Bare Necessities: Hard to Attain for a College Graduate

-By Nancy Salvato

College Loans: Scenario for Failure
Upon graduating from college, many twenty-somethings reconcile with living under their parents’ roofs until they can find full-time employment, pay for housing, feed, and clothe themselves. For some, there is the additional challenge of paying off college loans. “Student Monitor, a New Jersey research firm that specializes in the college market, puts a graduate’s average student loan debt at $25,760, which will take an estimated 7.9 years to pay off.” (1) Yale University’s Jing Cao has concluded that, “the current system forces college graduates into debt.” (2)

According to the experts, while paying off debt is important, the first priority of these young adults should be to start saving money, especially if they are offered a 401(k) plan at work. (3) Next, credit card debt should be addressed. This is because the interest rate is considerably higher than that of student loans which can be paid off over a longer period of time. (4) These are practical ways to address debt and help young adults become self sufficient. But it shouldn’t have to get to this point. Attaining a post secondary education shouldn’t force college graduates into debt.

Solutions to alleviate student loan debt, such as giving every newborn child a $500 certificate to open a savings account and in which the government matches contributions dollar for dollar to encourage savings for its poorest children, penalize taxpayers whose earnings fund such expenditures. While a well educated citizenry is necessary for a smooth functioning society, a likelier, more equitable way to resolve the problem of student loan debt is to eliminate the large grants and loans which serve to drive up the cost of tuition. Forcing colleges and universities to compete for students by offering a better product at a lower cost allows the free market to function properly. Furthermore, lending institutions should invest in students’ whose field of study is a sound venture. Scholarships should be awarded to students entering fields which are experiencing employee shortages. As it currently stands, college graduates who plan to work in shortage areas can sometimes have their loans discharged. Click Here

To read about how other countries handle post secondary education, Click Here

Saving for Retirement
“A five-day-a-week $3 latte habit on borrowed money can cost $4,154, when repaid over 10 years.” (5) Yet for $3.00 a shot, coffee shops do provide a respite from the daily grind and offer a neutral place to relax and catch up with a friend. They function like a mini-vacation from the constant bombardment of work or other stressors and they don’t cost nearly as much as going to a spa. If anything, $3.00 might be considered a small price in order to enjoy the aroma of Starbucks or take in the rustic feel of a Caribou Coffee; both companies have created a welcoming, almost familiar atmosphere which is difficult to pass up. Still, “Financial planners, best-selling investment gurus and a number of advice columnists have been warning consumers for years that seemingly insignificant daily spending on such luxuries as gourmet coffee can, over time, sabotage savings and hobble a person’s financial future.” (6) The key is not to make designer coffee a daily habit. Make that double shot espresso a weekend treat and deposit that “found money” into some kind of savings plan.

Placing money in a bank savings account is the safest possible way to earn interest on money. Another option to make money on your money is to place your savings into Money Market Accounts, which are also offered by banks; typically these pay a higher rate of interest than a savings account. The federal government backs these accounts with what is known as Federal Deposit Insurance Corporation (FDIC) Insurance. Interest rates do fluctuate, however. (Click Here) A CD or Certificate of Deposit can yield a higher interest rate still, but cannot be touched for a period of, say, one to six months, or one to five years, without withdrawal fees. Money Market Funds are available from mutual fund companies and usually provide a better return than Money Market Accounts; however, they are not FDIC insured. They are invested in very short-term bonds, and are regulated by the U.S. Securities and Exchange commission. (7a,b) Read More

Buying a Home
“Home ownership is a key wealth-building strategy. While a home mortgage is the biggest debt most individuals will ever owe, it can also be one of the best opportunities to pile up substantial savings. The more you own your house — which is another way of saying the more “equity” you have — the more you have saved.” (8)

Thinking back on college, it would have been a more profitable venture if instead of paying for housing; my parents and I would have paid for a condominium and charged a room mate rent. Not everyone has that option, but certainly it is something to look into if going to school in a big city. (Click Here) When I think of all the money I threw away on rent I could kick myself. If you know you are going to stay in one place for awhile, it is better to invest money in housing than give it to a landlord. That being said, how hard or easy is it to purchase a home?

Basically, a person who wants to buy a home will need money for a down payment and an ability to make sure the monthly mortgage costs are paid. It is best to have at least 20% of the total cost to put down or there will be private mortgage insurance (PMI) to pay, in addition to the principal amount you borrow and interest rate on the actual loan amount. A larger down payment means there will be less to finance and lower monthly payments. (9) Additional costs associated with a home purchase, called Closing Costs, are paid upfront and not over the length of the mortgage. Property taxes and insurance can be rolled into the mortgage payments, which will make the amount owed per month larger. If a person knows he or she is going to be staying in one area, owning a home is an investment that is worthwhile.

Lenders must decide whether a home purchaser can qualify for a loan and for the amount of the loan. “Lenders use two simple ratios to determine how much money you can borrow to purchase a home.” (10) The first ratio is the total monthly housing costs compared to total monthly income. This is calculated as 28% of a person’s gross pay. The second ratio is debt to income, or what can be paid off monthly as debt. This is calculated as 35% of a person’s gross pay. If a person is paying off a lot of debt (student loans, car payments), that person will probably qualify for a much smaller loan amount. This is because a greater proportion of the 35% will be taken up by pre-existing debt. Therefore, it is best to purchase a home with the lowest amount of outstanding debt possible. The buyer can then qualify for a larger loan amount and purchase a more expensive home. Given the choice of which to buy first, it is better to purchase a home and then a car. However, most people need transportation. Buying a used car and lowering the cost of car and auto insurance payments can help lower the debt to income ratio. (11)

Buying a Car
Whether a car is new or used, in order to be assured of a fair deal a wise consumer does some research before deciding to buy a vehicle and deciding how much money should be expended on the purchase. Nowadays, some dealers offer their cars for a set price that involve no haggling (and I don’t mean at sticker price), but that doesn’t mean the buyer will acquire an automobile at the best price. “If you like to negotiate and are skilled at it, you’ll probably get a better deal with a traditional dealer.” (12) Read More

The key to bargaining with a salesperson is having some key information at your disposal. This is easier than one might think. There are online guides to auto purchasing that help people acquire the type of information needed to bargain the best price for a car. To begin, find out the dealer’s cost for the vehicle. (Click Here) “Make it clear to the salesperson that you want the lowest possible markup over your starting price, and that you’ll visit other dealerships selling the same vehicle and will buy from the one with the best price.” (13) Discuss price, financing and any trade-in separately. (14)

Buying a used car doesn‘t present as many challenges to the consumer as it once did. This is because a consumer doesn’t need to be a mechanic to understand potential hidden problems. (Read More) Used cars can be purchased from private parties, new car dealerships, and off of used car lots. Again, do your homework. Find out the car’s valuation before you negotiate a price. Run a vehicle history report on the car to make sure there are no surprises. Make sure the car will meet your specific needs. Finally, do not buy anything that is not within your means. (Click Here) to find out how to get a used car bargain. Now that you’ve learned the tricks behind the smart purchase of a car, make sure to take advantage of all the ways to save on auto insurance, too. (Click Here)

An Apple a Day Keeps the Doctor Away
Tangible items, like a house, a car, or an education can be a source of pride. Sometimes maintaining a certain level of physical fitness brings great satisfaction, as well. Just as engines over heat and thermo couplers break, our bodies sometimes malfunction and need to be taken in for repairs. Unfortunately, our bodies don’t come with a manufacturer’s or home warranty. Instead, we must purchase insurance to cover the prohibitive costs of health care. When health insurance is available as a benefit through work, it is usually accessible at a much lower cost than if it is purchased individually. Sometimes group insurance is not an option, though, because a person is unemployed or working part-time without benefits. There are other ways to save money on health care. Certainly, one doesn’t have to go broke ensuring that a potential accident or illness won’t eat up any and all accumulated assets. However, it helps to be creative and vigilant about exhausting all the possibilities for purchasing insurance. First, realize that in order for insurance to be affordable, it must be purchased with a high deductible. Pairing affordable insurance with a health savings account (HSA) is one way to help cover medical costs that are not covered until the deductible is reached. Money deposited into an HSA is not taxed and can be used anytime. There are no penalties for not using it in a particular calendar year. Funds in an HSA can be invested and the interest and earnings are not taxable. Read More and More.

Eating on a Budget
After socking away money for retirement, paying down car, house, and education debt, and insuring one’s assets (including your health), it shouldn’t be surprising that a person might find oneself ravenous. Food is a disposable resource and only qualifies as an investment in terms of how well it nourishes the body. Face it, a person needs to eat; how discriminatingly one eats helps to determine optimum health and well being. So how can food dollars be stretched without feeling deprived?

Passing on convenience foods which are higher in calories, cost more and usually not good for your health should not make a person feel deprived. Eat healthy snacks so that you aren’t tempted to stop at McDonalds. Make sure there is food in the house. Caution: don’t shop for groceries when you’re hungry, or you’ll likely make impulsive purchases. It is best to plan for meals before heading to the store and buy only what you need. Don’t over buy perishables. Frozen fruits and vegetables are sometimes better for you than fresh, depending on what is in season and when it is picked. Remember, the difference between purchasing a generic and a name brand comes down to the price. Even if a food staple is not on sale, it is still going to cost less than processed or prepared meals.

Restaurants are not out of the question, though. There are ways to save when eating out. Look for money saving coupons. Drink water or refillable items like soda and ice-tea. Split an appetizer or dessert, and take half your meal home to be eaten the next day.

Being an adult and taking care of oneself is hard work, but it has its rewards. Knowing what is in store before going to college can help a young adult establish the right priorities and make the goals of an education more realistic. Instead of buying $3.00 lattes, buy a latte machine and charge your friends. It is never too early to begin investing in oneself with an enterprising venture or two.

Related Reading & Footnotes:
(3) (4) A math lesson for new college graduates
(7b) Banking, Bank Accounts, and Earning Interest Lessons
(1) Graduates in debt filling empty nests
How Buying a House Works
(9) How Mortgages Work
(5) (6) Javanomics 101: Today’s Coffee Is Tomorrow’s Debt
(7a) Saving Money
(2) The Debt-Free Graduate
(12) The wise buyer’s car guide – Buyers Guide (link missing)
(10) (11) Your Car Payment May Prevent You From Qualifying for a Mortgage
(8) 6 Steps to Six-Figure Savings
(13) (14) 7 ways dealers make you pay extra
10 Steps to Buying a Used Car
Nancy Salvato is the President of The Basics Project, ( a non-profit, non-partisan 501 (C) (3) research and educational project whose mission is to promote the education of the American public on the basic elements of relevant political, legal and social issues important to our country. She is also a Staff Writer, for the New Media Alliance, Inc., a non-profit (501c3) coalition of writers and grass-roots media outlets, where she contributes on matters of education policy.

Copyright Publius Forum 2001