As college seniors turn their tassles and leave campus, most are confronting a new reality: paying for life on their own. Many are hit with what one professor describes as the triple witching of higher education: the obstacles involved in paying off student loan and credit card debt while trying to find a job in a depressed market. But the outlook for new grads isn’t so overwhelming if they have plan.
GRADUATING SENIOR Shira Katsir is preparing for the big ceremony and the day that will usher in a new chapter: financing life after college.
“It’s just kind of in my face,” she said. “I have to figure it out, and I don’t know where to start. It’s overwhelming. It’s definitely overwhelming.”
Katsir doesn’t have a job lined up yet and owes $4,000 in student loans — less than many new grads. Still, she’s not sure how she’ll pay it off.
It’s a predicament facing many seniors, says Prof. Robert Manning at the Rochester Institute of Technology. And it’s the reason he’ll start teaching a mandatory financial literacy course for freshman at R.I.T. this fall.
“We’re talking about an unprecedented level of credit card and student loan and even other forms of debt now that require students to be aware of both financing their existing debts as well as planning for investments in the future,” he said.
The first step for new grads involves getting a credit report, says Manning.
“Make sure it’s accurate,” he said. “And then (they should) itemize their debts, finding out what the terms are, what the cost of their credit is and see if they can begin reducing it.”
Then, make a list of your debts. Who do you owe? What’s the interest rate? And when is it due?
Take advantage of credit cards offering low introductory rates.
“Two percent a month is a lot better than 18 percent,” said Jesse Vickey at Cap and Compass, which offers seminiars for recent college grads. “And if you keep switching from card to card, you can save a fair bit of money.”
But remember, that low rate usually goes back up after a month or two.
Trying to figure out what to pay off first? Vickey says you should always put your money where the highest interest rate is.
“If you’re paying off 2 percent or 4 percent student loans that are extremely low right now versus waiting to pay off those 18 percent loans, you’re putting yourself in the hole,” he said.
To dig yourself out, you’ll also need to keep track of money coming in and going out.
“Start with a budget no matter what your income,” said Suzanne Olson of ihatefinancialplanning.com. “If you are working part-time or if you did land yourself a quote-unquote real job, you are going to want to get a handle on how you’re spending your money.”
And make sure to earmark some of that money for savings.
“You want to make a conscious effort to save 20 to 25 dollars a paycheck or a month in a separate account that you can use for your emergency type spending that will come along,” said Olson.
When it comes time to stash those savings, again, look at the rates. The average rate on a regular savings account is less than one percent — compared to over two percent for a high yield money market account. That will at least help your emergency fund keep pace with inflation.
And start building your nest egg now. Open an Individual Retirement Account on your own or contribute to the 401(k) plan at your new job. You can’t take out the money until you’re 59-1/2. But, then again, Uncle Sam won’t get it either: your money will be growing tax-free.
For new grads like Katsir, the key to making smart financial choices is to know what the options are. That’ll make the next chapter much easier to read.
To get a better handle on your debts and the difference paying off an extra $5 a month can make, log on to the debt zapper calculator on Prof. Manning’s Web site.