A Graduate's Advice on Understanding Your Loans: Part 2
*This blog post is based off of a ten year repayment plan
Student loans…we start acquiring them before we can even fathom how much $30,000 is, but before we know it, we are graduating with a degree and often that amount of debt or more. After college, you will have a 6-month grace period, then reality hits as you start paying down that amount…with interest. These payments can drastically affect you by forcing you to delay life decisions or worse.
Ideally, dealing with student debt should start before you get accepted into your university. Hopefully, you have an idea where your interests lie before college because “exploring majors” by taking additional classes is an expensive option.
Paying between $9,000 and $32,000 dollars? That’s can be an expensive year of “exploring” majors.
how it affects you.
Now, the average student leaves school with $30,000 in student loan debt which costs them roughly $350 per month for the next decade ($42,000 in total).
I am not shocked by the fact that millions of students are in default. Here is an interesting headline from the Wall Street Journal (Apr-2016):
Not good. Missing student loan payments ruins your credit score which could lead to a higher interest rate on a car loan, if you get one at all, and disqualify you from buying a home. Learn about Debt to Income ratio here. Quick example:
You want to buy a house:
- You earn $50,000 a year, which is approximately $4,166 per month before taxes
- Mortgage/Insurance/Taxes will cost $1,200
- Credit card costs $50/month
- Student Loan costs $375/month
- Total Monthly Debts: $1,625
Debt to Income = 39% = 1,625/4,166
Since FHA loans typically require a ratio between 28% - 36% you would likely be denied. If you have a bad credit score, apartment complexes may not even rent to you, so plan accordingly what sacrifices you will need to make to afford the monthly payments.
how to handle it.
Shortly after you graduate, you should receive mail describing your loan amount and payment schedule. Again, you have a six month grace period to start working and saving. Start preparing to make those payments.
Make a budget:
- Take home income per month: $2,600 based on a $50K starting salary – avg starting salary
- Rent: $850
- Utilities: $50
- Phone Bill: $80
- Internet: $70
- Groceries/Dining Out: $450
- Car/Insurance/Gas/Maint: $400
- Remaining for student loans/savings/misc expenses: $700
If student loans cost you $350 (based on a $30,000 debt), your loans are taking ½ of your leftover money.
last few notes before I wrap up this post.
- After graduating, get a job. It might not be in your specific major, but take it. Employers want to see you apply yourself right away and will ask questions about gaps in your resume. I know more finance majors that started in sales than in finance. Your first job is not where you will be forever.
- Gain skills or additional degrees, including Certified Public Accountant (CPA) designation or a law degree (JD). These degrees may separate you from the pack. For example, a person with a JD or CPA striving to become a CFO has a leg up on a similar person without that certification.
- Understand your benefit package. Know the difference between a FSA and HSA. Always enroll in the Employee 401K, 403B, or Simple IRA match program where your employer will match your retirement contribution (typically 3% or so).
- After graduating, I hope you will be making more money than ever before. Spend, and save, intelligently. Using debt to fund depreciating assets, such as a car, is typically a bad idea. Be ready, more and more bills are coming.
- Although your education is over, the learning is just beginning. Speaking from experience, I use maybe five to ten percent of what I learned in my classes. If you want to grow in your career, you will probably need to read and/or dedicate longer than normal hours.