What Two Types of Debt Are Most Common for Millennials?

Debt is a common part of the financial landscape, serving as a tool for acquiring assets or investing in future potential, but also presenting obligations. For millennials, the economic environment has presented unique challenges shaping their relationship with debt. This generation entered adulthood during or after significant economic disruptions, including the 2008 financial crisis. High living costs, a challenging job market, and stagnant wages have made it difficult for millennials to build savings and wealth, contributing to certain types of debt becoming prevalent.

Student Loan Debt Explained

Student loan debt represents a significant financial burden for many millennials, reflecting the rising costs of higher education and increased participation in post-secondary schooling. The average outstanding student loan balance for millennials is around $40,438. Rising tuition costs have necessitated borrowing for many students.

Student loans are primarily used to cover tuition, fees, and living expenses while pursuing higher education. These loans generally fall into two categories: federal student loans and private student loans. Federal loans, such as Direct Subsidized, Direct Unsubsidized, and Direct PLUS loans, are offered by the U.S. Department of Education and typically feature fixed interest rates and various repayment options. For example, Direct Subsidized Loans do not accrue interest while the student is in school, during a grace period, or during deferment, as the government pays the interest during these times. In contrast, interest on Direct Unsubsidized Loans begins accruing immediately upon disbursement.

Private student loans are provided by banks, credit unions, and other private lenders, and their terms, including interest rates, are typically based on the borrower’s creditworthiness. Unlike federal loans, private loans may have either fixed or variable interest rates. Interest on student loans, regardless of type, accrues daily and is added to the principal balance, a process known as capitalization if unpaid, which can increase the total amount owed. Repayment usually begins after a grace period following graduation or a change in enrollment status, typically six months.

Mortgage Debt Explained

Mortgage debt represents another common and substantial financial commitment for millennials, reflecting their pursuit of homeownership. Despite facing significant financial hurdles, including high home prices and elevated mortgage rates, homeownership remains a significant financial goal for many in this generation. The average mortgage debt for millennials is higher than other generations, reaching approximately $261,484.

A mortgage is a loan specifically used to finance the purchase of real estate, with the property itself serving as collateral. The loan amount, known as the principal, is typically the home’s purchase price minus any down payment made by the buyer. Mortgage payments consist of two primary components: principal and interest. The principal portion reduces the original loan amount, while the interest is the fee charged by the lender for borrowing the money.

Mortgage loans typically have terms of 15 or 30 years, with longer terms resulting in lower monthly payments but potentially higher overall interest paid. In the early stages, a larger portion of each payment goes towards interest, shifting to more principal reduction as the loan matures. Borrowers typically choose between fixed-rate mortgages, where the interest rate remains constant for the loan’s duration, or adjustable-rate mortgages (ARMs), where the interest rate can change periodically based on market fluctuations. Besides principal and interest, monthly mortgage payments often include amounts for property taxes, homeowners insurance, and sometimes private mortgage insurance if the down payment is less than 20%.