Generation D (for debt)
Graduation season is upon us. Many of us have children, grandchildren, or acquaintances sailing out of school … and hitting pretty rough seas in the job market.
I had planned to speak to my sons about investing once they graduate. But while investing is undeniably important, I think a better discussion would be around debt management.
Students these days are graduating from college with significant debt: According to the U.S. Department of Education, the total outstanding federal student loan debt exceeds $500 billion. Worse still, many graduates have little or no experience in managing a budget, and many have had (and may continue to have) parents who bailed them out of debt crises—postponing the inevitable experience of managing their own debt. This is a serious problem.
A recent study by Sallie Mae talks about students living beyond their means, and on average running up credit card bills in excess of $3,170. That doesn’t include average college-loan indebtedness of $21,000 at graduation, and an increasing default rate for those loans just short of 7%.
Not all graduates are in the same circumstance. Plenty have worked their way through, carried loans, competed and won scholarships, and know exactly what they need to do to pay down their debt and keep financial control of their lives. Kudos to them. But suppose we haven’t done our children the favor of making them at least partially financially responsible during or after high school? Is it too late to remedy that?
I’d appreciate your comments, and I’ll share as many as possible in an upcoming blog post.
Notes:
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As a high school teacher and a parent of a high school student, I have the following suggestions:
For the student:
1. Take as many challenging classes (AP, IB) as you can, especially in math, science, and foreign language to prepare you for college. (In our state, TWO THIRDS of college freshmen drop out after their freshmen year. Worse than graduating with college loans is NOT graduating and having to pay them off.)
2. Volunteer and develop a deep interest in one or two activities rather than joining every club at school.
3. Use your teachers and counselor as a resource and treat them with respect. They write those recommendations to the colleges of your choice.
For the parents:
1. Invest early in your state’s 529 plan (especially if your state gives a tax credit). Consider an ESA in case you want to send your child to a private high school.
2. Save enough money so that you don’t have to take out loans, at least not for undergraduate studies.
3. If you have a written plan, a budget (everyone should), set up a budget for your child during his/her Senior year in high school. Give her/him the amount to manage that you can give him monthly for all expenses except tuition and room/board.
4. Above all, be a good role model in terms of how you manage your money and involve your children in the family’s finances. Line below (or at least within) your means. Explain taxes, 401ks, and Roth IRAs, the role of savings in a sound financial plan as well as the danger…
My son , in his second year of college is still living at home and will go to the main campus for his final two college years.
When I knew that he would be staying at home for his first 2 years of college, we sat down and made a written contract. I listed what house hold chores ( ie. laundry and keeping the common areas of the home clutter free) and other behaviors were expected of him. I then wrote the amount that I would give him for school and personal expenses during the school year. We discussed the amount, revised a bit of the wording , agreed on the specific details and both signed the contract. I then made two copies one for each of us and have referred to the contract throughout the year.
This year, we are still using the old contract and adding additional agreed upon items. This written contract has helped us both to remember the details. This has also helped my son get some experience with negotiating and dealing with contracts and has given me a means of becoming a “partner” with my son, as he becomes an adult.
Putting the expectations and details in writing has certainly helped us avoid misunderstandings. I hope that this suggestion may be helpful for other parents and their college age children.
Agreed. Having graduated college five years ago (bachelors) and finally having saved enough to enroll for a masters this fall, there is no reason to take out student loans. Wait and save. The current pattern is – go to college with your friends (at whatever college they are going to – or a more highly regarded one) then your life’s purpose will magically ‘come to you.’ Completely backwards. Student loans are what is making the tuition boom possible. It is tragic what has happened with student loan debt. Debt is debt and it will be a dark shadow over their future.
Guidance counselors, parents and students generally fail to do the obvious due diligence on college and graduate school (I failed to do it). The reason you are going to school is to get a better job. The most important place to evaluate is the placement/career office. Find out what percentage of the graduating class had jobs on graduation, with what employers and what majors got hired. If half of the people with your planned major graduated without jobs, you should rethink your school or major choice. Carefully evaluate how the career office is helping both students and alumni find jobs. Talk to alumni in cities and fields you might want to work in to find out how the school and alumni programs have helped them in their careers.