How to Get Out of Debt: A Guide for Millennials

By Jon O'Donnell Updated on May 13, 2019

Across the country, many millennials share a common goal: Paying down their debt as swiftly and smartly as they can. No generation has invested more heavily in its future through student loans, with millions of millennials making hefty payments each month. If you’re one of these young Americans working hard to address your debt, you’ll want the confidence of knowing you’re doing it right.

That’s where this guide’s actionable insights can help...

In this article, we’ll show you how to make your debt-free dreams a reality as soon as possible. First, we’ll cover some general tools and tips for managing any debt you’re dealing with. Then we’ll dive into specific strategies for tackling the kinds of debt millennials face most often: credit card and student loan debt. If you’re ready to see your debt decline, these simple solutions can help you get started.

austin-schmid-37423-705338-edited.jpg

Tips for tackling any kind of debt

Get to know your loans

Approaching any problem with incomplete information is difficult. Recent research shows many millennials are attempting to do exactly that. According to a 2016 survey, 37% of millennials weren’t aware of their loans’ interest rates, and 15% didn’t even know how much they owed.

If you’re unsure of these details, we can understand where you’re coming from. It can be stressful even to contemplate these aspects of your debt load. Maybe you’ve recently moved from your parents’ home, and your paperwork is scattered across several boxes. But until you’re intimately familiar with the details of your loans, you’ll never know if you could be paying less or reducing your debt more swiftly.

Gathering the following information is an essential first step in forming a plan because it will inform every action that follows. Obtain this list of details about every one of your loans:

The info you need to tackle your debt

Gather the following details for each of your loans
Lender Institution Which organization holds your debt currently? Gather contact information for the specific department that manages your debt, in case you need to get in touch later.
Amount owed What's your total balance at this time?
Interest Rate What percentage are you being charged on your debt balance? Note whether your rate is fixed or variable. If the latter, determine if there's a cap on how much your interest rate could increase.
Loan term Under your current plan, how long are you projected to make payments? Are there any penalties for accelerating that timeframe paying more each month, should you be able to do so?
Monthly payment How much must you pay each month? What are the suggested and minimum payment amounts, and could you possibly pay more?

With this information in hand, you can take action to decrease and eliminate your loans.

Build a budget

Too often, the road to continued debt is paved with good intentions. Unless you form a concrete plan for attacking debt, you could be stuck regretting the results of your free-form spending and saving. That’s particularly true for millennials who are still getting the hang of the earnings and expenses of adult life. Setting a realistic budget is a crucial tool in achieving debt freedom incrementally.

Budgeting techniques vary in their exact approach of tracking your cash, but they share a central aim: to ensure you can cover your fixed costs and hopefully save some more on top of that. By making debt payments a non-negotiable on your budget list, much like your rent or electricity bill, you can get a clear sense of how much disposable income you have left over. The Federal Trade Commission offers some good templates for making a cash flow budget of your own, free of charge.

Realism is the best budget philosophy. Don’t necessarily shoot for the moon or your ambition could backfire. For instance, a budget that allots $100 in food for a full month may not be realistic. If your plan to be frugal isn’t feasible, there’s no point in budgeting in the first place.

Prioritize loans with the highest interest rates

If you’re a millennial, there’s a good chance you have more than one loan and that their respective terms differ. Even if you can afford to pay down all your loans simultaneously, it’s smart to eliminate those with the highest interest rates first. That’s true across all debt, whether you’re paying for a new car or college. Doing so could save you thousands over the term of your loan.

This may seem like a counterintuitive approach if your largest loan doesn’t have the highest rate: For some of us, targeting the biggest challenges first makes sense. Or you might be eager to eliminate small loans so that you can celebrate freedom from at least one lender. If these approaches keep you motivated, we’re not necessarily knocking them. However, you should know you’ll pay a bit more by approaching your debts this way because the math is on the side of emphasizing interest.

Level with your lenders

If you have trouble making ends meet given your monthly debt payments, your lenders might be able to work with you. After all, they’d likely prefer to get paid something gradually than receive nothing and turn your debt over to a collections agency.

Lender flexibility varies significantly, and they might charge you more in the long run by changing your loan terms. But there’s no harm in suggesting a few solutions that are advantageous to you. For instance, you can ask that your payment date is changed to fall right after you get paid, so you’re more likely to have sufficient funds. If your trouble making payments is due to a temporary challenge of some kind, like looking for a new job after graduation, let them know that’s the case. They may offer a short-term alternative to your current payment obligation as a result.

Get an expert on your side

Free or low-cost debt counseling is available to you through many institutions. These counselors can help you evaluate your options and employ many of the strategies discussed in this article. Nonprofit organizations are a great resource; after all, you’re probably not anxious to spend more to reduce your debt.

Just be sure to clarify the cost of your counseling before you jump in because some less-than-reputable agencies hide their fees. To ensure you’re getting accurate and unbiased advice at a fair price, make sure your debt counselor is accredited.

Consolidation can help

Dealing with multiple lenders can be logistically and emotionally taxing. Debt consolidation offers you the chance to replace multiple loans with a single line of credit. If the prospect of less paperwork sounds appealing, this option could be for you.

In basic terms, your new single lender gives you a loan to pay off your existing loans. From there, you pay your one creditor back. While the process can simplify your debt arrangement, it won’t make your debt disappear. Your monthly payments could be lower, but you’ll still need to be responsible for making payments and avoiding new debt while you’re at it.

New call-to-action

Credit card debt solutions

In addition to the debt reduction strategies above, we want to explore some tactics specific to particular kinds of debts that many millennials face. First, let’s cover some ways you can tackle credit card debt.

Look at low-interest balance transfers

This option is one form of consolidation specific to credit card debt. Many companies offer their borrowers the chance to combine their various debts into a single account. For a specified period, that new account will be subject to low interest or none at all. That interest abatement can bring huge relief to those with significant debt across multiple cards.

That said, it’s important to be smart about knowing the terms you accept. Some companies impose high fees for taking advantage of balance transfers, which would effectively erase much of the benefit to you. A reasonable fee would amount to 3 percent of the total balance transferred.

Resist the minimum

We get it: Of course, you’d like to pay more than the minimum. But you might not realize just how much paying off slightly more each month could save you in the long run. Minimums effectively prolong your debt, doing little to address your loan principal. You’re paying to avoid delinquency and default rather than solving the underlying problem.

For instance, say you have $3,000 in debt with a 14% interest rate. Paying just the $65 minimum payment, your debt will take more than 17 years to pay off. If you paid just $100 each month, you’d pay off your debt 14 years sooner.

Student loan debt solutions

For many millennials, student loans are the single greatest source of debt concern. Thankfully, there are many options at their disposal specific to student debt. We’ll cover them in detail below so you can assess whether each is a viable tactic in your case.

Consolidate your government loans

Federal student loans can be combined into a single consolidated loan, eliminating competing lenders and paperwork. This could save you plenty of headaches and clarify your path to repayment. You can even switch variable-rate loans to one fixed-rate alternative, making your interest payments more predictable.

Consolidated loans can offer opportunities to lower your monthly payments, though often with the caveat that your loan term will be extended. You can use our calculator to determine how consolidation might help you.

Look at options tied to your income

In addition to consolidation, the government also offers income-based repayment plans. These options adjust your payments to an amount you can afford based on what you earn. That can mean lower monthly payments and less fear that your salary won’t permit you to address your debt incrementally. For many millennials in entry-level positions, this option keeps payments affordable in the present, though they anticipate paying more every month in the years to come. During periods of illness and unemployment, you may also be able to defer payments as necessary.

Additionally, these plans include forgiveness for your remaining loan balance after 20 or 25 years. That means the prospect of endless debt is eliminated. We should note that these income-based solutions vary significantly, and their distinctions can be confusing. Before leaping to an income-based option, you’ll need to compare and contrast financial jargon to see which could work best in your circumstance. The Comet guide to these plans and their advantages can help you sort through the details.

Refinance for a better rate

While consolidation is technically only possible with federal loans, refinancing expands your options to the world of private lenders. While refinancing eliminates many of the options that the government offers, such as income-based repayment plans, the choice makes sound financial sense for many Americans.

That’s because borrowers benefit from lender competition in the private marketplace. When a wider variety of lenders are vying to work with you, you can secure a lower interest rate and smaller monthly payments. While it’s not the best choice for everyone, refinancing can bring significant relief to those struggling with unsustainable loan terms. The Comet guide to student loan refinancing covers all the advantages to consider. 

The debt-free future

Whatever the size and source of your debt, the strategies we’ve described above can put you on the path to repayment. While these actions can dramatically improve your debt outlook, you’ll likely need to remain patient while you make progress. There’s a reason debt repayment is structured over a significant period: You’ll probably need it.

Keep in mind that slow and steady progress is entirely fine. Hopefully, your debt represents a significant investment in your future. If that’s the case, your debt is a good problem to have, and you can feel proud of addressing it incrementally.

As you move toward debt freedom, Nitro can help with more tips and insights for building a strong financial foundation. From daily matters, like saving and spending, to long-term goals like retirement, we can guide you toward a thriving future. Check back with us often for new articles and resources to help you manage your money.

Published in: Student Loan Debt

About the Author
Jon O'Donnell

Jon is a writer and marketer for Nitro who is passionate about bringing transparency to the student loan process along with providing families with the information needed to make smart financial decisions. He also just recently refinanced his student loans allowing him to pay them off 5 years faster all while saving an additional $152/month. As he continues to pay them off himself, he strives to help others do the same. Jon also has a long history of connecting people with educational opportunities to help them improve their careers and their overall personal finances. In his free time you can find him reading travel blogs and researching destinations around the world in search of his next adventure. Read more by Jon O'Donnell