Getting On The Right Financial Track After Graduation
Do you know anyone graduating this year? With the economy and the employment market on the upswing, many graduates have high hopes of starting their careers with a promising first job. Yet, if it’s not managed carefully, student loan debt can put a damper on grads’ dreams. According to the Project on Student Debt, an initiative sponsored by the Institute for College Access & Success, graduating seniors carried an average of more than $26,000 in student loans in 2011.
With that in mind, we’ve compiled some ideas that you can share with new graduates to help them take control of student loan debt, as well as their day-to-day finances.
Controlling student loan debt
- Know your loan repayment options. For federal loans, either guaranteed or made directly by the federal government, you may be able to reduce your payments by choosing a different repayment plan.
- With a graduated plan, your payments start low and then gradually increase, usually every two years. This plan may work best if you expect your income to increase rapidly.
- With an extended plan, you can stretch your payments over a period of up to 25 years, but you must have an outstanding loan balance greater than $30,000. Also, your overall costs may be higher because of the increased interest.
- With an income-based plan, your payments fluctuate each year based on annual income, household size, and loan balance. This type of plan may be a good choice if you expect your income to be low or unstable.
- Look into a loan consolidation program. These programs help simplify the repayment process by combining multiple student loans into one, possibly at a lower or fixed interest rate. Coupled with a discount for automatic payments, consolidating your loans may dramatically reduce your monthly payments. To learn more, visit www.studentaid.gov and click on Repay Your Loans > Loan Consolidation.
- Consider public service. If you spend 10 years in a field dedicated to public service (including the Peace Corps and AmeriCorps) and make 120 full, scheduled monthly payments on time, your outstanding loan balance may be eligible to be forgiven; for more details, go to www.studentaid.gov and click on Repay Your Loans > Forgiveness, Cancellation, and Discharge. In addition, Perkins loan balances can be reduced by 70 percent for two years of Peace Corps service and 100 percent for military service.
- Stay on top of payments. Missing loan payments doesn’t just hurt your credit. To collect on student loans, the government can confiscate your tax refund and even some of your wages (up to 15 percent of your disposable income). Unlike with other debts, there’s no time limit for the government and private lenders to sue you in order to collect student loans.
Keeping day-to-day finances in check
- Give online budgeting tools a try. Budgeting is a great tool to help you live within your means and prevent overspending. Gone are the days of Excel spreadsheets; now, user-friendly websites like Mint.com and Yodlee.com can show you where you’re spending most of your money, as well as organize all of your accounts (checking, loans, investments, and others) to help give you a complete picture of your finances.
- Watch your credit. Often, your credit score plays a role in determining whether you can lease an apartment, get a mortgage or a car loan, or even land a job. To help maintain a good score, be sure to make your loan payments on time, and don’t use more than 30 percent to 50 percent of any given credit line.
- Hang onto older credit cards. Lenders like predictability, and older credit cards in good standing demonstrate that you can manage credit, helping your credit score. If you want to avoid using a card, don’t close it; instead, consider just taking it out of your wallet and keeping it in a safe place.
- Pay off higher-interest debt first. Although some would suggest paying off student loans as fast as you can, many college seniors have at least one credit card, with an average of more than $4,000 in credit card debt, according to Credit.com. Depending on the card’s interest rate, it may make sense to pay off those balances before paying down student loans.
- Start saving for retirement early. Though it may be difficult to look ahead 40 years from now, saving for retirement early may pay off in the end thanks to the power of compound interest. If you start putting away $150 per month at age 25, you could potentially have $527,142 when you’re 65, assuming an 8-percent return. But if you wait another five years to start saving, you could potentially have only $346,376—a difference of $180,766.* Other considerations include:
- If your employer offers a retirement plan program, consider contributing enough to take full advantage of any matching contributions.
- A Roth IRA may be a great option to save for retirement while keeping the money available for emergencies. The sum of your contributions can be withdrawn tax- and penalty-free at any time, for any purpose, while the earnings can be withdrawn tax-free after five years and age 59½.
We’re here to help
Graduating students face a number of challenges when it comes to managing their finances. Beyond these tips, we’re happy to offer personalized advice to help you or someone you know start off on the right foot financially.
*This is a hypothetical example and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. Past performance does not guarantee future results.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax or legal professional regarding their individual situation. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than original value. © 2013 Commonwealth Financial Network®