Student Loans, Credit Cards And Car Payments: How To Manage Debt

Unless you landed a one-way ticket to the haute-bourgeoisie at birth, odds are you’re accumulating debt -- and possibly quite a bit of it. It pays for the stuff the American Dream is made of; those pretty houses, college degrees and shiny new cars all come with hefty price tags. And although overall household debt isn’t dramatically going up or down, it’s taking new forms for those coming of age in the 21st century. Here are a few tips for paring down debt.

Student Debt

Forty-one percent of all millennials -- that is, people born between 1981 and 1997 -- have some amount of debt from education, according to a Pew study released in July. Unsurprisingly, thanks to the soaring cost of higher education, that’s a much higher rate than previous generations. Only about a quarter of all Generation Xers, according to the same study, have some amount of student debt, and only 13 percent of baby boomers do. The average millennial with student debt owes $20,000. Barring an unexpected jubilee from federal authorities, or a successfully-organized mass default, you’re going to have to pay that back.

Heather Jarvis, an attorney and student loan expert, says it’s important to keep in mind one of the overarching realities of debt: “The longer it takes to pay back, the more you’re going to owe in interest,” she says. Saving money is obviously important, too. But if you’ve got the means, it makes sense to pay off as much of it as you can at an early stage.

Jarvis has a few other pointers. “You should begin by taking a clear inventory” of what you owe, she says. “It’s very important to recognize the difference between federal loans and private loans.” The latter tend to offer less flexible repayment plans and be more expensive, and it makes sense to “repay more expensive debt more aggressively.”

While it may sound obvious, Jarvis says it’s critical to stay in touch with loan servicers. Deleting an important email, tossing out snail mail or changing addresses without notifying them can come with real financial consequences. To keep track of different loan servicers and remind yourself how much you owe them, Jarvis recommends getting a free credit report -- the government-approved starting point is annualcreditreport.com.

If you’re having a hard time paying your federal student loans, you may qualify for an income-based repayment plan with the Department of Education. Under these plans (there are a few different types), you pay your loan based on how much money you’re making. Over time, you’ll end up paying more for the loan than you would under the standard 10-year plan. But the upshot is that paying less each month could prevent you from defaulting on the loan – which can have serious consequences for your credit history, and the willingness of banks to lend you money down the road.

Ask your loan servicer about this, and check out the federal government’s “Repayment Estimator” tool to see what type of plan you're eligible for. If you do go this route, make sure to update your income information with your loan servicer every year (a process known as “recertification”), otherwise your payments could revert back to the standard amount.

Go Easy On The Credit Cards

A new microwave? Pumpkin-flavored espresso blend from Starbucks? Discounts on gasoline? Don’t let the promise of such juicy rewards get to your head. You don’t need multiple cards. Likewise, it’s tremendously shortsighted to finance an extravagant lifestyle on credit cards. You’ll rack up a boatload of interest on all that outstanding debt. And eventually, it’ll hurt your credit score and make it harder to borrow in the future.

On the other hand, getting a credit card isn’t a bad move in itself, says Mark Kantrowitz, senior vice president and publisher at Edvisors.com, which covers planning and paying for college. It’s especially beneficial in the early years if you graduate with student debt. At this point, your credit score tends to be relatively low, he says. Building credit and paying it off on a monthly basis will raise it.

The Other Kinds Of Debt

The percentage of millennials with car loans, another major source of debt, rivals that of Generation X’ers: 41 percent compared to 43 percent, according to a recent Pew study. While interest rates are still relatively low, unless you have a superb credit score, you may find an even better deal on your loan outside the dealership. The Center for Responsible Lending, a nonprofit that targets predatory lending, recommends you start the search by shopping around with credit unions or community banks.

Lastly is the most significant debt of all: home loans. About a third of millennials are paying mortgages, according to Pew, compared with 56 percent of Gen Xers and 47 percent of baby boomers. There are a couple of reasons for the divide: Young people are buying homes later. Also, millennial homeowners benefitted from the decline in housing prices after the housing bubble burst, so they owe less overall.

Millennials should follow the same advice as all homebuyers: Maintain sparkling credit scores, shop around with a handful of lenders before committing and seek professional help as needed. Due diligence is key.