Five Steps to Helping Your Graduating Senior Manage Debt

New graduate, Rachel Olson. Photo credit: Zach Gleiter.

New graduate, Rachel Olson. Photo credit: Zach Gleiter.

My niece, Rachel, graduated from Gustavus Adolphus College over Memorial Day weekend. Like most recent grads she is relieved to finally be done with school and excited about a promising future.

Between graduation parties, a summer job, and looking for her first teaching gig, tackling her student loans and setting financial goals likely isn’t too high on her list. But it probably should be.

Below are five steps you can take with your newly minted graduate to help them manage their college debts and get their financial life off to a good start.

First, help them create a financial inventory. If they are an accounting or business student, they might know this as a balance sheet. Whatever you prefer to call it, your graduate should have an accurate inventory of the assets they own, money or other assets they can count on from you, as well as money they owe to others. It’s quite possible they don’t know the details regarding investment accounts and other money in their name. Now is the time to tell them.

For example, maybe they still have some money left in their Uniform Transfer to Minors Account (UTMA), a bank account, and some cash from graduation gifts. They probably also have student loan debt, maybe a credit card balance and even a car loan.

Add it all up and see where they stand. It might be painful but young people need to have a good understanding of their financial situation if they are to make good decisions over the next few months. Odds are they owe more than they have. That’s OK when you are 21.

Second, create a debt-timeline. Student loans usually have a grace period. Some loans can continue to be deferred. Credit card debt and car payments are due monthly. Help your grad to know what bills are due and when so they can prioritize payments and figure out a schedule for meeting their obligations.

If you have been paying your kids’ bills for the past 21 years, they may quietly assume you will keep paying the bills until you tell them otherwise. Creating a debt-timeline will help initiate the conversation about what bills are due and who will pay them.

Third, tally up the student loans and figure out their payment. Most kids have more than one loan and more than one payment schedule. Add it all up and figure out what the total amount is before the loans start coming due. With most loans you have some time before the first payment is due, but your grad should know what this amount is before they sign an expensive car lease and rent a swanky new condo in the North Loop.

Just an aside: even if you can afford to pay off their student loans, don’t. Let them have the pleasure of trying to make ends meet with a few bills hanging over their head. It will help them appreciate the value of their own labor and have a positive effect on how they spend money in the future.

Fourth, develop a plan to tackle the debt. The average Minnesota grad leaves school with over $31,000 in student loan debt. Using the student loan calculator on Finaid.org I estimate the typical student loan payment to be about $356 a month for 10 years. Stretching the payment out over a longer time reduces the monthly payment, but increases the total amount paid with interest. Considering that most loans have an interest rate of 6.8%, paying it off as soon as possible might be a good idea.

Tackling the debt means creating a budget. A budget will help your grad come to grips with how much money is coming in and where it is going. From there she can begin to make smart choices about how to spend her money and how much she needs to set aside to meet her goals.

Fifth, create some short-term financial goals. A quick Google search for “smart money moves for college grads” produces numerous articles about adding to 401k plans, starting IRAs and other great ideas. Saving for retirement is definitely a smart move for young college grads, especially if there is a matching contribution from the employer.

However, I think it’s also a smart move to have some shorter-term goals as well. The $30,000 debt thing, that’s a big deal. What is the plan for paying it off? Set a goal to pay it off early.

These days more kids than ever return from college to live at home with their parents, a fine strategy – for a while. When do you expect your kids to move out for good? How much money will they need to do that? Set a goal (and the implied expectation) that this will happen by…. Fill in the blank.

Here are some other shorter-term financial goals you and your grad should discuss:

  • I will be debt-free by…
  • I will have $5,000 saved up by…
  • I will move out of the house by…

You don’t need me to tell you or your kids what your goals should be. But if you want a refresher on how to set goals more effectively, check out this blog post from December of last year or this one from two years earlier.

Congratulations to you and your grad on a job well done. Paying for, and graduating from, college is no small thing. Take some time to soak it all in then help them take charge of their financial life by creating a plan to manage their day-to-day finances and pay off their loans.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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