson Financial Group's Fort Lauderdale, Fla., office, notes that having a solid savings and payment plan prevents you from reaching the end of the year without having saved and not knowing why. Once you've trimmed expenses and started saving, though, Kibler recommends reducing debt by starting with loans carrying the highest interest rate first. That's typically credit card debt, which she says can be wiped out by transferring it to a 0% interest credit card or negotiating a better rate on your existing cards.

By clearing that debt, you can use the payments you were making to build up your savings and cover six to 12 months of living expenses in case of an emergency. If you don't have to tap into the emergency fund, it will eventually become part of your retirement nest egg, which is kind of a big deal for debt-laden Millennials. Of the 74% of Millennials who financial firm Franklin Templeton says are considering working during their retirement, 30% think they won't be able to retire at all.

"A good rule of thumb is to have an emergency fund that covers at least six months of expenses," says Anthony Crisculolo, certified financial planner, enrolled agent and portfolio manager with Palisades Hudson Financial Group, Fort Lauderdale, Florida, office. "If you are older and/or have dependents, you may want to be even more conservative and build up 12 months of expenses."

Even when you have an emergency fund ready to go, there are still a few options available before you use it. First, make an emergency budget in advance. If you already have a standard budget that factors in your normal income and expenses, take a look at non-essential expenses that can be cut or reduced in an emergency and make a low-expense budget based on those trims. Secondly, keep your credit clean so a 0% interest credit card or home equity loan is an option. An emergency line of credit still isn't ideal, and should be reserved for actual emergencies, but it can provide you a low-rate cushion until you're able to level things out again.

Finally, always remember that an "emergency" isn't a trip or a night out with friends. Your emergency fund should be dedicated to more urgent matters and, by no means, should be treated like a piggy bank or ATM.

"You never know when an emergency will occur or how severe it may be," Criscuolo says. "If an emergency hits right after you used some of the money, you may never be able to replenish the account and what's left may not be enough to last through the length of the emergency."

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