Student loan debt in 2019 reached a new high — $1.5 trillion to be exact. As if that figure weren’t eye-popping enough, consider that student debt has eclipsed both credit card debt and auto-loan debt in the U.S., and is now second only to mortgage debt. It’s no wonder, then, that the majority of students (79.2%) report that they “frequently” worry about debt, according to a report from EverFi. But as students graduate and take on the “real world” they’ve got to think about a lot more than just repaying their loans. The money moves they make in their first few years after graduation can make or break their financial futures. Here’s a look at five of the most important steps they can take to get off on the right foot.
Understand the student loan specifics.
This means getting a grasp on the outstanding balance, the interest rate (and you’re likely to have student loans with several different interest rates), the payment plan you’re on, and who the lender is. “Write them down. Organize them into a table,” says Douglas A. Boneparth, certified financial planner, and founder and president of Bone Fide Wealth in New York. “Once you’re organized around your loans, you can start making constructive decisions. You’ll have control.”
You might consider enrolling in an income-driven repayment (IDR) plan if money is tight, but be careful. They shrink your monthly payment to a more affordable number, but they may shrink that payment so small that what you’re paying doesn’t even cover the interest each month. “Income driven plans should only be used as a crutch,” says Boneparth. “[They free] up your cash flow in the short term, but have the potential to grow your loan balance in the long term,” he warns.
Start saving for retirement as soon as you’re able.
Retirement may seem eons away, but you’ll benefit more from compound interest over time the earlier you start putting money aside, says Kelley Holland, a financial stress coach. “One really easy way to save for retirement is in a plan offered by your employer, usually a 401(k). One great thing about 401(k)s is that employers will often match at least part of your contribution. That’s free money! Do your best to contribute enough to get that full match,” Holland says.
The earlier you start saving, the sooner you’ll get used to having your retirement contributions deducted from your paycheck. On the flipside, if you procrastinate retirement saving until you’re older, you’ll have to save more to make up for the lost time (and money). If your first employer after college doesn’t offer a 401(k), then Holland suggests checking out a Roth IRA account that you can open yourself. “Your contribution to a Roth IRA is not tax deferred–but your money grows tax free, and you don’t pay taxes on the money you withdraw in retirement.”
Get on a budget, and stick to it.
It’s important to be intentional with your money (mom and dad were right — it does not grow on trees), and budgeting helps you do just that. “When you create a budget, you are articulating how you intend to put your money to use,” says Holland.
But if you’ve never done it before, how do you begin? Holland recommends starting at the top, totaling all the money you have coming in. This is what’s left from your paycheck after all taxes, healthcare, and retirement plan contributions have been deducted. “That figure tells you how much you have to work with.” says Holland. To decide how best to use that money, she suggests first allocating money for necessities (things like rent, food, utilities, car payments, and student loan payments) then working your way down the list of things you want to spend money on in the coming month. “By the time you are budgeting for really discretionary things like entertainment, eating out, travel, and clothing, you already will have set intentions to cover all of your essentials.”
Be patient, says Boneparth. “There’s a learning process here. Ease up on yourself. Commit to the fact that you’re learning about these things and working towards making a lifestyle for yourself that fits within your income.”
Use credit cards responsibly.
“Credit cards can be a genuine hazard for first-time users — unless you understand how to make them work for you,” says Holland. She finds that students are often unaware how high the interest rates on credit cards really are. “They are punishing, often well over 20%.” Not only that, if you miss the deadline for a credit card payment, you’ll get hit with a fee that could easily be $25 or $35, she points out. “It’s extremely important to always pay your credit card bill in full and on time. Credit card debt [that you revolve or carry from month to month can be] some of the most expensive debt you can have, so do your best to avoid it at all costs.”
Reading this you might think it’s best to steer clear of credit cards altogether. But credit cards are a useful tool if used wisely: “Paying your bill on time and in full every month can help you build a credit record, and then a credit score. A good credit score will make it easier for you to someday get a mortgage or car loan at a good rate,” notes Holland.
With Molly Povich