A house? A family? Retirement?
For millions of millennials saddled with debt, just thinking about these milestones of adulthood is a luxury. Before any of those things come responsibilities like the student loan bill you’ll be paying until you’re 50, monthly rent, figuring out how to pay more than the minimum on your credit card debt, cell phone bills, and maybe a ticket home to see Mom and Dad for the holidays.
Thanks to the spiking price of a college degree, the level of education needed to get a good job, and an economy still recovering from the Great Recession (which many millennials graduated headlong into), millennials are carrying more debt than any generation in history. On average, they have nearly $48,000 in debt, and one in three millennials has more than one source of long-term debt.
What’s it like for them? How has the size of their debt affected major decisions like buying a house? Has debt changed their relationships with loved ones?
Money360 wanted to find out, so we spoke to five millennials at different stages of debt. Two have overcome it. One filed for bankruptcy. Two continue to struggle every day with payments.
Their stories are unique, but we know they’re not the only people working to overcome debt. So we asked Pamela Capalad, a financial planner who specializes in millennials’ finances, to weigh in and offer insights and advice to anyone who sees a bit of themselves in these stories.
In 2008, Alex had a decision to make.
On one side was La Salle University in Philadelphia. Close to Alex’s family’s home in Western New Jersey, La Salle was offering Alex, then a high school senior, a full ride and much more, like free room, board, and books — really the whole kit and caboodle.
Also vying for Alex’s enrollment was New York University, but in a very different, dangerously flirtatious way. NYU, with its lofty reputation and top-ranked Stern School of Business, had been Alex’s dream school for years, but the notoriously expensive university (tuition, room, and board were nearly $53,000 in 2008) wasn’t offering him any scholarship money.
Alex’s parents had already told him that they wouldn’t be able to help him with education costs, so when the Free Application for Federal Student Aid (FAFSA) informed Alex that it too wouldn’t be providing financial assistance, he was left to make a severely consequential decision: Go to La Salle and have all of his expenses paid for, or fulfill his dreams of attending NYU Stern, loans be damned.
Alex choose NYU and the cocktail of state, private, and federal loans. The decision, he says, haunts him to this day.
“Honestly, I think it’s going to go down as the worst decision I ever made,” he tells Money360. “I knew that I would have debt, and I knew that I would have a lot of debt, but I convinced myself that everybody has student loans — that everybody pays them their whole lives.”
“What I didn’t realize is that there are people who owe $25,000 over the first 10 years of their professional life, which is pretty manageable, and then people like me who have something like $250,000 at 8% interest.”
“That’s not manageable,” he says. “That’s crippling.”
Despite the size of his loans, Alex was determined to not resign himself to a lifetime of payments, so he got started early on socking away money. Outside of class, he rarely went out to bars and ate most meals at campus dining halls, where his meal plan was covered by his loans. In and out of school, Alex worked hard and efficiently. He loaded up on credits so he could graduate early, thereby saving thousands of dollars, and padded his resume with a paid internship and an unpaid research position, which he subsidized by working at the school gym.
During college, Alex tried to not let his debt dictate his life, but there were times when he had to be realistic and consider the big picture. This was especially true during his senior-year job search. Alex had to choose between an entry level sales/software development position at the music magazine he interned at (and idolized) and a well-paying but unglamorous job at a software company.
“It would have been perfect for me — a hip, music-focused place — but they wanted to pay me like $25,000,” he says.”At the other company, I wasn’t too excited to use my computer skills to build insurance software, but the money was significantly higher. That made the decision for me.”
This time, not pursuing his “dream” would end up being the right decision for Alex. After receiving the software company’s job offer, he told his new bosses about his loan predicament. Wanting Alex to stay with the company, they let him work during his final semester of college, when he was only attending school part-time. This meant that Alex would have a full year of work and savings before his loan deferment period ended.
Housing was still a problem, though. Alex lived in New York for a year after college, but couldn’t justify paying for rent there once his loans kicked in. Soon after, he went to his bosses again and asked to relocate to New Jersey, where he could move back in with his parents.
“I went in and had a heart-to-heart with my boss,” Alex says. “I was like ‘Look, this is the situation for me. I want to work for you guys, but living in New York isn’t financially sustainable for me. I either need to be allowed to work remotely or I have to get a new job.'”
Again, Alex’s bosses cooperated with his needs. Since then, he’s been promoted twice and doubled his starting salary. Still, he continues to live at home in order to make more progress on his loans.
“When you’re 26 and live at home, people just kind of think you’re a loser,” Alex says. “They don’t get the full story. Now, I’m really starting to feel it because I obviously make significantly more money than I did when I started working. I have the down payment saved to buy a house, but I can’t use my savings for that because I need that money as emergency money in case I don’t have a job.”
With decades of loan payments ahead of him, Alex understands that bitterness won’t help him overcome financial obstacles. He’s also grateful to be in a position where he can overpay his loans because his salary is high. Alex’s debt, while something he regularly curses, has helped him mature.
“I try to have a really positive attitude about it,” he says. “Even if I’m financially crushed by it, I don’t have to be spiritually or emotionally crushed by it.”
“I thought I was smart enough to make that decision when I was 18,” he says. “I just wasn’t.”
Like many first-year college students, Whitney had never owned a credit card before, or really needed one, for that matter.
Also like many first-year college students, she would finish her freshman year of college with a piece of plastic that would spell doom for her finances.
It was never supposed to turn out like that, though. Originally, the credit card was just for emergencies, Whitney told herself.
But after using the card to pay for some computer repairs, Whitney learned just how easy it was to pay for goods and services with credit. Soon, she was regularly using the card to pay for dinner and drinks with friends. Sure, it wasn’t a $2,000 purse or a trip to the Bahamas, but $100 here and a $100 there added up. By 2007, Whitney had maxed out four credit cards and was $25,000 in debt.
“I was like, ‘It’s small. It doesn’t count. Don’t worry. I can get rid of that,” she tells Money360. “In the moment, I could make any justification to use my credit card. Then the bill came at the end of the month and I was like, ‘Oh no, I’ve made a mistake. I can’t do this anymore.'”
“You just end up in this feeling of shame and recrimination.”
Temporarily, Whitney’s financial pressures abated. When her mother died, Whitney received a life insurance payment and the proceeds from selling her mother’s home, both of which she used to pay off her debt. But she never made an effort to reform her uncontrolled spending habits.
“I was so used to spending that I went right back to the credit cards and ended up running up just the same amount of debt again,” she says. “I was hiding from the fact that I was in debt. A lot of the reasons I ran up more debt was because I was trying to maintain a lifestyle and not reveal that I had kind of driven myself broke. I would be like, ‘Oh, yeah — I can come to dinner. I can do that thing.’ But I would be putting it all on a credit card.”
“For years, all the Christmas presents for my family would be put on a credit card.”
Whitney was acutely aware of her spending addiction, but felt trapped in a cycle of debt. While she was always able to make her minimum monthly payments on her cards, she had to continually use them for basic needs like groceries because there was nothing left over from her paycheck once she’d paid her credit card bills.
“When I was in debt, I just felt like I didn’t have a long-term financial future. I had no savings. I had nothing,” she says. “I didn’t have a 401(k) or anything because I didn’t feel like I could take anything out of my paycheck to put to that.”
Around 2014, Whitney did something she’d never done before in her nearly 10 years of debt accumulation: She told those around her about her problem and asked for their advice. Her most important ally during this time was her father. Always fiscally responsible, he told her that bankruptcy was her only option, which sounded ominous to Whitney.
Declaring bankruptcy, she says, felt like admitting abject failure, one that would force her re-live her financial mistakes and confront a bleak future. But was bankruptcy really the worst outcome, she asked herself? Was the status quo — spending irresponsibly, being ensnared by debt, and constantly despairing over it — really much better? Talking through the dilemma with her therapist and father, Whitney began to unpack bankruptcy and understand how it isn’t the boogeyman it’s often perceived to be.
“People see filing for bankruptcy as this horrible thing that’s going to ruin your life, but if you’re in a situation where you are just trying to live your life again, it’s a really good option,” she says.
“It obviously does affect your credit score, but it’s worth taking that hit rather than drowning in your debt.”
A week after speaking with her father, Whitney visited a bankruptcy lawyer and put the wheels in motion to file for Chapter 7, which allows individuals to start over in exchange for forfeiture of their assets and a diminished credit score. Because Whitney didn’t own property or vehicles that could be used to pay her debts, nor did she intend to take out a mortgage in the future (she’s a New York-lifer, she says), the filing would do more long-term good than harm for her.
Debt-free for more than a year, Whitney now uses the site Simple to budget and save for extras like Christmas gifts. She even has enough money for an emergency fund, which recently came in handy when she broke her ankle. A few years ago, those bills would’ve all gone on her credit cards.
The temptation to spend on credit doesn’t exist for Whitney today. When she filed for bankruptcy, all of her active credit cards were canceled, and she hasn’t obtained any new ones since. She’s also made progress on repairing her credit score.
“I had to realize I was stuck, step back, and get over the shame,” she says. “It was a combination of being too ashamed and also too proud to ask for help.”
“Then, I did and it was very good. It worked out really well for me.”
At 29, Joe was living large, or so he thought.
Having recently earned his MBA from Harvard Business School and landed a well-paying job at a major technology company, Joe filled his life with the trappings that he felt befitted his new Ivy League credential: a new home, two cars, a motorcycle, and monthly entertainment expenses that regularly crept into the four figures.
“I was like, ‘Man, I’ve got this Harvard MBA. Now, I’ve got to prove to the world that I’m a successful, Harvard MBA'” he tells Money360. “That’s when I got all the indications of success and wealth without actually having been in the trenches and earned it.”
Behind Joe’s creature comforts, however, was a foreboding financial outlook: He was nearly $300,000 in debt from his MBA program and new home.
“I had $2,100 just going to servicing debt every month,” Joe says.
While Joe’s salary allowed him to make steady payments on both loans, his student loan interest payments began to overwhelm him. After two years of paying nearly $1,000 a month on them, Joe realized he’d only managed to slough off $10,000 from his principal. If he let the student loans go to term, he’d owe $42,000 more…just in interest.
“I was looking at my earnings projections and expenses projections and realized that if I didn’t take some drastic measures, I was going to fail in front of the world,” Joe says. “I felt trapped.”
To Joe, the interest payments represented a dead end. He knew he had to turn around, so he set a goal for himself: To eliminate the remaining $90,000 of his students loans in under a year before interest payments inundated him any further. To hold himself accountable, Joe created a blog where he’d document his spending reductions and lifestyle changes.
Joe’s first move was to remove the excesses from his life. He sold his extra car, his motorcycle, his road bike, and gadgets. Getting rid of the vehicles brought in more cash to pay Joe’s loans and saved him thousands of dollars in maintenance fees. More importantly, he says, their sale tore him away from his conspicuous consumption habits.
“I had a whole fleet in my garage,” he recalls. “If you’d open the garage door up, you’d think, ‘Wow. What a cool guy.’ I was kind of a douchebag.”
“All the upkeep, the maintenance, any decisions — I erased so much complexity from my life by just selling them. I started embracing the changes.”
Joe’s mortgage was the next expense that had to be squared — or, at the very least, mitigated. To offset his monthly payments, he rented out his guest bedroom and even his personal office. It was the end of Joe’s bachelor paradise, but it gave him a few thousand dollars every month to put toward his $90,000 goal.
What Joe didn’t fully appreciate when he created his lofty debt reduction goal was that it would force him to make more difficult sacrifices than selling excess cars and forgoing expensive bar tabs. He says that missing two friends’ weddings and then telling his parents that he couldn’t fly home for Christmas was a real gut-check.
“I still remember walking by myself up to the church doors for Christmas Eve mass surrounded by families laughing and talking to each other,” Joe says. “My family was doing the same thing 1,100 miles away, and I wasn’t there to join them. I don’t think I’ve ever felt more lonely than I did at that point.”
Joe would find himself confronted by tough decisions throughout his year-long pledge. The next one involved what to do about his savings and retirement accounts. Should he transfer money out to speed up his debt repayment, or leave the funds intact for retirement? After a lot of hand-wringing, Joe reasoned he had no other choice than to act now on his student debt, even if it went against conventional wisdom. He wound up cashing out his IRA and emergency fund and stopping contributions to his 401(k).
In the end, Joe was able to pay off $90,000 in seven months instead of ten because he relinquished his retirement savings. It wasn’t what most financial planners would advise — jeopardizing your retirement to make up for the prodigal spending of your youth, that is — but Joe felt so encumbered by his debt that he didn’t want to let any of it linger.
“I was completely set on achieving my goal and was willing to stop at very little to become-debt free,” he says. “The risk associated with losing my rainy day fund was outweighed by the idea of imminent financial freedom.”
In the time since, Joe has further downsized, selling his house and buying a condo. As he prepares to pay off the mortgage on the condo, he’s confident his modest spending habits will stick even when he’s completely debt-free.
“I made my peace with moderating my lifestyle,” he says. “I took myself out of the rat race where I was keeping up with the Joneses. I’m not even putting on the track suit.”
To many of us, college seems like an interrupted experience — you get in, study for four years, and graduate.
When we look closely at the numbers, however, we see that the college journey for many Americans isn’t so linear. According to the National Student Clearinghouse, only 42% of students younger than 20 who enrolled in college in the fall of 2008 finished at their starting institution six years later. Many take longer than six years to complete their degree, others transfer, and even more drop out.
Aurora is among this large group of college students (and their loans) that we tend to overlook. In 2003, she enrolled at the University of California, Santa Cruz, where she received in-state tuition because her father worked at a research laboratory that was then owned by the University of California. Aurora still needed to take out loans to go there, but her parents reasoned the cost of the loans would be offset by the career opportunities she’d receive at UC Santa Cruz.
After nine months at Santa Cruz however, Aurora wasn’t acclimating well, and she chose to withdraw. A change of scenery felt like a good decision at the time, but neither Aurora nor her parents realized the impact that taking a break would have on her loans: Six months after Aurora’s withdrawal date, her first payments would be due. Though Aurora would re-enroll at Santa Cruz in 2005, the damage had already been done.
“I didn’t realize that meant I would be accruing interest every single day on my loans that I needed to pay back from my freshman year,” she tells Money360. “For the next four years I was accruing about $5 of interest every single day and I didn’t even know it.”
“I accrued about $8,000 worth of interest during those four years. I’m still only paying that off. I can’t pay the principal.”
Aurora isn’t the first young college student to be unaware of the future impact of her loans, but her case is especially pernicious because her payment period began her freshman year, not six months after she graduated, like a typical deferment period.
“I was making minimum wage and paying $300-$400 in credit card and $200-$400 in student loan bills every month, in addition to paying rent and other bills for the first time,” she says.
Paying rent, Aurora quickly discovered, wasn’t feasible. While she was less than thrilled about moving back to the New Mexico town that she hoped her college degree would liberate her from, she understood that paying rent would only prolong her debt.
“I really believed that if I went to Santa Cruz that this wouldn’t be me when I graduated,” she says. “I felt like I was waving the white flag in surrender.”
As difficult as moving back home was for Aurora, it was worse on her parents. They constantly felt guilty that they pushed her to attend Santa Cruz and take out loans, Aurora says.
“They really believed that they had pushed me to do the right thing, and here I was moving back into their house and trying to renegotiate being an adult living with my family, asking them for money,” she says. “That was pretty stressful on my relationship with them.”
After being blindsided her freshman year of college when her loans suddenly kicked in, Aurora vowed to become more financially educated once she graduated. She began practicing austerity at home, forgoing nights out with friends and restaurants, and looked into debt consolidation programs for her more modest credit card bills.
“I wasn’t afraid to ask questions or be the person that calls the loan department every single day until I really understand what the fine print is,” she says.
Eventually, Aurora took a full-time teaching job with benefits and moved out of her parents’ home. When she felt more financially stable, she also began looking at online graduate school programs, but only ones that she could afford.
“I took out the minimum amount of loans that I could to cover it and was awarded a scholarship,” she says. “What I paid for three years of grad school equaled one year of undergrad.”
Aurora was especially proactive about negotiating a more favorable payment plan for her graduate school loans and examining the fine print — lessons that she’s eager to pass on.
“I was first given a bill for my loans of almost $600 a month. I told the company, ‘What else can I do? I can’t pay that.’ I was able to find different options and now I pay about $150 a month,” Aurora says.
“Don’t be shy about asking a lot of questions,” she advises. “You need to be a pushy person.”
Sebastian, like scores of ambitious millennials raised during the era of billion-dollar startup valuations, harbored aspirations of becoming a tech entrepreneur.
In college at the University of Waterloo, he didn’t lose too much sleep over the student loans that would help get him there. They weren’t too heavy, he told himself, and he could wipe them out with about five years of corporate accounting work for a major firm. Then, he could move on and pursue his dream of starting a business.
“In my head, I figured that if I worked a corporate job, student loans wouldn’t be a big issue, because I’d be making a lot,” he tells Money360.
Two years after graduation, however, Sebastian was finding out that his journey to financial freedom and tech entrepreneurship wouldn’t be as seamless as he imagined it would be in his dorm room.
A number of things went wrong. First, instead of staying in the corporate world for five years to pay off the loans, Sebastian left his accounting job after only a year, moved to Boston, and started a business. With little revenue coming from the early-stage company and a lot of his money going into it, Sebastian had to scrape together funds for his loan payments.
“When I tried to do a startup, my plan kind of blew up in the water,” he says. “The student debt added a huge amount of stress onto everything because it created a lot of questions, like ‘Is the startup the right decision? Why am I taking a risk when I already have a ton of debt to deal with?'”
Next, it took longer than Sebastian expected to raise capital. To give his startup some runway, he began placing business expenses on his credit card. Because Sebastian wasn’t paying himself a salary for the business’ sake, personal expenses on the credit card began to pile up. Before he knew it, he was responsible for nearly $75,000 in student and credit card debt.
During the six-month period when he was finalizing a seed round, Sebastian lived austerely, subsisting on free yogurt, bananas, and the occasional slice of pizza from the co-working space he rented an office from. Further, he restricted his living expenses to a shared apartment, which he paid $500-per-month for, and a $60 bus pass.
Unfortunately, many of Sebastian’s sacrifices would be executed in vain. He closed his startup less than a year after starting it. The experience, however, wasn’t all for naught, Sebastian says. Today, he credits the frustrations of raising money and living in debt with guiding him towards his current job at a company that helps startup founders crowd-fund loans with flexible terms so they don’t have to resort to credit cards.
“I realized that I would have really benefited from a tool like that when I was trying to start up a company,” Sebastian says.
It took Sebastian about three years with a stable paycheck and savings plan to erase the $25,000 in credit card debt that he accrued starting his company. These days, he’s focused on clearing his student debt.
“I allocate one paycheck to my rainy day fund and student loans and the other paycheck to rent and other living expenses,” Sebastian says, “so about 25% of my pay goes to the student loans.”
Past experiences have taught Sebastian the importance of keeping a robust emergency fund, he says.
“I think a lot of people aren’t the best with keeping a rainy day fund,” Sebastian says. “For me, I know what it feels like to have to go on credit cards.”
“I don’t want to be in a position where I would have to deal with that again.”