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In the decade since the financial crisis and recession, college graduates were often faced with a grim reality: they had unlucky timing. With few exceptions, they encountered a tough job market, sometimes with piles of debt owed for a diploma that was supposed to help make the transition to adulthood easier.
Amid college graduation season, I am often asked to provide financial advice for college students, who are heading out into the “Real World”. I’m hoping that six years after the worst recession since the Great Depression, the class of 2015 will be more financially prudent than some of its predecessors. That said, recent grads, as well as their elders who are trying to get their financial lives back on track, should work hard to complete “The Big 3”. (1) Pay down debt. Your first priority is to pay off the highest interest consumer-related loans (credit card and autos) and then work your way down to the lower interest ones. If you are among the nearly 70 percent of 2015 graduates with student loans, pay the minimal amount while you are whittling down your consumer debt. If the only debt you have is a student loan, then feel free to make extra payments to accelerate your pay-off time – the average student borrower takes about 20 years to repay the loans and the sooner you repay, the quicker that degree will pay you great dividends!
(2) Establish an emergency reserve fund of 6-12 months’ worth of expenses. This is also the account where you may want to accumulate money for a car or house down payment or any near-term financial goal -- meaning funds that you plan to access within the next year.
(3) Maximize retirement contributions. This is a tough one-very few recent graduates will earn enough money to put away the maximum of $18,000 this year, but many could contribute at least up to the company’s match level; or if they don’t have an employer plan, they could try to fund a Roth IRA up to the $5,500 maximum.
Job Insecurity: On the career front, it is clear that the labor market has shifted and workers now work for many companies, especially in the early years after college. Remember that your first job will not be the last one and the rotten job you hate today may be useful in helping you to figure out where you want to go tomorrow. Definitely cultivate a network, but do so carefully—nobody likes a nudge, who only makes contact when seeking a favor. Finally, be willing to take chances or move laterally so that you can position yourself for the next phase of your career.
MARKETS:
THE WEEK AHEAD:.
Mon 5/25: Markets closed for Memorial Day
Tues 5/26:
8:30 Durable Goods Orders
9:00 Case Shiller Home Price Index
10:00 New Home Sales
10:00 Consumer Confidence
Weds 5/27:
G-7 finance ministers and central bankers meet (through Fri) - Greece will be the focus
Thurs 5/28:
10:00 Pending Home Sales
Fri 5/29: 529 College Savings Plan Day
8:30 Q1 GDP (2nd estimate could show a contraction from prelim reading of +0.2%
9:45 Chicago PMI
10:00 Consumer Sentiment
The graduating class of 2015 may be partying like it’s 1999! A study earlier this year from Michigan State University found that employers have been recruiting new college graduates at levels not seen since the go-go years of the technology boom and Y2K (remember that?). With economy and the job market picking up steam, hiring of college graduates this year was expected to be up by 16 percent from a year ago, though the National Association of Colleges and Employers puts the increase at 9.6 percent. Either way, the market for recent grads is improving and more than half of employers are offering signing bonuses, the highest percentage in five years.
Of course it is easier to get a job with a degree. The national unemployment rate stands at 5.4 percent and is 4.8 percent for recent college graduates and 2.7 percent for all college graduates. With that degree comes increased earnings potential: the Federal Reserve Bank of San Francisco found that the average U.S. college graduate is likely to earn at least $800,000 more than the average high school graduate over her working years.
All of this good news about college comes with an asterisk: the ability to land a good job out of college often depends on a graduate’s major. According to a report by the Georgetown University Center on Education and the Workforce, “Recent college graduates who major in arts, psychology, and social work earn $31,000 per year, only $1,000 more than the average high school educated worker. By comparison, recent graduates who majored in engineering earn $57,000 per year, almost twice as much as the average high school graduate.”
For families that are spending tens and even hundreds of thousands of dollars, the Georgetown report begs the question: What if my child is not interested in the STEM (Science, Technology, Engineering and Mathematics) majors? While you can’t force college students to study what you believe is most prudent for them; if they are likely to head into a liberal arts field with a lower earning potential, you need to steer them into a cheaper undergraduate education (community and public schools or private colleges that offer loads of grants) and to keep a lid on total borrowing.
Many families can only get their kids through college by assuming loans. That’s why total outstanding student debt (federal and private) reached nearly $1.2 trillion at the end of the first quarter of 2015. The class of 2015 is only going to add to that staggering sum: its graduates are the most indebted ever. The average graduate with a student-loan owes just over $35,000, according to Edvisors. Adjusted for inflation, that’s more than double the amount borrowers had two decades ago. Unless these graduates are about to land one of those plum STEM jobs, they could be paying off their loans for decades. (The average student repays her college debt within 20 years of graduation.)
Students and their families need to strike a balance between the increasing necessity of completing a college education (earlier research from Georgetown predicted that the share of jobs requiring post-secondary education will likely increase to 64 percent by 2020, a big jump from 50 percent in the 1970s) and the decision to assume tens of thousands of dollars of loans to earn that coveted degree.
One way to keep debt levels in check is to only assume a total student debt load that matches what you think you (or your prospective graduate) will earn in the first year of work. If you’re going to be an engineer or software designer, you can borrow a total of $50,000 to $60,000, twice the amount of an art history or education major. It may not seem fair, but to navigate the current labor market effectively, without draining current and future resources, this rule of thumb may keep the scales balanced.
