youíve just finished college and are heading to a new
job, avoid the extremes.
other words, donít panic about your student loans, but
donít ignore them either before locking yourself into
huge expenses like rent and car payments.
so much attention on student loans in the news, college
students tend to get alarmed when financial aid offices
force them to look at their loan responsibilities just
as they leave the hallowed halls. The typical student
with loans leaves college with $35,000 in debts.
rather than worrying about loans, many graduates take
the opposite approach, said Shannon Schuyler of
professional services firm PricewaterhouseCoopers.
Students leave college without thinking ahead, and they
get themselves into a financial mess, according to
research by George Washington Universityís Global
Financial Literacy Excellence Center that was funded by
research shows most millennials "donít have basic
knowledge" about handling money and consequently
dig themselves into a hole shortly after finishing
college, said Schuyler. About 28 percent of those with
college degrees have ended up taking emergency payday
loans or selling possessions to pawn shops, she said.
size of student loans, alone, however is not necessarily
rule of thumb for college loans is to keep the loan
payments to 8 percent of your salary. So for $35,000 in
loans at recent interest rates, a person would need an
annual salary of about $53,250. But college finance
expert Mark Kantrowitz, publisher of Cappex.com, said
people should be OK if they simply make sure their total
college loans donít exceed their annual pay.
with federal student loans have 10 years to pay them
off, so payments on $35,000 in loans charging an average
interest rate of 4.05 percent would be $355 a month.
your first job pays too little to cover loan payments,
you may qualify for a government program that reduces
monthly payments while your income is low. Itís called
if you still donít have a job when your loan payments
start six months after graduating, you can ask for a
deferment, which means you donít have to pay your
in mind, however, that deferring your payments or
reducing the monthly payments while your income is low
doesnít free you of the responsibility indefinitely.
Eventually, you will have to pay both the interest and
principal unless you canít finish all the payments
within 20 years.
advises graduates to avoid extending loans beyond 10
years of repayments because extra years add a lot more
interest. Even if you pay off $35,000 in loans in 10
years, you are going to be paying $7,622 in interest, or
a total of $42,622 based on the $35,000 principal plus
the interest payments. And if you pay off a $35,000
loan, with a 4.05 percent interest rate over 20 years,
you will be spending $16,123 on interest, or $52,123 in
total. Think of what $16,123 could buy if it wasnít
going toward interest. A car? The start of a house down
pay as much as you can each month" so you keep your
interest charges as low as possible, Kantrowitz said.
do that, think of the rest of your spending.
Overspending on rent, a car, or anything else could
disrupt your future.
keeping within a 50-30-20 budget. Fifty percent of your
income is devoted to necessities: housing (rent,
utilities), food, transportation, required payments on
student loans, credit cards or other loans, phone,
internet, even gym payments if you sign a one-year
contract. Thirty percent goes for entertainment and
choices you could skip: clothing, restaurants, gifts,
travel. Twenty percent goes toward saving. Saving for
emergencies and retirement is essential.
emergency fund will help if you lose your job or have
expenses like flat tires. Without emergency funds,
people tend to use credit cards, fail to pay them off
each month, and get into a spiral of paying interest.
Saving for retirement on your first job is essential
because your early life savings give you a huge head
start. Assume you are 21, earning $35,000, and you put 7
percent of pay in your 401(k) at work, and your employer
gives you 3 percent through a company match. Thatís
about $1,050 in free money. If you keep on saving like
that until 65, you will have about $1.1 million for
retirement if you earn 8 percent on average each year.
If instead you wait until you are earning $50,000 at age
35 to start saving the same percentage, you will
accumulate only about $502,000. Try this calculator.
will that mean when you retire? With $1.1 million you
will be able to spend $44,000 a year when you retire.
With the $502,000, you will only be able to spend
$20,080. If $20,080 looks OK, consider that there will
be inflation and to buy what you do today with $20,080
you will need about $44,400 40 years from now.