|
By Pat Curry, ©
2007, Bankrate,
www.bankrate.com
The summer after I graduated from high
school, I expressed my enthusiasm for starting college to a co-worker, who
was a student at the university I would attend. I couldn't wait, I said, to
finally get out into "the real world."
She smiled.
"College is not the real world," she said knowingly. "College is the final
playpen."
She was right. For most young people, college is the last phase in life in
which someone else is paying the bills. Graduation marks the point at which
they take full responsibility for their financial successes and failings.
This summer, thousands of students will leave the final playpen for the real
world. From negotiating a lease to the heart attack of auto insurance rates,
there's a host of new experiences awaiting them, and some situations for
which they're totally unprepared.
Bankrate.com asked financial experts for their lists of the top 10 financial
surprises faced by college graduates and suggestions on navigating in the
real world. Here's what they said:
Gross vs. net income
"Even though they may work in college, they weren't making near the money
they're making now," says Ric Edelman, author of "The Truth About Money."
"They've never seen this much money in their lives." Reality hits with the
very first paycheck, Edelman says, when they suddenly discover deductions
for benefits, payroll taxes and income taxes at the 15 percent, 27 percent and 30
percent
bracket.
"They go out, get an apartment and buy a new car," he says. "They develop
very quickly a lifestyle based on their gross salary, having failed to
realize they have to live on their net. Two weeks after they start, the
bills are due and they get their first paycheck and discover it's less than
half of what they were expecting. To sustain the expenses they're now
incurring, out come the credit cards."
The cost of independence - bills, bills and more bills!
If a college student is living in the dorms and has a meal plan, it might
never occur to him or her that living on their own comes with a long list of
expenses, starting with auto insurance and ending with utility bills.
Groceries, the cable bill, Internet access, car maintenance, commuting costs
- it all adds up.
"One of the biggies is rent," says Fran Katzanek, former director of Career
Services at Roger Williams University and author of the book, Reality 101:
The Ultimate Guide to Life After College. "Everybody thinks they will have a
big apartment, beautifully furnished. They almost can't afford an apartment
by themselves. They really need to think it through and need to have one
roommate, possibly two."
"The other fantasy is a wonderful car to drive up to this phenomenal
apartment. Does one really need a car? In New York or Boston, a car is a
detriment. It's very unglamorous, but public transportation may be an answer
for a short while. They need six months to see how their work lives develop.
Then they will have a better idea of what they can and cannot afford."
The range of bills comes as a surprise, she says, because of the number of
adjustments to make after graduation.
"They're so overwhelming, finding out what the electricity costs is at the
bottom of the list," she says. "When a graduate goes up in May or June to
receive a diploma, there should be a little budget sheet hidden in there."
One significant resource that many students don't take advantage of is the
alumni in the city in which they will live. They're a wealth of information,
Katzanek says, and often eager to help a new grad. Contact the alumni
affairs office to see if there's a chapter in the area. If not, ask for a
list of names of alumni to contact ahead of time.
The first tax return
Sure, college students may have filled out a tax return before, but it
probably was a simple form that involved no more record keeping than hanging
on to a W-2. This will be the first time a return could get a bit involved.
"They'll go to H&R Block at the beginning of April and they haven't planned
over the year for the deductions they can take, so they can't take them,"
says John Sherman, the Money Matters guru at egrad.com. "There are an awful
lot of rules to learn. They don't think about business travel and business
car use."
Some of the activities that could translate into tax-savings for new
graduates include job-hunting expenses such as resume services, mailing
costs, travel to interviews (if you drive, keep track of the mileage),
professional association dues, subscriptions to journals, moving expenses
related to starting a new job, charitable contributions and setting up a
home office.
"There are tough rules to qualify (for the home office deduction)," Sherman
says, "but they can be tax-deductible."
The price of youth - car insurance
Mom and Dad may have picked up the bills until now. Even if students are
paying for their own car insurance while they're in college, they may be the
beneficiaries of the family's multi-car and multi-policy discounts. But
since many graduates will find work in a metropolitan area, car insurance
rates may come as a major shock.
"Because they no longer live with their parents, they'll need to insure
their car on their own," says Madelyn Flannagan, vice president of education
and research for the Independent Insurance Agents of America. "They may find
that insurance is very expensive. College grads tend to want to go out and
buy new, sophisticated cars. They don't realize the cost of insuring that
car. There are huge increases to move to big cities."
Other issues to consider include gap insurance, which covers the difference
between what a car is worth and what is still owed to the bank if the car is
totaled or stolen. Also, if a policyholder allows another person - a
roommate, a sibling or a boyfriend or girlfriend - to drive your car
regularly, that has to be disclosed to the insurance company and can affect
the premiums.
Another issue to keep in mind is that poor spending habits may affect your
car insurance rates, depending on what state you live in.
"The logic behind it is if you're desperately in debt, you might burn the
car to collect the insurance," Flannagan says. "That's the plain and simple
of it."
Health insurance
The other insurance coverage that comes to a screeching halt when students
graduate is health insurance. Whether they're still in school or not, they
can't be covered under their parents' policy after age 23. (In fact,
students who take time off from college or drop to part-time status will
usually lose coverage under a parent's policy.) IIAA reports that young
adults ages 18 to 24 are more likely than any other age group to lack health
insurance – nearly one in three lacks coverage. Among adults age 25 to 34,
the number improves only slightly, to nearly one in four.
More than 80 percent of college graduates with full-time jobs are eligible
for employer-sponsored health insurance, but many companies have employee
probation periods before coverage goes into effect. Grads should talk to an
insurance agent about catastrophic coverage as an interim measure.
Also, they should check to see if they are eligible to extend their parents'
coverage short-term under COBRA. Some colleges also offer graduates interim
coverage.
"If they're gainfully employed, most employers offer health insurance,"
Flannagan says. "Take advantage of everything that's offered, including
flexible spending accounts."
Overlooked insurance needs
Most graduates will initially rent an apartment or a house, but few think of
getting renter's insurance.
"People think the landlord's insurance covers them if something happens, but
that's not true," Flannagan says. "His coverage is on the building, not your
personal belongings."
In some states, if several people rent an apartment together, they can't get
a policy together, and some items, such as high-end stereo equipment and
computers, might be difficult to insure. Also, recognize that most renter's
insurance policies cover what an item is worth today, not replacement cost.
(Think about it: what's a four-year-old computer worth?)
Renter's insurance also covers liability, which would pay some of the costs
"if your dog bites the FedEx guy," Flannagan says.
The other commonly overlooked insurance need is disability insurance. While
most company benefits plans include some level of DI, it's still worth
looking into getting an individual policy. The benefit to getting it as a
new graduate is that it will be very affordable (the cost goes up with age).
Try to get a non-cancelable, guaranteed renewable policy. That means it can
never be canceled, the rates will never be increased and it's good until age
65.
Bad credit decisions in college have long-term implications
Perhaps the most unsettling surprise for college graduates surrounds the
effect that poor use of credit during college can have for years after
graduation. The typical graduate owes $3,262 on credit cards, according to
HSH Associates. Loan burdens average almost $20,000. Graduate students
accumulate more than $31,700 in student loans.
"You go to rent an apartment, they check a credit report. You go to get a
graduate loan, same thing," says Mallary Tytel, president of Education and
Training Programs, Inc., an employee training company. "It's a very serious
issue in terms of the repercussions."
The result can be higher insurance rates, larger security deposits for
apartments and even missed job opportunities and graduate school acceptance
when credit reports show bad habits.
"The moral of the story is you can't run away from your obligations," says
Tahira Hira, founding president of the Association for Financial Counseling
and Planning Education. "I knew a person who kept doing interviews, doing
very well and not getting jobs. It turned out their credit reports showed
they were irresponsible. That's not the kind of person people wanted to
hire."
Besides the financial implications, excessive debt has physical
consequences, too, Tytel says. Studies have shown that college students with
credit balances of more than $1,000 smoke more, drink more and take more
medication for depression than students with less debt. They're also more
prone to heart attacks, insomnia and explosive emotions.
The most beneficial thing college grads can do is to get copies of their
credit reports to have clearer pictures of their debt situations and how the
debt is affecting their credit histories. This is also an opportunity to
correct any inaccurate information on a report.
Credit isn't free money
Barraged by credit card offers and enticed by incentives to sign up, college
students frequently do not understand the true cost of credit.
"They don't know diddly-do about interest rates," Hira says. Add to that the
cost and impact of late fees, and the vicious cycle that occurs when just
the minimum is paid each month.
"Restraint is very important when one graduates," Katzanek says. "You get
all sorts of credit cards in the mail, and one often uses all of those
credit cards. It would scare the hell out of me.”
"My daughter graduated from college in 1985," Katzanek says. "She had a very
close friend who is still paying off credit cards. They're not academic type
debts. This woman is in her mid-30s, has a wonderful job and wonderful
earnings, but so much of it goes to paying off her credit cards for debts
incurred 15 years ago."
Student loans don't go away
Sherri Williams, assistant director of career services at Texas Women's
University in Denton, Texas, says students often are surprised by how soon
six months passes and they have to start paying on the loans they have taken
out. Be careful of deferring loan payments, she says, because they continue
to accrue interest. Another item to remember is that if finances get totally
out of control and a graduate decides to declare bankruptcy, everything will
be forgiven except student loans.
"Those never go away," Tytel says.
Now is the time to start saving for retirement
The last thing on the minds of most college graduates is saving for
retirement, and it's a missed opportunity they'll never regain.
"The most important thing is to get started early on retirement,"
egrad.com's Sherman says. "Put aside as much as you can. There's a million
different ways to invest. They'll all tell you, start as soon as you can.
You get long-term growth, but it's the interest on the earnings you
accumulate. There can be a huge difference in just a couple of years. You
get the tax savings and in some cases, it's free money."
If it seems like college graduates are totally unprepared for what's waiting
for them, there's definitely some good news to share. Studies show that
about 70 percent of college students graduate with positive credit habits
and their debt under control, and many have already begun saving for
retirement.
"Here is the glimmer of hope," Hira says. "I see a lot of good things as
well. I see students who are very aware of financial reality, understand
what they earn and what they spend. They're already talking before
graduation about a 401(k). We have kids who go home and teach their parents.
I'm very optimistic about the future."
|
