What to Do When Student Debt Crashes Your Adult Life
NEW YORK (BankingMyWay) — For many recent college graduates, stepping in to the “real world” is not quite the thrill it ought to be. The problem: heavy student debt that will interfere with adult moves such as buying a home or car, or even getting married.
What can you do about it?
Unfortunately, big debts are like long-term disease: something to be managed rather than quickly cured. But the right moves can get you out from under faster, and minimize the pain along the way. And some of the things you have to postpone may not matter that much anyway.
A recent Federal Reserve survey found that 30-year-olds without student debt were more likely to own homes than 30-year-olds with that debt, even though those with the debt had more education. It’s supposed to be the opposite, with more education making you more prosperous.
The problem is that student debts have become so large, with the average recent graduate owing about $29,000. This debt totals nearly $1 trillion, about three times the 2004 level. It’s not uncommon for recent college graduates to spend a quarter of their incomes on student loan payments — about the same as what many people expect to spend on house payments.
Another survey, by Harris Interactive for The American Institute of CPAs, found that 75% of people with college debt have made personal or financial sacrifices as a result. But some of these trade-offs need not be major setbacks.
Of those surveyed, 41% said they had delayed contributions to retirement accounts. That’s too bad, because saving early is a sound strategy that provides more years of compounding. But many 20-somethings are not able to save much for retirement even if they don’t have student debt, because beginner salaries tend to be skimpy. The bulk of most retirement accounts is based on savings people make in their 40s and 50s.
The key goal for a 20-something should be to create a rainy-day fund, then to put enough into the 401(k) or similar workplace plan to get the employer’s full matching contribution. But it would not make sense to fall behind on student loan payments simply to save more for retirement.
About 40% of those surveyed reported they had delayed buying or upgrading a car. Again, that needn’t be a terrible setback. While buying that first new car may seem like a rite of passage for a recent college grad, today’s vehicles are so good that a 5- or 6-year old car can cost half as much as a new one and still have 80% of its life left. In fact, buying used cars can be a sound lifelong strategy, even after your income is higher.
Of those surveyed, 29% said they had delayed buying a home. But although it seems terrible to miss today’s low home prices and mortgage rates, renting is often a better option for people in their 20s whose housing needs can change quickly.
Many experts think the recent rapid rise of home prices will settle down quickly to a more typical 3% or so a year, so home prices probably will not shoot out of range over the next few years. If that’s the case, paying down student debt may be a more profitable investment than buying a home, as the debt reduction will earn a return equal to the interest rate on the loan — typically more than the 3% you might earn through home price gains.
The survey did find some serious sacrifices, including 31% of respondents who worked a second job, 22% who lived with roommates, 22% who lived with family, 16% who postponed having children and 15% who delayed marriage.
There’s no question that soaring student debt has produced serious pain, and that it can take decades to get out from under. The best strategy is the simplest: Create a budget and trim those expenses that don’t produce much value, including nights on the town, unused cable tiers and cellphone data plans, pricy coffees, interest and penalties on credit card balances ...
If you can find a couple of hundred dollars a month in painless cutbacks, you can get that student debt under control years ahead of schedule — and start spending money on those things you want.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.