Millennials Wonder: ‘Where’s My Money Going?’

By Susan Tompor
Detroit Free Press

WWR Article Summary (tl;dr) More than 70 percent of millennials have at least one long-term debt, be it a student loan, home mortgage or car loan. And 34 percent of millennials are juggling two or more loans.

Detroit Free Press

Millennials could be risking their financial future as they craft ways to tackle their student loans, car payments and credit card debt.

New research indicates that many are overusing credit cards, racking up fees with late payments or overdrawing checking accounts and in some cases even taking loans against 401(k) plans.

What’s worse: Millennials may have less wiggle room for financial mistakes. In many cases, millennials could be earning about 20 percent less than their parents did when they were in the 25- to 34-year-old age range, according to a generational comparison by the nonprofit the Young Invincibles.

Millennials, defined for this study as those who are ages 23 to 35, may be experiencing a disconnect with their money, according to new research funded by the National Endowment for Financial Education and conducted by George Washington University.

More than 70 percent have at least one long-term debt, be it a student loan, home mortgage or car loan. And 34 percent of millennials are juggling two or more loans.

Yet many millennials are taking on extra costs and risks as they juggle the bills. A quarter of those with checking accounts, for example, had overdrawn their account in the prior 12 months, according to the survey.

About 23 percent of those with a self-directed retirement account either took a loan or made a hardship withdrawal from their 401(k) plan or other self-directed retirement account in the prior 12 months.

Having confidence about dealing with your cash doesn’t equate to knowing the right moves to make when juggling debt or getting socked with an economic shock, such as a costly car repair or job loss.

So what are some practical moves that millennials can make? Here are three thoughts:

Many millennials won’t likely pay off their student loans entirely before settling down to buy a home. So how do you pull off qualifying for a mortgage while juggling student loans?

Some experts advise that if you’re shopping for a mortgage and have a lot of student loans, you might consider switching to an income-driven repayment plan for federal student loans to make sure you have enough cash to make the monthly mortgage payments.

A federal income-driven repayment plan, there are four different types of such plans, initially will reduce your monthly payment to take into account your income and family size. You’re stretching payments out 20 years or 25 years, depending on the plan.

While it’s an appealing idea to try to slash that monthly student loan payment, remember there are extra costs. In general, the longer you turn to such safety nets, the longer you build interest debt.

Katie Bossler, a counselor for GreenPath Financial Wellness, said it may not be easy to come up with $300 or $350 a month to pay off $30,000 in college loans in 10 years with a standard repayment plan.

But Bossler noted that you could save thousands of dollars in the long run by opting for a 10-year standard payment plan for federal student loans.

Millennials, she said, are better off if they avoid basing a decision on a short-term fix that isn’t financially healthy for the long term.

However, an income-driven repayment plan can help you make sure that you don’t become delinquent or default. The remaining balance on an income-driven repayment plan is cancelled after 20 years or 25 years in repayment, depending on the plan. Some borrowers will have paid off their debts before hitting that year mark. (Note: The dollar amount of the loan that is forgiven after 20 years or 25 years in repayment is taxable under current law.)

Other strategies might be worth considering.

A small percentage of employers, less than 5 percent based on some estimates, offer their employees help with repaying student loans, said Mark Kantrowitz, publisher and vice president of strategy for

Some companies might match the employee’s monthly loan payment, up to a monthly or annual limit.

Fidelity Investments rolled out its Step Ahead student loan assistance program in early 2016 for employees with more than six months on the job. The employees can receive $2,000 a year toward their student loans up to $10,000. More than 6,000 Fidelity associates have already enrolled.

Kantrowitz said these types of loan repayment assistance programs would represent taxable income under current law. At some point, advocates say that may change.

College grads also should review the Public Service Loan Forgiveness program, which forgives remaining debt after 10 years of making payments while working full time in a government or nonprofit job. The debt forgiven under Public Service Loan Forgiveness is tax-free under current law.

Often, millennials, and those in the Gen X and Baby Boom generations, take out a loan from a 401(k) to pay off credit debt or for home repairs, according to research from Fidelity Investments.

“Most people aren’t using them for a vacation or big-screen TV,” said Meghan Murphy, director for Fidelity Investments.

They treat a 401(k) as an emergency fund, which it is not.

Fidelity’s numbers show that about 8 percent of millennials participating in Fidelity-administered plans have taken a loan from their 401(k)s within the last 12 months. The average loan for the millennials: $5,300.

Typically, Fidelity sees even more loan activity with Generation Xers in the 40-to-45 age group.

“When a lot starts to happen in life, we see peak loan usage,” Murphy said.

Murphy said 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 pay back time might be 30 days to 90 days.

To be sure, the rate on a 401(k) loan might sound attractive, possibly the prime rate plus 1 percent or the prime rate plus 2 percent. But you’re losing some tax benefits and the opportunity to make money by having that money fully invested.

“We’re seeing employers put restrictions in place to help money stay in the plan,” Murphy said.

Some employers are limiting the number of loans that can be taken out, Murphy said.

To be sure, a consumer can recover after taking out a small 401(k) loan, she said. But a cycle of 401(k) loans over one’s working years will hurt a retirement nest egg.

Eight out of 10 millennials have at least one credit card, according to the research funded by the National Endowment for Financial Education.

The trouble spot? Among these cardholders, half engaged in costly credit card practices, such as paying only the minimum amount, tapping into those credit cards for cash advances and incurring fees because of late payments or exceeding their credit lines in the 12 months prior to the survey.

Women, African-Americans and Hispanics are more likely to engage in expensive credit card behaviors, according to the study.

Billy Hensley, senior director of education for the endowment, said he’s concerned that too often consumers can look at that minimum monthly payment on a credit card bill and pay that dollar amount as if it were the equivalent of making the monthly car or mortgage payment.

It’s possible, for example, to pay just $25 for a minimum monthly payment on roughly $840 of credit card debt. But it would take you five years to eliminate that debt if you only paid the minimum. And you’d end up paying $703 in interest on a card with an annual percentage rate of 26.99 percent.

“I don’t think people understand how costly it is to keep charging if you are carrying a balance from one month to the next,” said Bill Hardekopf, CEO of

If you have a balance, he suggests, don’t use the card to pay for more items until that balance is paid off. Pay cash, instead.

By only paying the minimum payment, you’re stretching out credit card charges for years and racking up considerable costs for interest. And for what? A few drinks or dinners out with coworkers?

“Is a night out with friends worth $100 now versus $200 later?” Hensley said.
Susan Tompor is the personal finance columnist for the Detroit Free Press.

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