How Gen Z Plans To Avoid Student Loans

Many young American adults who went to college took on some kind of debt — including student loans — to fund their education. According to the Federal Reserve, the median amount of educational debt in 2021 was between $20,000 and $24,999 for those with outstanding debt for their own education.

Meanwhile, the cost of college continues to rise. The average tuition and fees for the 2021-2022 academic year ranged from $10,740 for a public four-year in-state school to $38,070 for a private nonprofit four-year school, according to CollegeBoard. It’s no surprise, then, that students are seeking school loans to pay for their education. However, Generation Z might be reversing the trend by looking for other ways to pay for college, according to this survey.

TD Ameritrade surveyed more than 3,000 adults and teenagers who are either Gen Z (ages 15 to 21), young millennials (ages 22 to 28) or parents (ages 30 to 60), and compared their attitudes about attending and paying for college. Here’s what the survey found about how they’re planning their finances for the future.

TD Ameritrade asked Gen Zers and young millennials if they have attended or plan to attend college or trade school. Among the respondents, 83% of Gen Z and 81% of millennials said yes. However, when parents were asked if they expect their children to attend college or trade school, 96% said yes.

“As college expenses continue to rise at a rate that’s greater than inflation and student debt is reaching record highs, young Americans are beginning to change how they are thinking about college,” said Dara Luber, senior manager of retirement product at TD Ameritrade. “Young Americans are concerned about college costs and the debt that they may incur, [and] they are looking at a number of alternatives to college.”

In recent decades it’s been pretty typical for Americans to go straight from high school to college and attend a traditional four-year program, but Gen Z is changing the status quo.

“Many students believe that they should attend a four-year school because this is what they are expected to do,” Luber said. “However, what we see is that many students are also considering a range of cost-effective pathways, as college costs continue to rise and average college debt continues to grow.”

According to the survey, 46% of Gen Z respondents said they would take online classes, 36% said they would attend community college before moving on to four-year college and 31% said they would take a gap year between high school and college — a decision that would let them earn money to help pay for college before enrolling.

While these are the main methods Gen Z plans to use to lessen their college costs, alternative pathways to a higher education are also being considered.

Roughly one-fifth (21%) of Gen Z said they would consider attending community college instead of a four-year college; 19% said they would complete a two-year degree instead of a four-year degree; and 18% would delay college due to the expense of paying for it.

TD Ameritrade asked Gen Zers and young millennials to rate their stress level on a scale of one to 100 about a number of factors related to attending college. Gen Z rated their stress level about tuition and living expenses a 74, while young millennials rated it a 66. The younger generation was also more stressed about student loan debt, with Gen Z rating their stress level a 63 and young millennials rating their stress level a 59.

“For most young Americans, the college experience of today is quite stressful,” said Luber. “Tuition and living expenses are part of the stress, with six in 10 young Americans being stressed about their student loan debt. Student debt is becoming more prevalent, as nine in 10 (94%) young millennials incurred some debt through their college education, up 36% from when it was measured in our 2017 survey.”

The majority of young Americans are currently saving for college, with 62% of Gen Z saying that they are setting money aside for higher education expenses. On average, Gen Zers have saved $4,734 to help cover college costs.

One reason Gen Z is dedicated to saving for college is that the average Gen Z American plans to pay for half of their college education, the survey found. Most Gen Z respondents (30%) plan to pay for 26% to 50% of their college costs, while 27% plan to pay for 76% to 100% of their college costs. However, many are depending on family contributions.

“In many cases, the whole family is chipping in, with 84% of parents currently saving for their child’s education,” Luber said. “In some cases, grandparents are also participating by contributing to their grandchildren’s education, with a quarter of them chipping in.”

TD Ameritrade asked Gen Zers how their college is currently being paid for or will be paid for, and 43% said they would be paying for it — at least partially — from their own savings. Thirty-nine percent would be using their parents’ savings, 14% would be using their grandparents’ savings, 8% would be using a college savings plan from their parents and 3% would be using a college savings plan from their grandparents.

It’s clear that Gen Z is being proactive about making their college experience more affordable. But before figuring out where and how to cut costs, Luber said the first step young Americans should take is to talk to their parents about their parents’ plans for the future to ensure they are on the same page.

“Parents can save early and often — even if it’s a small amount every month,” said Luber. “529 college savings plans could be one option. And although they vary from state to state, they generally offer federal tax-deferred growth and withdrawals that are free from federal income taxes. There are no income or age limits, and many plans have high lifetime contribution limits.”

In addition to their own savings and family contributions, “Gen Zs are hopeful that scholarships and part-time employment will help cover the cost of college,” said Luber.

Less than half of Gen Z Americans — 42% — said they plan on paying for or are already paying for college with student loans. Most plan on paying for or are already paying for college with scholarships, grants and bursaries (58%). Other options include taking on a part-time job while at college (48% of respondents); working a summer job (46%); and applying for financial aid (43%). In addition, one-fifth of Gen Zers plan on using work-study income to help pay for their college education.

Working a part-time job is the most common way Gen Zers are earning money or plan to earn money during college, but they are open to other options as well. Twenty-three percent said they have or expect to have a paid internship, 22% plan to participate or are participating in a work-study program, and 16% are working or plan to work freelance and gig jobs.

“Young Americans are starting to realize that to tackle their worries over potential student debt, they need to take some action,” Luber said. “Working part-time is one way to reduce student loan debt.”

While nearly half of Gen Z (48%) plans to work a part-time job during college, only 36% of young millennials said they worked part-time jobs. Gen Z is also taking on more summer work, with 46% saying they have worked or plan on working a summer job compared to only 25% of young millennials.

Interestingly, the survey found that if millennials could give their 18-year-old selves any advice regarding affording college, the largest percentage said they would work harder to earn money for college.

“Millennials’ top advice would be to work more in college, and it seems that Gen Z is certainly open to that idea,” said Luber.

Many young Americans now think about saving money when considering which school they will attend. The survey found that 73% of respondents either chose or would choose a less expensive college to avoid debt.

When it comes to millennials versus Gen Z, the latter group is more optimistic about the process of student loan repayment. On average, Gen Z Americans plan on paying off their student debt by age 33, while the average young millennial said it would take them until age 37. Twenty-seven percent of Gen Z respondents plan to pay off their debt by age 29 compared to 26% of millennials, while 47% of Gen Z plans on paying off their debt between ages 30 and 39 compared to 40% of young millennials. Only 8% of Gen Z said they think they will be paying off loans at age 50 or older versus 15% of young millennials.

“Gen Z is more optimistic about paying off their college loans than young millennials, not only because they recognize the costs of college — but they are also doing something about it,” said Luber.

The TD Ameritrade survey found that Gen Z — the generation that is currently in or will soon be attending college — is on the path to taking on fewer loans than the previous generation. They’re doing this by using more cost-effective pathways to higher education, such as taking gap years and enrolling in online courses for college credits; by being proactive about saving for college costs; by choosing less expensive schools to avoid debt; by paying for college through financial aid, scholarships and grants; and by working during school and summers. It remains to be seen whether their proactive planning and wise financial choices will be able to reverse student loan trends, but it’s clear that many Americans in this generation are on the right track.