MILLENNIALS WONDER
'WHERE'S MY MONEY GOING?
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% less than their parents did when they were in the 25- to 34year-old age range, according to a generational comparison by the non-profit 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% have at least one long-term debt — be it a student loan, home mortgage, car loan. And 34% 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 sur- vey for the National Endowment for Financial Education.
About 23% of those with a selfdirected 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, according to the survey for the National Endowment for Financial Education.
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.
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 Green-Path 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 canceled 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.)
Also, a small percentage of employers — less than 5% based on some estimates — offer their employees help with repaying student loans, said Mark Kantrowitz, publisher and vice president of strategy for Cappex.com.
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. Fidelity’s numbers show that about 8% 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.
Many are taking on extra costs and risks as they juggle the bills.