Your Money Now

Student loan debt teaches personal finance to graduates

 

Special to The Miami Herald

You’ve just graduated from college and landed your first “adult” job. You dream of fancy vacations, designer clothes and a cool apartment. Then, like the average U.S. college graduate, you receive your first payment due notice for the $23,000 you’ve racked up in student debt.

And you’ve just learned your first adult lesson: It’s time to pay up.

What life really costs is a hard lesson to learn, said Ellen Siegel, a certified financial planner with Ellen R. Siegel & Associates in Miami. College loan debt can be a big anchor around the neck of a recent graduate who is ready to enjoy the rewards of years of hard work in the classroom. On July 1, the interest rates on some federal loans doubled, which means future borrowers will face a larger burden.

“The biggest challenges for [graduates with student loans] are prioritizing the debt as the first thing they pay off, and not quantifying what life really costs,” Siegel said “They’re so in a hurry to get a paycheck and not be impoverished students.”

Johnny Aguilar De Dios of Miami graduated from Florida International University in April with a bachelor’s degree in psychology and more than $20,000 in student loan debt. He works 17 to 28 hours a week at Best Buy Mobile in Doral while he looks for a full-time work in his field.

“Everything I make is going towards living expenses like gas and food,” said Aguilar De Dios, 24. “Any little money that is left over is going towards savings, or to pay on credit card bills and my car note. I haven’t started paying my student loan yet.”

Young adults graduating with high hopes and a burden of student debt need to have with a firm grasp of their financial situation in order to stabilize it, experts say.

Start with good habits

To a recent college grad, the first full-time job may come with a paycheck that looks like it will last forever. “To someone who has only worked part-time, $40,000 may seem like a tremendous amount of money,” said Ashley O’Kurley, a certified financial planner with John Hancock Financial Services in Miami. “But if it’s the first time on your own, the bills will add up quickly.” You have to watch spending and practice living within your means, from the start.

When it comes to financial planning, so much is habit based, O’Kurley said. “The choices you make and the habits you develop will affect you throughout your life,” he said. “Make good habits.”

Get a look at the big picture

If your parents have a financial planner, ask for a free consultation. “I don’t know any of my peers who would not give the child of a client an hour,” Siegel said.

Learn the terms of your student loan, so you can understand your payment options. Stafford loans have a six-month grace period, while Perkins loans offer a nine-month period before the first payment is due. The grace period for private and other types of federal loans vary.

Federal loans typically have a 10-year term, but there are ways to extend the term and lower your payment if you can’t afford the monthly note. The U.S. Department of Education, www.studentaid.ed.gov, has information on deferment and forbearance programs that delay repayment. The Project on Student Debt, www.ibrinfo.org, has information on income-based repayment plans.

Aguilar De Dios applied for and received forbearance, which delays the first payment of his federal student loans until January 2014. “The loan will continue to build interest, but it will delay the payments until I am on more sound financial footing,” he said. “I firmly believe that a new job with better hours and better pay will help me manage my finances.”

Make a budget

“People have no idea where their money is going,” said Austin Frye, a certified financial planner with Frye Financial Center in Aventura. “They don’t want to budget, because they don’t want to know.”

Download a spending plan worksheet at www.mint.com or www.quicken.com and figure out how much real life costs, Siegel said. Factor in student debt, housing, transportation, clothing, food, entertainment and health insurance. If you don’t have enough money to cover everything, figure out where you can cut. Can you live in a smaller apartment? Buy a used, instead of a new car? Get a roommate?

Look at your monthly earnings. Subtract 25 to 30 percent for taxes. Now subtract your expenses. What’s left?

“If it’s zero or below zero, you either have to cut the expenses or increase the revenue,” Frye said.

Just say no to credit cards

Recent grads are bombarded with credit card offers, and some mistakenly take them all, Siegel said. “Some young adults don’t understand that credit cards have to be paid back, and that you have to pay interest,” she said.

Be strategic about the debt you incur. Prioritize, Frye said. After your student loan debt, housing should be your next priority. Because mortgage interest rates are at record lows and real estate prices are still down, it may be an opportune time to buy, he said. Consumer debt, or using credit cards to finance things like new clothes or fun, should be your lowest priority, he said.

Remember that credit cards often come with the highest interest rates, O’Kurley said.

“Pay your discretionary expenses like going out to a bar with friends, only in cash,” Siegel said. “When you’re not using plastic, money is very real.”

Maintain your credit

Work out a plan to pay your debt on time, or your credit will take a hit. One way is to set up automatic debits from your checking account to pay your student loan, Siegel said.

“Maintain the integrity of your credit,” Frye said. “A lot of people are casual about accumulating debt and declaring bankruptcy. People have to be careful about that.”

A bad credit score can not only make it more expensive to get more credit when you need it, through higher fees or interest rates, it could also cost you a job.

Frye said his company recently declined to hire a good job candidate when they learned the person had bad credit. “The credit report is a marker of how a person handles responsibility,” he said.

Manage your debt

Uncontrolled debt is the silent killer of a financial plan, Frye said. The clients who really sink, who end up in foreclosure or with a mountain of bills they can’t pay, are the ones who never learned to take control, he said.

You don’t have to avoid debt altogether, because you need it to buy a home or a car. “It’s your best friend and your worst enemy,” he said. “You just have to be smart about it.”

Buy at the right price, at the right interest rate for the right amount of time, he said.

“If you can manage your debt throughout your life, you can always do well,” Frye said.

Postpone leaving home

Mom and Dad shouldn’t jeopardize their retirement by paying off your debt, but they can give you a place to stay. Being a “boomerang kid,” or one who returns home after college, may be a good strategy to solidify your financial footing, Siegel said. Use the time to maintain a stable job and income, save for a car or apartment or work your way up to a better paying job.

Aguilar De Dios lives at home with his parents and a younger sister. He said he has seen friends who move out struggle to pay their bills. “I’m saving money, and being more conscious of where my money is going and what I am saving for,” he said.

“The world is different now, it’s a very legitimate choice to go home,” Siegel said.

Go back to school

Returning to school will delay the payment of your student loans, but if you need to borrow more, you’re digging yourself deeper in debt, Siegel said. Make sure the career field you want will allow you to pay off that debt.

Here’s a cautionary tale: One middle-aged client with three doctorate degrees and $400,000 in student loan debt has chosen a career field that will never allow him to pay off his debt, Siegel said. “He continues to struggle with paying all of his expenses,” she said.

Invest in yourself

Good money management is more than paying off your highest interest debt first, O’Kurley said. “You have to be balanced, and pay down debt, watch spending, and put something aside for emergencies.”

Take advantage of an IRA, 401K or 403B offered by an employer, at least up to the company match. Then you can take advantage of the snowball effect of compounding interest, Siegel said. Frye said to look at your 401K plan’s website for wealth-building tips, like how much you need to save for how long to meet your goals.

“Look at 10 years ahead and decide where you want to be, then figure out what you have to do to get there,” Siegel said.

Aguilar De Dios said he would like to go to graduate school, and is studying for the entrance exam. “I’m investing in myself, to be a better person, and to have a better life,” he said.

Above all, don’t let debt drag you down, O’Kurley said. “Remember why you went to college in the first place,” he said. “There may be a big burden of debt hanging around your neck, and debt can be daunting, but investing in yourself is going to worth it in the long run. Improving yourself through education is the value that you will get out of this debt.”

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