- Personal Finance
Wage Caps and Financial Strain
Many people struggle financially at some point in their lives, but it seems like there is an undue burden on many Millennials. There are two main culprits in this predicament: student loans and low wages.
These issues are causing a stagnant economy because Millennials don't have the income to support the housing, retail or auto industry. This article will discuss the undue financial burden on Millennials caused by student loans and how their wages cannot carry this burden.
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Student Loan Facts
Student loans range in interest rates from .07% with the highest being 6.8% fixed rate. This means that if the interest rate is fixed, it will never change. Currently most fixed rate mortgages have a lower rate in the 3 percent range. So if an 18 year old student goes to college and borrows $10,000 for their first semester, they have a 6.8% interest tacked onto it after they complete school if they have a subsidized loan. If the loan is unsubsidized, then it starts accruing interest immediately. Unsubsidized loans can cause more problems down the road because that $10,000 loan turns into $10,680 when that student enters their second year (this is done by simple interest method for demonstration only). So before graduation the student has that debt load from one semester of school.
Student loans are a trillion dollar industry. That's trillion with a T! The average graduate has about $37,000 in student loan debt with an average monthly payment of $351 that gets paid over 10 years. That's debt that's causing many to go into more debt or living with their parents because being on one's own is unobtainable.
Many federal loans have programs that can be paid as the borrower earns. Private loans can cause more problems as many offer a one time reduction or up to 1 years hardship forbearance. Once you use them, there are gone. Consolidation can be an option because it can lower monthly payments, but it can also increase the loan term or interest rate. A current quote on a consolidation loan has been as high as 9.39%. Banks and the federal government are making a lot of money of of student loan interest.
Many Millennials are having problems paying their student loans. 6 million student loan borrowers are either in default or forbearance. There seems to be a reason for this: conservative employment wages.
Subsidized vs. Unsubsidized
How many student loans do you have that are subsidized?
Wage Caps, Gaps, and Underemployment
Many companies have a cap on what you can earn for the position that you are in. This is nothing new. However, it can be demoralizing for employees when they hit the cap because there is no incentive to stay with the company or continue to strive for excellence.
The author's current position has a wage cap of $14/hour, which will be reached during the next review period.. While that seems like a great wage, when that math is done out before taxes, the salary is $29,120. That's assuming the employee is working a consistent 40 hours a week. After taxes, insurances, rent, loan payments, and credit card payments, there is almost nothing left over to break out of debt and achieve goals like owning a home. Pay increases would help many Millennials as many thrive more on achievement than pay alone. As long as pay increases exist (not just a "bonus" once wage cap is reached because it gets taxed differently,) there might be less turnover and more economic stability.
As for wage gaps, it has been proven that men make more than women. Those with college degrees make more then those with only a high school diploma. Getting an education was supposed to stop the major wage gap. Not everyone can be a doctor, lawyer or pharmacist that make 6 figure salaries and support the educational debt they accrued. When a person changes companies, their pay temporarily is cut to start at the position minimum till after training. This also causes a wage gap because despite experience, the hourly rate might be only $11/hour. The wage gap is also what is keeping Millennials from getting out of a financial hole.
The final problem is underemployment. After the great recession many Millennials were underemployed. While the economy is still recovering, it is taking several people a few years to get into a decent paying job. Many have two jobs just to pay the bills, which are referred to as side hustles. Millennials drive Uber, work as servers, write articles or blogs and house sit to make extra cash to ease the financial burden. Many work an average of a 50 hour week because they need to. This is to afford the comforts of life like going out to dinner or socializing. This extra time spent working can have consequences.
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Consequences and Possible Solutions
With all this stress there are some consequences. Depression and poor credit being two of them. Depression is a serious illness that is partially caused by stress and overthinking. It is estimated that Depression will be the number one disability in the US by 2020. Not being able to pay the bills because of debt and wage disparities, I believe, are responsible for this estimate.
As for poor credit, late payments or being behind in debt do get reported. This can make the credit score go down, which can then effect what types of loans you are eligible for later including auto loans and mortgages. These can add to the stress of a Millennials' live as we are said to be poorer than our parents were at our age.
So what can be done? Senator Sanders highlighted some possible solutions during his presidential campaign of making public colleges tuition free and having a $15/ hour minimum wage. Those do not help Millennials right now though. Many have finished college and have those loans. Not all of us qualify for the loan forgiveness programs and we don't always make enough to pay the loans and pay rent. Something has got to give.
There are several problems with a higher minimum wage. The first is that with the wage caps discussed earlier, there is no reason to increase the wages as everyone would have a possible living wage. The second is that education would not necessarily make people strive for a better life because $15 an hour can be made at Walmart or other retail locations. I would hope that businesses would follow suit and increase wages to increase competition, but with many companies, it is not looking bright. Many companies have to make a profit, which many do by cutting benefits, salaries or hours for employees.
Student loans should be reviewed and renegotiated. Many are forgiven after 25 years of being in repayment, but 25 years is a long time to hold onto debt. Student loan rates shouldn't have rate changes where they increase. Perhaps if 80% of the loan is paid it should be forgiven. Not having this debt would stimulate the economy by Millennials spending on houses, cars and restaurants.
As for employers, the cultural shift needs to change. Employees need to be valued and compensated justly. Businesses are allowed to make a profit, but it should not be at the expense of the employees. Many employers do not take into account turnover costs. Turnover is when an employee leaves and then a new one has to be found and retrained. That hidden cost could not only drop productivity, but cost the company more by potentially increasing overtime and employee absenteeism due to stress. Happy employees make better employees.
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While this article points out the financial problems of the average Millennial, it is in no way an exhaustive list of issues facing Millennials. Also, with any generation, there are exceptions to these observations. Some Millennials have great jobs and are living their dreams.
There aren't clear cut answers on how to get out of this financial slump for this generation. Millennials are overburdened with debt and don't have an income to carry this debt load easily. Many work for a low wage, live at home and don't have disposable income. There are many who work 2 or 3 jobs just to pay their bills. All that is clear is that this burden must come to an end in order to have a better economic recovery.