3 Common Financial Mistakes of Recent Graduates

Recent college graduates find they have transformed into full-fledged adults once they collect their diplomas. This is great in many ways, but some of the associated responsibilities have grads wishing for a return to the comforting halls of their educational institution. LendKey understands the post-grad money stress and wants to help. To begin, take a look at the following top three common financial mistakes recent graduates make.

1. The “Show Me the Money” Mentality

After a college or university accepts a student, they typically follow up with a financial aid package. Scholarships and grants are good – that’s money students needn’t pay back. It helps to be more discriminating about loans; students may not need all the money being offered.

Carefully evaluate the amount needed before agreeing to any loan funds. Consider how much you expect to earn in your first year working. Lawyers or engineers might expect higher initial earnings, but music or history majors may not want to borrow more than they’ll bring in with future income. Data from the U.S. Department of Labor suggest that expenditure outweighs earning for most people under the age of 25.

Avoiding overspending is critical, but it is also important to avoid taking on too many student loans in the first place.

2. Taking No Interest in Interest

The dollar amount students intend to borrow in a year can be intimidating. Nevertheless, it’s nothing compared to the shock of seeing the amount of money they end up owing when they leave school. For example, a $30,000 loan will cost close to $38,000 assuming a 5% interest rate and a 10-year term. To avoid this trap it helps to:

• Make interest payments while still in school or during the grace period
• Use any extra money (such as a tax refund) to make additional payments
• Claim all student loan interest as a deduction on your federal taxes. Borrowers can deduct up to $2500 and that can yield several hundred dollars in tax savings

Managing your interest is a key part of any loan repayment plan.

3. Failing to Plan Ahead

Many students feel they have their whole life ahead of them, and many loans come with extended terms (e.g. the ten years for federal loan repayment). Still, don’t ignore the fiscal reality of student debt. To provide a good foundation to manage payments the following steps should be taken:

• Determine the total cost of the loan repayment in advance. It’s easy enough to do this using a loan repayment calculator such as this one from the US Dept of Education.
• With many borrowers taking out multiple loans over the course of their education, it’s critical to keep track of all documentation. This will help students avoid accruing late fees, or even defaulting, because of a lost statement or coupon book.
• Think ahead about which repayment method works best. For instance, with standard repayment the debtor pays fixed amounts and pays less over time. Those on a graduated repayment pay a lower amount at first, but the repayment amount increases as their income (presumably) does. This option costs more overall, but it may be more manageable at the outset. Other options — such as extended or income-based — must be calculated in terms of interest accrued over time and the length of time it will take to repay the loan.
• Another smart strategy is to set up automatic money transfers from a bank account. Some lenders lower their interest rate 0.25% or .0.5% as an incentive). Plus, missing a payment is less likely.

If these tips aren’t enough and you fear you’re going to miss a payment, be proactive. Reach out to your loan servicer to see what can be done!