The following is a guest post from David Chen, a personal finance enthusiast. You can follow him over at Millennial Personal Finance, where he shares his story of destroying debt and building passive income.
Across the United States, the cost of obtaining a college education has risen dramatically. As the expense has risen, the level of student debt has as well, leaving many Americans in the position of having high levels of student loan debt — and being unable to pay for it.
The average borrower in 2016 had nearly $38,000 in student loan debt, with the average graduate having just over $16,000 in debt. For graduate students, the debt load is far more substantial, at $57,600. Because savings, scholarships, grants, work study programs and other forms of financial aid only go so far, the majority of students will need to borrow money in order to pay for school. However, high levels of student loan debt are having a massive impact on the lives of millennials — and we have the stats to prove it.
According to a survey by the National Association of Realtors, student loan debt is pushing many millennials to delay homeownership. Eighty percent of those surveyed said that they cannot save for a down payment due to their student loan debt, and an additional 71 percent stated that the burden of their monthly payments prevented them from buying a home.
It isn’t surprising that heavy student loan debt has had such an impact on home ownership, given the average student loan debt and monthly payments for many college grads — and for those who did not complete school. Monthly payments can easily eat up a substantial portion of a millennial’s budget, leaving little room for saving after necessary expenses like rent, utilities, food and other items. If the combined burden of student loans and bills leave little money left over at the end of each month, most millennials will find it difficult to impossible to save the tens of thousands of dollars necessary for a down payment for a house.
The boomerang effect is the term used for the phenomenon of adult children who move back in with their parents after some period of living independently, whether just for college and/or graduate school or for longer. According to a Pew Research Center survey, in 2016, living with mom and dad was the most popular living arrangement for millennials, with 32.1 percent of 18 to 34 year olds choosing this arrangement. It turns out that the driving cause of the boomerang effect is not the economy, but student debt. Moreover, it is often the case that these same parents are feeling the burden of student debt too. About nine out of ten private student loans are cosigned, leaving a lasting impact on parents.
Across the United States, student loan debt stands at $1.4 trillion, and that number continues to grow. It is unsurprising that so many millennials are finding themselves unable to support themselves financially after college or graduate school with heavy student loan debt. With college tuition and fees increasing at exponential rates, the average borrower found himself with nearly $38,000 in debt in 2016 — a 6 percent increase since 2015. For graduate students, the number is even higher, depending on the type of degree obtained. At the low end of the scale, the average M.B.A degree holder has $42,000 in debt, while a graduate with a degree in the medicine or health sciences has over $160,000 in debt.
With numbers like these, it isn’t surprising that so many graduates are unable to live on their own after school. Paying rent, utilities and other bills on top of monthly student loan payments of several hundred dollars per month or more is simply untenable for many millennials, particularly those in expensive housing markets. If these grads have entry level jobs, they may find it impossible to make ends meet on a $40,000 per year position with $30,000 or more in student loan debt. The only solution that makes sense is to move back in with their parents or other family members.
Delayed Retirement Savings
Having student loans often requires millennials to make financial sacrifices. For many, that means skimping on paying into their retirement funds. According to a poll conducted by the American Institute of CPAs, 50 percent of Americans have delayed saving for retirement because of student loan debt. Millennials may feel more comfortable than other age groups making this choice, believing that they have plenty of time to save for retirement. But the best way of saving for retirement is to start early — and so foregoing retirement savings in your 20’s and 30’s can have an incredibly negative impact on your financial well-being in later years.
Student loan debt is a fact of life for millennials, and it is having a major impact on many aspect of their lives, from housing to retirement to reaching other financial goals.