Tips for Young Adults to Manage Debt
Only half of Americans still consider college a good investment, according to the July 2013 COUNTRY Financial Security Index survey.
Second only to home purchases, college remains one of the largest investments families will make. Twenty years ago, less than half of college graduates carried student loans; today, that number has risen to nearly 60 percent. For those carrying student debt, the average graduate walks across the stage with a diploma in one hand and a note for more than $27,000 in the other.
So, what’s the strategy for handling this debt?
To manage debt in the best possible way, you must avoid it in the first place. For those with young children, “save early and save often.” College Savings Plans (529s) can be a great way to accumulate funds in a tax-favorable manner. Many states offer additional tax benefits if you’re using the state-sponsored plan.
If you already have student loans, recognize that it’s not the end of the world, as you can have “good” debt. Carrying $25,000 of student loan debt at a 7 percent interest rate adds $290 per month to a graduate’s budget – certainly not too onerous, especially when considering the long-term benefits in the job market of having a college education. Follow these tips to ensure good debt.
Always be on time with loan payments to build a solid credit history.
Pay more than the minimum, if possible, in order to minimize your interest costs. Unsubsidized Stafford Loans, for example, begin to accumulate interest while you’re still in school. While payments aren’t required, it may make sense to at least pay the interest so the debt doesn’t snowball.
Take your breaks. Subject to income limits, you may be able to deduct up to $2,500 a year in student loan interest from your federal income taxes. That can free up extra cash to help you pay down principal faster.
However, bad debt also exists. According to student lender Nellie Mae, 31 percent of college seniors have balances on credit cards between $3,000 and $7,000, and nearly 10 percent have more than $9,000. Using credit cards wisely to build your credit history can be vital to securing a job, accessing the best loan and insurance rates, and improving your quality of life.
But if you’re carrying credit card debt, be sure you know the basics. Understand the Annual Percentage Rate (APR), application and late fees, and charges for cash advances. Try to limit yourself to a single credit card, and use it only for emergencies (pizza and a beach holiday are not emergencies). Pay your balances in full each month to avoid late charges.
With young adults, the toughest steps may be more psychological than financial. Prior to graduation, their lives have been shaped since kindergarten by a series of short sprints of time in the form of four-month semesters. Now, suddenly, they’re adults facing a 50- or 60-year marathon with goals equally long. The first steps may be shaky and uncertain with a desire for a life like their parents’. But with the help of a parent or trusted adviser to guide them, those steps can soon become solid and confident in building a tangible plan to meet all of life’s goals.