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Financial Advice for College Graduates
With protests on college campuses making headlines, it’s easy to lose sight of one important fact: About 4 million Americans will graduate from college this year, and for them, life is about to get more complicated.
The good news is that a robust job market has provided many well-paying jobs.
The average annual salary for recent college graduates ages 22 to 27 was $60,000 last year, according to the New York Federal Reserve. That’s a big jump from the $36,000 high school graduates earn.
The bad news is that more than half of college graduates will leave school with student loans.
For them, the first task is to drill down and detail what is owed, the interest rate associated with each loan, the monthly payment amount and when the first payment is due.
If you have a federal loan, all of this information can be found at studentaid.gov, but if you have a private loan, you will need to contact the lender directly.
There is usually a grace period of 6 to 9 months during which you are not required to make payments, but as the interest clock is ticking, start as soon as possible so you can quickly reduce the outstanding balance.
To ensure you don’t miss a payment, set up an automatic withdrawal from a bank account. If you cannot make the monthly payment on a federal loan, consider an income-driven repayment plan, which can reduce your monthly payment by extending the amount of time you have to pay off the loan.
Whether or not you owe money, you’ll need to keep track of where your money is going.
This is an easier task than creating a budget which often looks more like an ambitious document and not a realistic action plan.
There are plenty of apps to help, but the goal is to ensure you have a firm grasp of what is a “must” (loan repayment, car payment, utilities) and what is a “want” (a friend’s destination wedding, tickets to a sporting event or concert).
In the list of “must haves”, I did not include rent. This is because in many parts of the country, still high prices are forcing many recent graduates to return to the nest, where they can accumulate enough money to launch themselves fully.
In fact, it’s better to return home than to dive into the rental market and experience stress every month or, even worse, resort to your credit card when an unforeseen emergency arises.
With your cash flow in hand, you can establish a monthly amount that will help you tackle what I like to call “The Big Three”:
1) Reducing consumer and student debt
2) Establishing emergency cash reserves (6 to 12 months of living expenses)
3) Maximize retirement contributions.
Even if cash flow is tight, if a recent graduate’s new job includes a retirement plan, try to contribute up to the matching amount, if any. If there is a Roth option, use it, because prepaying taxes on contributions now, albeit in a low tax bracket, will likely pay off in the future.
Even if health insurance is offered through your employer, it may be cheaper for graduates to stay on their parents’ health plan, which they can do until age 26. If you use your employer’s insurance, consider a high-deductible plan, which may be more affordable.
Finally, don’t forget to establish good habits around security and credit.
It is vitally important to pay bills on time, protect personal information and review your credit report every 12 months at Annualcreditreport.com – if there are errors, correct them.
Jill Schlesinger, CFP, is a business analyst for CBS News. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check out her website at www.jillonmoney.com.