Financial Advice for College Grads
With campus protests grabbing the headlines, it’s easy to lose sight of an important fact: about 4 million Americans will graduate from college this year and for them, life is about to become more complicated. The good news is that a robust labor market has provided many with well-paying jobs. The median annual wage for recent college graduates aged 22 to 27 was $60,000 last year, according to the Federal Reserve of New York. That’s a big jump up from the $36,000 that high school grads earn.
The bad news is that over half of college grads will be leaving school with student loans. For them, the first to-do item 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 that lender directly.
There’s usually a grace period of 6 to 9 months, during which you are not required to make payments, but since the interest clock is ticking, start as soon as possible so you can whittle down the outstanding balance quickly. To ensure that you don’t miss a payment, establish an automatic draft from a bank account. If you can’t make the monthly payment on a federal loan, consider an income-driven repayment plan, which can reduce the monthly amount by extending the period of time you have to repay the loan.
Whether or not you owe money, you will need to track where your money is going. This is a far easier task than creating a budget that often feels more like an aspirational document, not a realistic plan of action. There are a lot of apps to help, but the goal is to ensure that you have a firm grasp of what is a “must” (loan repayment, car payment, utilities) and what is a “want” (friend’s destination wedding, tickets to a sporting event or concert).
In the list of “musts”, I did not include rent. That’s because in many parts of the country, still-high prices are forcing many recent college grads to return to the nest, where they can accumulate enough money to fully launch themselves. In fact, it is far preferable to move back home than to plunge into the rental market and feel stress every month or even worse, turn to credit cards 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”:
Reduction of consumer debt
Establishment of emergency cash reserves (6-12 months of living expenses)
Maximizing retirement contributions. Even if the cash flow is tight, if a recent grad’s new job includes a retirement plan, try to contribute up to the match if one exists. If there’s a Roth option, use it, because paying taxes upfront on contributions now, while in a low tax bracket, will likely pay off in the future.
As far as health insurance is concerned, even if there’s an option through an employer, it may be cheaper for grads to stay on their parents’ health plan, which they can do until age 26. If using employer insurance, consider a high deductible plan, which can be more affordable.
Finally, recent grads should establish good habits around security and credit. It is vitally important to pay bills on time, to guard your personal information, and to review your credit report every 12 months at annualcreditreport.com, if there are errors, correct them.