Why are so many millennials in debt?

There may be hundreds of individual reasons why people in their late 20s to early 40s are in debt, but there are two big, big reasons.

1. Millennials make up the largest group of Americans by generation at 83.1 million people.
2. The first two decades of adulthood are when most people accumulate debt.

When you put two and two together, it's not surprising that it adds up to a lot of debt. According to Experian, the average millennial debt in 2020 was $87,448.

It's easy to say more millennials (most of whom were born between 1980-1995) are in debt because there are more millennials. But millennial debt is different from previous generations. In addition to asking why so many millennials are in debt, it's helpful to take a closer look at why young adults are facing a different debt than ever before.

What's different about millennial debt

With so many people managing so much debt, there's a larger-than-average percentage of millennials in debt. While the math adds up, many more factors are impacting the current start of borrowing across Generation Y, as millennials are also known.

If you are one of the members of the millennial generation, debt isn't a new topic. But unlike the older generation of Americans, millennials are on top of it!

Millennials know their debt

Being aware of debt is certainly a millennial trait — but that's a good thing. No, that's a great thing! According to its annual Credit Health survey, the financial company Discover determined that as of 2021, 93% of millennials knew their credit score.

This is more than knowing how much you owe. This is actively being aware of your credit history and the impact of your debt on your borrowing power. It also is a measure of how much you need to pay down debt to reach your future financial goals. That's a lot of knowledge about debt that your generation can use to its advantage.

Student loan debt is a much bigger bucket

Much ado has been made about the fact that millennials are mired in student loan debt. Based on when most people attend college, it shouldn't come as a surprise to anyone that a college graduate in their 20s and 30s hasn't paid off all their student loans. Unless, of course, you landed that prime money-making dream job.

Federal student debt is currently estimated at $1.6 trillion — a huge amount of debt and a hurdle that previous generations did not have to overcome. Your generation may know your financial position, but you also feel the emotional weight of all that debt.

Are millennials really in more debt?

To say millennials are in more debt, some comparisons should be made to American debt over the past few generations (or really anything past the end of the Great Depression). Compared to the generation immediately ahead of you — the Gen X adults (born between 1965-1980) — millennials have less debt in two common categories: mortgages and credit card debt.

A report published by the St. Louis Federal Reserve Bank in 2018 noted millennials had 15% less home mortgage debt than Gen X and only about a third of the credit card debt.

That's good news and bad news if you're a millennial. That greater awareness of your credit may serve you well when it comes to avoiding using credit cards. Unfortunately, the lower mortgage debt may be due to your inability to move towards home ownership. Here again, the blame may return to student loans.

That big bucket of student loan debt is hard to grasp until you compare it to Gen X. Millennial student loan debt is 300% greater than it was for the adults in the next age bracket above you.

Overall, a quarter of all Americans in the 18 to 34 age range (most millennials and a few of the oldest Gen Z) owe more than $30,000. This adds up to a 22% increase in overall debt from 2014 to 2019 — more than any generation in history.

The median amount of loan debt for millennials is more than $6,000 higher than when Gen Xers were the same age. That statistic alone definitely makes it sound like the easy answer is yes, your generation is really in more debt.

It's true that student loan debt deals a tough blow to a generation that has pulled itself up by its bootstraps after the Great Recession. Yet, 13% of millennials remain debt free, which is only slightly higher than Gen X's 11%.

How much debt do millennials have on average?

Keep in mind that millennials make up a group that includes a range of ages from those of you just finally able to rent a car on your own to those who remember when Ronald Reagan was president. That's a wide age group and your average debt reflects the range of life stages for all millennials:

Mortgage balance: $237,349
HELOC (home equity loan) balance: $40,496
Average outstanding student loans: $38,877
Auto loan debt: $19,011
Personal loan debt: $12,306
Credit card debt: $4,322

So, is this a lot of debt, or a fair representation of a generation that is living in its prime borrowing years?

How millennial debt breaks down

Looking at the average debt only tells part of the millennial story. Not all 83+ million millennials have student loan debt, and not all millennials have the same kind of debt.

67% of millennials owe some credit card debt
36% are still paying on their student loans
34% owe money on a vehicle
Only 26% have a mortgage
13% have personal loan debt
3% have additional debt (such as HELOCs)

Since we already know that millennials carry less credit card debt than their Gen X predecessors, it's not all bad news for millennials. You're not accumulating as much debt just through everyday spending. Sometimes you just say no — a lesson the Gen Xers ought to have learned in the 80s.

Looking closely at those top debt categories of your and your peers' debt will give an even sharper view of how millennial debt breaks down.

College education and millennial debt

Yes, student loan debt is a beast, but it also gives a healthy glow to the future of this generation.

Education statistics show that more millennials sought higher education opportunities than the generations before them. Between 2001 and 2016, the number of people aged 25 to 29 with at least a four-year degree grew by 25%.

In addition to the total number of your generation in school, the cost of a college degree continues to increase, upping the total cost. Do the math: it's an inevitable increase in loan balance during a time when other forms of financial aid were decreasing.

While the larger college debt is definitely a burden weighing on millennials, your generation's overall lifetime earning potential will be greater than that of Gen X, and even your Boomer parents due to your increased education.

As student loans get paid down, borrowing opportunities will increase. Even within your generation alone, student loan debt is 12% lower for those over age 30. Student loan debt may affect your ability to save up for a down payment on a home or even qualify for a mortgage, but your increased earnings may change that ability as you pay down debt.

Credit card debt and behaviors

Millennials continue America's love affair with credit cards, but compared to other generations, young adults are making stronger improvements in managing your credit card debt.

Experian reported that prior to the pandemic, millennials carried $4,712 in credit card debt. Gen X, however, averaged $6,028 — one too many trips to the mall for a generation whose social circle revolved around the retail environment.

Even credit card usage behaviors are better for millennials. In 2021, The Ascent noted that millennials were less likely than Gen X to max out their credit card. They were also more concerned about the impact on their credit score than both Gen Z (younger than you) and Gen X (older than you).

Putting all these pieces together, the percentage of millennials who have credit card debt — plus the amount of debt in general and considering more responsible credit card behaviors — equals a higher level of financial responsibility. As a millennial, you manage credit card debt with just as much intention as you likewise enjoy the convenience credit cards continue to offer.

Auto loan debt and the rising cost of automobiles

As mentioned, about one in three millennials have a car loan averaging around $19,000. While these numbers are on par with your parents, the pandemic may have aggravated the conditions for your borrowing opportunity. This one's not on you or your approach to debt.

The rate at which millennials have fallen behind in their car payments since the start of the pandemic has jumped from 1.66% to 2.14%. Keep in mind, that these results are rather short-term and may not indicate a trend.

You can blame the pandemic for the increase in the price of vehicles, too. As of June 2022, you can expect to pay $46,526 for a new car and $28,205 for a used car. This jump in the cost of a vehicle — new or used — may continue to move the needle in the auto loan category towards a more challenging type of debt for millennials.

Millennial mortgages and the American dream of home ownership

The percentage of home ownership gives a clear picture of the direction of millennials taking on mortgage debt. According to a 2022 report, 48.6% of millennials own their own home — nearly 30% lower than their parents' generation. Yes, this is likely heavily affected by the ever-nagging student loan debt, but it may also be a reflection of your different views of home ownership.

Millennials are shaking up lots of traditional aspects of American life, including their financial choices but also when they choose to get married and start a family. This may also delay or even completely change when, and if, you consider purchasing a home.

TaxAct also notes that millennials might have an aversion to large-scale borrowing after all the complications of your student loan debt. Your willingness, or unwillingness, to take on yet another financial burden, even if it can improve your overall net worth, may give you a reason to think twice before abandoning your apartment.

Likewise, being more financially aware of your credit score, as well as being focused on your long-term financial wellness, may give you a reason to consider the benefits and pitfalls of homeownership for your own financial gain.

Millennials are dealing with a lot of personal debt guilt

Despite what boomers may chide, millennials are not setting out to shake up the world deliberately. It just happens that your confidence in your decision-making and your responses to a changing world impact your choices about homeownership, debt, and life in general. Let's face it, financial stress weighs heavily on your choices.

The rising costs of child care and education also impact millennials' decisions about family life and the financial choices that come with raising a family. It's as much an emotional choice as a financial choice.

Your generation has more options to maintain health coverage and likewise avoid medical debt due in part to the wider availability of the insurance marketplace. You take advantage of health savings accounts so you can snag those extra tax-free savings. The worry of health care costs, though, may prove a strong motivator in caring for your physical — and financial — well-being.

In a report by the All State and National Journal Heartland Monitor, 68% of younger millennials (aged 25-29) felt consumer and non-mortgage debt impacted their decisions about marriage and home ownership. Not every choice is about the money, but it may be about how you feel about money and the stress it causes you.

Like other generations before you, millennials listed their top three financial worries as knowing how much to save (and finding enough money for savings), debt management, and retirement. Nearly 75% of millennials — so it's likely this includes you — say they are somewhat stressed about managing their finances.

The ever-evolving changes in technology that arrived with your generation, whether as simple as new entertainment options or more critically advanced such as health care, will continue to impact your borrowing behaviors. They will also add to your uncertainties about long-term financial self-care as you make daily choices and long-term plans.

The emerging millennial wealth gap

One last glimpse into the debt of millennials ties to the growing (and future) wealth gap. The average net worth of millennials is only 70% of the generation ahead of you when they were your age.

Worries about inflation and planning for retirement could add a one-two punch to your current and future net worth as your work to pay off your debt.

Again, with more advanced degrees (those student loans for college are going to come in handy one day), millennials will have more earning potential lifelong. Yes, the rising cost of home ownership, the cost of transportation, and interest rates could balance out into a zero-sum game, too. A study from 2016 found older millennials (those of you in your late 30s at the time of the study) were 40% poorer than your parents when they were in their 30s.

But wait, there is plenty of good news yet to come! Some millennials are still in their 20s and for this group as a whole, you are just coming into your borrowing years. Also, as your parents pass on their wealth, millennials stand to inherit large amounts of money from a sizable and financially sound generation.

Millennials also have one of the greatest assets on their side: time. Only Gen Z (born between 1995-2012) following in your footsteps can claim a greater advantage. Advances in technology, readily available and improving health care, and the earning power to pay down all that current debt may push you — and your Generation Alpha children — into a generation like no generation has ever seen.

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