By Ruth Mahoney,
President, Capital Region, KeyBank
Approximately 20 million Americans attend college each year. According to the Tax Act, of those who graduated in 2015, more than 70 percent had to borrow money to pay for the cost of courses and housing. The average student loan debt for these graduates: more than $35,000.
For most college students, the perception is that a degree is the ticket to a good-paying career and a secure life. And this view is warranted; according to a 2014 Pew Research Center study, today’s workers with only a high school diploma earn 62 percent of what a college graduate earns. However, there may be a false sense of security. A college degree guarantees you neither a high-paying job nor even a good job. It just makes obtaining either or both easier.
Unfortunately, many of today’s graduates find securing a job in their field of study difficult, and many start in entry level jobs that do not require their education or even a high school diploma. In fact, according to the New York Federal Reserve, almost 44 percent of recent college graduates are underemployed and more than 8 percent of graduates younger than 25 are unemployed. This makes paying back those large student loans all the more difficult.
So if you’re a recent college graduate, what are you supposed to do when it comes to debt . . . especially when you’re struggling just to make ends meet from month to month?
Learn to manage your loans
First, avoid new debt. You’re likely in this position because not only did you borrow money for class credits, but you also accrued credit card debt for dinners and drinks out, clothing and accessories, and books and entertainment. So learn from past mistakes and spend only what you can afford to pay.
Second, don’t settle for your lender’s standard repayment plan, which is probably along the lines of 10 years with flat monthly payments. Instead, pay more than you can when you can. If you can’t afford your current plan, contact your lender to see what other options are available to you based on the loan type you have. Just remember, the longer the payment term, the more you will repay in interest.
Also consider consolidation or deferment, and research interest rates. You may be able to negotiate for lower rates or take advantage of promotions. And don’t forget to consider loan forgiveness programs. These are programs designed to eliminate your student loan debt—for free. For example, the public service loan forgiveness program requires that you work in public service for 10 years. Some volunteer positions also qualify for forgiveness, but they typically require many hours of service.
Finally, review your student loan status, current debt obligations and budget. Write it all down on paper and make some honest calculations. Sometimes the simple exercise of making a list is enough to sound a wake-up call.
Get your budget on track
The most important part of getting your finances in order is to have a plan, which should be dictated by your budget. The following tips will help you get your budget on track:
- Prioritize payoffs. Decide what and how much needs to be paid first. Start by looking at your debts with the highest interest rates. Pay as much as you can on the highest rate loan and make at least the minimum payment on your other loans. Once this loan is paid off, apply the payment to the next loan on your list with a high interest rate.
- Eliminate hidden expenses. Review all automatic payments. You could be paying for things you no longer use, such as a membership fee for a club you signed up for in college. Cancel these accounts.
- Discuss debt obligations with family. Your parents and family are probably the last people you want to know about your 21 percent interest rate credit card, but they can be a great support system. Chances are, mom and dad—or even your grandparents—have been through some tough times as well. Furthermore, they may be have co-signed your loans, so they can and should be involved in helping you develop a strategy that is realistic, focused and actionable.
- Build an emergency fund. It will be hard, but automate transfers into a savings account each month. It might seem counterintuitive, but building six months of living expenses into an emergency fund will give you access to cash if you encounter an emergency, which will spare you from incurring even more debt.
- Pay bills on time. This will save you money in fees and help establish a good credit history.
- Start saving. Even if it’s a few dollars, making small contributions will add up—for either retirement savings or a rainy day. So skip the latte at Starbucks and put the cash away.
Perhaps the most important thing to managing debt is to commit to spending wisely. Try to keep your debt ratio at or below 30 percent of your income, because whether you create a budget or pay your bills on time, if you don’t live within your means you are going to find yourself in a deeper financial hole. And remember, you can do this. You have your degree. It was a worthwhile investment. With hard work and focus, the future you envisioned for yourself when you first walked on campus, as well as the revised version of it you left with upon graduating, is well within reach.
Ruth Mahoney is president of KeyBank’s Capital Region. She may be reached at either 518-257-8619 or [email protected] This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice. ©2016 KeyCorp. KeyBank is Member FDIC.
Tips for staying debt free throughout the college years
Each year, tens of billions of dollars in scholarships are given out across North America, and every year, tens of millions of dollars go unawarded due to lack of applicants. For those that go unawarded, it’s a lost opportunity for a student to avoid debt.
Research and applying for scholarships can be a time-consuming process, but if you can lay claim to some available scholarship dollars it will be well worth your while because the more money you receive to help with funding for your college education today, the less you have to borrow and repay tomorrow. For more information about scholarships you may be eligible to apply for, visit collegeboard.com or salliemae.com.
Other ways to help fund your education and graduate college debt free include the following:
- Advanced placement classes. If you are still in high school, you can start earning college credit by taking college level courses through your school. This will help save you credit hours in college, which will save you big money. Consult with your guidance office about offerings available in your school.
- Stay local. Consider beginning your college education at a two-year community college, then transfer to a four-year college. Not only is tuition typically lower at community colleges, but you may find you if change your career goals, credits for your course of study do not transfer. Community colleges help you fulfill your basic educational needs while introducing you to various fields of study that may help you bring focus to your educational plans.
- Get frugal. Use public transportation instead of buying and parking your car on campus. Find alternative sources for textbooks.
- Live at home. You can save up to $25,000 over the course of a four-year college enrollment by living at home. If your college is too far from home, rent an apartment off campus and get a roommate or two.
- Stay on schedule. Graduate in four years . . . or on time for your college standards.
- Work a little harder. Look for opportunities to make money. Aside from a part-time job, seek work-study opportunities, tutoring, note-taking, or odd jobs off campus.
You may not like the idea of living at home or taking public transportation to college, but the decision to make these compromises will help you keep money in the bank or, at the very least, keep your student loan or debt obligations at reasonable amounts. So think about it. Would you rather be paying back a large student loan debt when you graduate college, or would you rather be on a shorter path to buying your own car or home?