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12 Financial Tips For Debt-Burdened New Grads

Do you know anyone walking across the commencement stage this month? Unfortunately, a diploma isn’t the only thing they’ll be walking away with. As student loan debt has recently surpassed credit card debt, the average student is now carrying over $25k in student loans and graduating in a job market with an unemployment rate over 8%.

To make matters worse, the rates on new undergraduate student loans for 7 million students are set to double to 6.8% this July. This is an important issue for millions of students and their families all across the country. But while both political parties claim to want to keep rates low, partisan bickering has paralyzed the U.S. Senate on this issue. So instead of waiting for the politicians, here are ten things new grads can do to take control over their student loan debt and the rest of their financial future:

1) Keep that starving student mindset: A recent survey showed that a majority of young people between 18 and 34 admit that they waste money on things they don’t really need and would like to scale back their spending. The good news is that most college students have already been living on a limited budget so they wouldn’t have to make a major adjustment to maintain their frugal lifestyle into their working lives. This can include living with roommates, keeping an older car longer, and not spending too much on discretionary expenses like shopping or eating out. Keep in mind that it will be a lot harder to change your spending habits once you get used to a more expensive lifestyle.

2) Take advantage of retirement accounts. When you start that new job, be sure to contribute at least enough to your retirement account to get any matching contributions your employer is providing you. Otherwise, you’re leaving free money on the table. A Roth IRA can also be a good place to save for retirement while keeping the money available for emergencies. That’s because the sum of your contributions can be withdrawn tax and penalty-free at any time for any purpose while the earnings can be withdrawn tax-free after 5 years and age 59 1/2.

3) Create and stick to a budget. A budget can help you live within your means. Just don’t forget to include savings for emergencies, short-term goals like a vacation or a home purchase, and long-term goals like retirement. To keep you from overspending, you can track your expenses for free online with sites like mint.com and yodlee.com. Both sites also have mobile apps for both iPhones and Android smartphones.

4) Watch your credit. Your credit score can help determine whether you can get a mortgage, a car loan, and even a job. The most important things are to make sure you make loan payments on time and that you don’t use more than 30-50% of any given available credit line. In addition, be careful of closing your oldest credit card since that would shorten your credit history, which is also an important component of your score. Get your credit score, a credit report card (and you thought you were done with report cards), and more ways to improve your credit score for free on sites like creditkarma.com and quizzle.com.

5) Pay off higher interest debt first. It might be tempting to pay your student loans as fast as you can, but student loans aren’t the only debt that most graduating students have. According to a Sallie Mae study in 2009, over 90% of college students had at least one credit card and graduating seniors had an average of over $4k in credit card debt. With an average interest rate of almost 17% on student credit cards, paying these off should be a higher priority than paying down student loans early.

6) Know your student loan repayment options. For federal loans, either guaranteed or made directly by the federal government, you can reduce your payments with a graduated, extended, or income-based repayment plan. With the graduated plan, your payments start low and then gradually increase, usually every 2 years, which is best if you expect your income to increase rapidly. With the 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 $30k and your overall costs will be higher because of the increased interest. With the income-contingent or income-sensitive plans, your payments fluctuate each year based on annual income, household size, and loan balance so it’s best if you expect your income to be low or unstable.

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Great post, Liz! I graduated 6 years ago (omg) but still have a few friends on their way out who are facing significant challenges.

A good resource that I have found for younger (and older, for that matter) people to help manage their finances is a website called Mint.com. Mint is a free service that aggregates your assets, create a budget, and categorically see how and where you spend your money, so that you make changes and/or save more if you wish.

There is also a great resource called LearnVest that is a lower-cost financial planning option provided via phone and internet. Compared to traditional planners, they are very reasonably priced.

I don’t want to plug my own site in here, but I recently wrote two articles, one discussing several college loan repayment options and the other discussing both LearnVest and Mint.com a bit more to help people who are looking for that kind of advice. It’s good to see that there are a lot more resources helping the younger generations get started on the right foot.

Sorry, normally the articles are good and this is good too. There is a mistake on the Roth IRA part. No one can take money out whenever they want from a Roth IRA. They need to wait 5 years for the contribution to be taken out without penalty. Tax has already been paid. The earnings should not be taken out until the individual is 59.5 years old unless the individual would like to pay 10% penalty.

With a Roth IRA I think there are two things to consider. It is important to differentiate Roth IRA “contributions” from “earnings”. In order to avoid taxes and a 10% penalty on the distribution of earnings, the distribution must be a “qualified” distribution, meaning that it would generally have to occur after someone has held a Roth IRA for at least 5 years, and until they are age 59 ½ or older.

The rules are a little different with respect to contributions. As you point out, contributions have already been taxed, and therefore are not included as taxable income when withdrawn. The IRS clearly states this in Publication 590 (http://www.irs.gov/pub/irs-pdf/p590.pdf) when it says, “[y]ou generally do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s).” The IRS also states in Tax Topic 557 (http://www.irs.gov/taxtopics/tc557.html) that “[t]he 10% additional tax applies to the part of the distribution that you have to include in gross income.” Because you do not have to include the return of regular contributions in gross income, they are not subject to the 10% penalty.

Because of the complexity of IRA distribution rules, I agree that it is a good idea for taxpayers to discuss their options with a qualified financial professional prior to taking a distribution.

Hi Liz. I’m glad to see you have sources for your information. I also know that the IRS code is hard to interpret. The contributions are not going to avoid the 10% penalty if it is taken out before the first 5 years of 59.5 years old. To the IRS it doesn’t matter unless you have an account for 5 years or more for contributions. Earnings will have penalties if taken before 59.5 years old.

I work with these types of situations on a daily basis.

I appreciate your encouragement for young people who are graduating from college. It is good information.

We AGREE that EARNINGS must be qualified distributions in order to avoid potential taxes and penalties, but REGULAR CONTRIBUTIONS are not subject to taxes and penalties, and therefore may be withdrawn at any time. I know this sounds too good to be true, but it’s not just my interpretation, but also the interpretation of CNNMoney (http://money.cnn.com/retirement/guide/IRA_Roth.moneymag/index5.htm), State Farm Insurance (http://www.statefarm.com/mutual-funds/account-types/retirement/roth-ira.asp), Edward Jones (https://www.edwardjones.com/en_US/products/retire/individual_plans/roth_ira/index.html), and yes, even other Forbes contributors (http://www.forbes.com/sites/moneybuilder/2012/01/19/contribute-to-your-roth-ira-even-if-it-stretches-your-budget/). Our on-staff CPA, Diane Winland, can attest to it, as can all of our on-staff CFP(r) professionals that also have had a lot of experience with these types of accounts.

Perhaps it’s a restriction placed on the account by the custodian, or the investment manager, but it is not a restriction by the IRS.

Sorry I forgot to post this before with the Roth IRA comment. I also wanted to include that the people graduating should find financial advice from a professional. They will be much better off using a conservative company that doesn’t push their own products.

My other comment has to do with an amortization schedule to see if consolidation is actually their best option. Having looked into the option myself I found that I would pay 2/3 more in interest then my current multiple loans.

Be careful of reading and listening to everything you read. These articles are great for getting ideas but people need to meet with a professional financial advisor.

Great article.. and this information should be required reading for any recent grad with a loan. but there are other ideas for recent graduates saddled with student loan debt, seeking alternatives to the standard ‘next steps’ taken after college. Exchanging labor for rent is a way save money, learn tangible skills, and get satisfaction outside of a standard white-collar job. Find an old building, or a cool old house that is in disrepair.. work with the owners and start rehabbing it in exchange for rent/equity. You can follow a project like this at http://www.jarboeinitiative.com/

True story = A grandma 68 yrs old–went back to college in her 50′s– with a student loan balance of $3500.00. She could not find a job…developed poor health… her Social Security check was garnished 15% now owes b/t $17,000–20,000. Congress has removed nearly every consumer protection from student loans. Stats are the US seniors 60+ owe $36.5 billion with the total debt for all students is over 1 trillion overall. Congress found it difficult to agree on $6 billion to save the students recently, but they managed to agree in 2008 to come up with $700 billion to save the banks; and the Federal Reserve found many trillions more. ( This is what I read from memory on Truthout… )

True story = A grandma 68 yrs old–went back to college in her 50′s– with a student loan balance of $3500.00. She could not find a job…developed poor health… her Social Security check was garnished 15% now owes b/t $17,000–20,000 due to interest. Congress has removed nearly every consumer protection from student loans. Stats are the US seniors 60+ owe $36.5 billion with the total debt for all students is over 1 trillion overall. Congress found it difficult to agree on $6 billion to save the students recently, but they managed to agree in 2008 to come up with $700 billion to save the banks; and the Federal Reserve found many trillions more. ( This is what I read from memory on Truthout… )

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