Over the last month, we have all seen the news articles about college graduates with large student loans. All fingers have pointed to college costs which have significantly increased over the years as the main culprit of their debt. Yet, before we blame it all on college costs, there are other factors that should be considered as well. Some obvious factors include minimum wage not going as far as it use to and the costs of keeping up with the latest fads (e.g., I-Pods).
Yet, a main factor that we dance around is not having a good financial education class in our high schools. Thus, we learn financial lessons later in life. Some of these financial strategies that can be applied by college graduates, college students and high school students are:
Over the years, many adults have lived on investment earnings (first with internet stocks then with home equity) or lived on their bonuses which could fluctuate over time. Yet, as these investments slow down in growth (or lose money), the extra income stream dry up. And, with a change in the economy, the bonuses that at one time they could count on decline as well. This creates a recipe for financial disaster because it is hard to downsize after becoming use to spending at a higher income level. Imagine cutting just 5% from your budget. And then think how hard it would be to cut your budget by 10% or more all at once.
Yet, this is what we expect many young adults to do when they get their first real experience with financial independence. By the time that children are ready to go to college, their parents are in their 40’s and 50’s and close to their highest standard of living. Parents are able to provide the basic food and shelter expenses. Others are able to treat their children to cars on their 16th birthday and take them on nice vacations. Meanwhile, their children are about ready to enter their lowest standard of living due to low salaries and needing to pay for their own food and shelter for the first time. Many children have used their high school jobs to pay for clothes, transportation and entertainment. As they leave home, they will have to pick up other costs that their parents have paid for like food, shelter and transportation which usually will eat up most, if not all, of their income. This is a dramatic shift because all their income use to go towards clothing and entertainment to having their income now just cover the basic needs (with no extra frills). Imagine how hard it will be for these young adults to downsize their standard of living if we have a hard time just cutting 5% from our budget? No wonder many graduates need to live at home.
• Plan for college like retirement
In a Fidelity study , 75% of teens who plan on going to college have started to save. Yet, 64% of college bound teens do not know much college will costs. How can they save enough when they do not know how much college will cost? High school students usually do not get serious about thinking about colleges and visiting college campuses until their junior year. Is this enough time to save for college? Would we suggest that workers wait until they are 55 or older to plan for retirement? College bound teens should start the planning for college as they enter high school. This way they know how much they need to save while working or need to plan on scholarships to fund their college costs.
• Find alternative income streams (e.g. scholarships)
Many today are looking for investments that will give them an extra income stream. Yet, these income streams do not appear out of nowhere. They usually take several years of savings and investigating to find and set up. So why do high school students wait until their junior and senior years to find scholarships? By this time it is too late to change their resume in order to qualify for certain scholarships. If they start looking in their freshman year at what they need to qualify for some scholarships, they will better understand the GPA and extra curricular activities that they will need to optimize their income streams in college.
• Make extra payments towards debt
We have become more aware that the easiest way to get out of credit card debt is to make an extra payment. If an extra payment is not made then credit card debt will take 25 years or so to pay off. The same goes for a college loans. Yet, as young adults receive raises in their 20’s, many have used the extra money to either maintain their lifestyle (already spending beyond their means) or to increase their standard of living. Then they find themselves in their 30’s raising a family and not having the extra cash to payoff their student loans. David Bach’s Latte Factor™ could be applied to college graduates. Yet instead of coffee, the factor could be based on beer (saving $5 or more by forgoing a beer afterwork).
To learn more about financial lessons for college bound students read College Planning