Compared to older generations, millennials (ages 24 to 39) and Gen Z (ages 8 to 23) have less debt — though this is likely just because they’ve had fewer years to accumulate debt. A 2019 Northwestern Mutual study found that Gen X reported the highest levels of personal debt with $36,000 on average, followed by baby boomers at $28,600, millennials at $27,900 and Gen Z at $14,700. Based on some of the reasons why these younger generations are going into debt, it would seem that they are choosing to go into debt.
I talked to financial experts about the life events millennials and Gen Z are going into debt for, and what they should be doing to minimize and manage this debt.
Last updated: Sept. 6, 2021
Why Are Younger Generations Racking Up Debt?
“Debt can be an important tool towards managing opportunities, and for Gen Z and millennials, life experiences like weddings, trips, educational classes and philanthropic support are all viewed as very worthy and satisfying ‘investments’ compared to previous generations,” said Kayly Gerowski, associate director at Pathstone. “What this means is that old metrics of allocating approximately 33% of income towards housing is now being reduced to accommodate ‘wants’ elsewhere.” This debt also can take a toll on emotional and physical wellbeing.
Here are the “wants” and major life events that are sending millennials and Gen Zers into debt.
A Pricey College or Graduate School Education
Student loan debt has reached a record $1.6 trillion in 2020, with the average student loan debt for members of the class of 2018 at $29,200, Forbes reported.
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How Millennials Can Manage Their Student Loan Debt
“Following credit card debt, student loans are the second-highest source of debt for millennials,” said Brent Weiss, CFP, chief evangelist and co-founder of Facet. “Many millennials paid for college using loans before, during and after the great recession, and this mountain of debt and the required monthly payments are creating financial challenges for many. Some millennials decided to attend graduate school coming out of the great recession in hopes that higher education would provide better job opportunities. This often did not pan out and left some millennials with higher debt loads that were not offset with higher incomes.”
Serial entrepreneur John Rampton recommends seeking out an employer that offers student loan repayment assistance.
“Many employers are eagerly willing to help fresh talent by offering benefits that tackle student loans,” he said.
However, not every millennial will be able to find a job with this benefit.
“If you can’t get a job that directly helps, you’ll need to find a way to reduce the interest rate and create a budget that helps you make more than the minimum due each month,” Rampton said.
Weiss said that paying off student loans might entail some sacrifice for this generation.
“Student loans are a financial challenge for many, and we need to factor these costs into our lifestyle,” he said. “The best course of action is to sacrifice a little while we are younger to pay them down or off. If this is not an option, think about other expenses that can be cut to help you get back on track.”
He also recommends looking into student loan refinancing.
“It can sometimes lower your rate and allow you to better plan for your monthly payments,” Weiss said. “This isn’t always a possibility and it may not always make sense.”
Even if it’s tough, Weiss said that it’s essential to keep up with student loan payments.
“Student loans need to be a priority for most as it will impact your ability to get other loans in the future and your ability to buy a house potentially,” he said.
How Gen Z Can Minimize Student Loan Debt
“Gen Z is still in the driver’s seat when it comes to their financial lives. They still have time, albeit limited for some, to plan for higher education,” Weiss said. “Student loans are a byproduct of the decisions we make when attending schools. And loans aren’t necessarily a bad thing, but they need to be kept in check.”
Weiss said to consider attending in-state schools and schools that offer robust financial assistance packages.
“Schools are not created equally,” he said. “Managing the cost and the debt-load at graduation can be a great way to come out ahead and in control of your financial life.”
Aaron Rasmussen, founder and CEO at Outlier.org, said to also take future earnings into consideration.
“Students should ask themselves two questions. First, how much is my education going to cost me? They should think about this both in terms of the total sum, and their expected monthly payments for student loans,” he said. “The second question: Given my major and a reasonable projection of my career path, how much can I expect to earn after graduation? That math should work so that students can comfortably pay down their student debt while still earning enough to live on.”
“Unfortunately, literature majors and those pursuing a career in media may find that their expected earnings don’t justify a large amount of debt,” Rasmussen continued. “Students in fields with higher demand, such as nursing or computer science, may find that the math works in their favor.”
A Dream Wedding
The average cost of a wedding is now $33,900, according to The Knot — which is more than many people have ready to go in their savings accounts.
“Weddings are an area where people are choosing to go into debt more and more,” said the anonymous blogger behind Time in the Market. “There are certainly people who do it on the cheap, but there’s often a lot of expectations that come with a wedding that can lead to people taking on a hefty price tag to make it happen. Average weddings cost $30,000 now, and it’s hard to do that without taking on debt.”
How Millennials Can Pay Down Wedding Credit Card Debt
If you’ve racked up credit card debt to pay for your wedding, consider taking on a second job that will enable you to eliminate your debt faster.
“One of the best ways [millennials] can tackle debt is to find a flexible job that works with their schedule and use the extra income to pay it down,” said Tana Greene, CEO of MyWorkChoice.
You should also make a plan for paying down the debt.
“The plan should start with prioritizing your debt based on the highest interest rate,” Weiss said. “The higher the rate, the more that loan is costing you each month. As loans vary in size, it may not feel that way, but the cost of every dollar borrowed is higher.”
Once you’ve established a debt repayment plan, “find ways to cut unnecessary spending, like eating out and subscription boxes,” said Yenn Lei, head of engineering at Calendar.
How Gen Z Can Plan For a Budget-Friendly Wedding
You shouldn’t be going into crazy amounts of debt to pay for a wedding, the experts said.
“If you’re having a wedding, plan a small one or have a courthouse ceremony,” said Erik Huberman, founder and CEO of Hawke Media.
If you do want a larger or fancier affair, plan ahead and start saving early.
“My wife and I wanted a relatively nice and fancy wedding but we knew that we didn’t want to go into debt for it,” said the Time in the Market blogger. “We started a wedding budget and started to save $500 per month — or more if we could — just for the wedding to make sure we had enough cash to cover the cost of what we wanted. It wasn’t easy and we had to give up a few things, but we did it for a bit and saved up enough. We didn’t want to have to put [our wedding costs] on a high-interest credit card, as that can be a killer on the future budget.”
Buying a House
The average cost of a home in America is around $245,000, according to Zillow. However, the cost of homes varies widely based on what city and state the home is in.
Although millennials are less likely to buy homes than previous generations due to a number of factors that include higher student loan debt and later-in-life marriages, CNBC reported, 37% of millennials were homeowners by the end of 2015, Forbes reported.
How Millennials Can Manage Their Mortgage Debt
One way to make paying your mortgage more affordable is to get extra help paying it.
“[Millennials] may be interested in renting out rooms — or the entire home — to make additional money to repay the debt, and help them buy additional properties for more income streams,” said Scott Hankinson, CTO of EmailAnalytics.
How Gen Z (and Millennials Who Don’t Own Yet) Can Budget For Their Future Home
“Gen Zers are getting old enough to take out mortgages and buy their first homes,” Hankinson said. “They tend to be more willing to take this type of debt on than millennials because of the value they see in such an investment.”
When it comes to figuring out how much house you can afford, Tracey Grace, president and CEO of IBEX, recommends sticking to these guidelines: “You should allocate 25% of your gross income for your mortgage,” she said. “You should expect to put at least 10% of the purchase price as your down payment.”
However, it’s best to put down more than 10% if possible.
“The larger the down payment, the lower the amount being financed,” Grace said. “It is always best to make your down payment as large as possible, even if that means taking more time to save and perhaps staying with a parent or family member until you have your targeted amount saved up.”
Going On Exotic Vacations
A 2017 LearnVest survey found that 74% of Americans have gone into debt to pay for a vacation, with the average debt Americans have accrued to pay for a vacation at $1,108. The survey also found that millennials were more willing to go into debt to pay for a vacation than older generations — 49% of millennials said they would take on debt for a trip versus 37% of Gen X and 18% of boomers.
How Millennials and Gen Z Can Save On Future Trips
If you plan your vacation right, you might be able to afford it without putting more on your credit card than you can actually pay back.
“Be flexible when traveling,” Huberman said. “Look to go when there’s cheap airfare.”
Starting Their Own Business
“The appeal of being your own boss has taken flight and is especially attractive to the millennial and Gen Z audience,” said Jonathan Keyser, founder of Keyser Commercial Real Estate.
However, starting a business can put a strain on already strained finances.
“You’re likely to drain your savings account or need to borrow money,” Keyser said. “In all reality, few people can embark on a journey like this without taking out a business loan.”
Chalmers Brown, CTO of Flint, said that Gen Z is particularly eager to go the entrepreneurial route.
“Gen Zers are taking out personal loans to fund their business ideas and create their own careers because they want greater control over their lives than even millennials,” Brown said. “They see the short-term debt as necessary to get them what they want in terms of a career, and find it easier to launch as a bootstrap than seeking large amounts of funding from traditional investor circles.”
How Millennials and Gen Z Can Start a Business Without Going Broke
Keyser recommends becoming a franchisee.
“Only 4% of businesses in the retail space live past 10 years. Because of this, the concept of franchising is a safer option than starting your own business,” he said. “It’s a proven concept that has demonstrated a pattern of success.”
Another option might be to keep your full-time job and start a side hustle instead. This way you maintain financial security while still getting to flex your entrepreneurial muscle — and the extra income can help you to pay off student loans or pay down credit card debt more quickly.
Buying a Car
Auto loan debt reached $1.33 trillion in the third quarter of 2019, according to the Federal Reserve Bank of New York.
“Americans owe more on their cars than they do on credit cards and almost as much as they do in student loans, yet auto debt seems to get just a fraction of the attention,” said Paul Fortin, chief risk officer of vehicle subscription provider Fair. “This makes it particularly dangerous for the average consumer because they might not even recognize it as a threat. Fact is, Americans are being forced to take out larger loans over longer periods of time — often putting their financial futures at stake — just to have a car that will gradually lose most of its value as they pay it off.”
And millennials have been spending more on their cars than other generations.
“According to a 2018 study by the U.S. Bureau of Labor Statistics, millennials aren’t too far apart from other demographics in terms of food spending or entertainment. However, when it comes to annual spending on vehicles, millennials aren’t afraid to pay up,” said Tom Blake, founder of This Online World. “According to the data, when it comes to vehicle purchases, millennials spend over the category average, keeping up with the spending habits of older and theoretically more financially grounded generations.”
How Millennials Can Keep Auto Payments Low
Millennials may have overspent on their first car, but they have the opportunity to get back on track with future car purchases.
“It is important that millennials reign back their spending on vehicle-related purchases if money is tight, and that they never take on monthly vehicle payments they can’t afford,” Blake said. “Shopping around and buying used are two excellent ways to save money when purchasing a vehicle. Leave yourself enough time to visit multiple dealerships, and don’t be afraid to look online as well. If the price isn’t right, having time to continue your search will potentially save thousands of dollars.”
How Gen Z Can Save When Buying Their First Car
“More Gen Zers are willing to take auto loans out to buy their car than millennials, but are more focused on vehicles that are affordable and help them achieve their goals than excessively spending for a luxury vehicle,” said Kristy Rampton, wife of serial entrepreneur John Rampton. “They are putting healthy down payments down and financing over a shorter time to avoid too much interest.”
While it sounds like Gen Z is on the right track, they can benefit from these saving tips when it comes time to buy their first (or second) car.
“There are multiple tips for budgeting for a car,” Blake said. “One important practice is to outline what you absolutely need in a vehicle versus what you want. Oftentimes, a much more affordable car will serve you just as well as a car with more bells and whistles. Ultimately, purchasing a car is a major decision, but it should never stress your finances or leave you unable to pay off other debt or invest your money.”
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Gabrielle Olya contributed to the reporting for this article.