Career and money advice for new college graduates

If you’re a millennial, do these things, or else risk remaining unemployed for a long time.

1. Wake up early. Job seeking is a full-time job.
2. Don’t pass on everything. No entry-level job is ideal.
3. Stop relying on mom and dad.

Career advice from Aol Jobs, summarized by FINS Morning Coffee

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With two out of three college graduates averaging more than $24,000 in student loans, Fox Business steps in with this financial advice.

Step 1: Create a Budget

Even if grads don’t have a concrete post-grad plan just yet, creating a budget of projected expenses such as bills, rent and discretionary spending can help them better understand their cash flow situation, suggests John Bucsek, managing director with MetLife Solutions Group. …

Making a budget doesn’t have to be an overwhelming prospect—grads can easily keep up with their expenses using sites like Mint.com or creating a simple spreadsheet….

Step 2: Figure Out Student Loan Terms

Grads typically only have a six-month grace period before having to start repaying student loans, making it essential to secure a job and stay on top of other expenses.

Unemployed or financially-strapped grads should consult with their lender to determine repayment options available to them such as deferment, forbearance, and Income Based Repayment plans should they have issues making payments on time….

Step 3: Get High Interest Debt in Check

Whether grads are an authorized or co-signed user on a parent’s card or have their own account, they should  focus on getting the debt with the highest interest rate paid down first.

Understanding how debt impacts future goals and how credit score plays into every major purchase can help them stay on top of making steady payments and monitoring credit history health, says Bucsek.

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A variation on the expert’s advice

Since the percentage of young adults living with their parents has risen to 22% today, from 11% in 1980, it appears the recommendation to “stop relying on mom and dad” is being ignored by many.  Here’s my variation on the preceding advice.

1. Get up early every day to find a job, or to hone your skills to make yourself more employable.
2. Even if you can’t find a job in your field, work somewhere, even if it’s part-time.  Earn some money.
3. If you’re living at home, use the opportunity to save aggressively and/or pay down student loans.

 Related:  Parents have lower expectations for kids becoming financially independent (Cost of College)

Average amount of parents’ contribution to college is about $10,000

What is the average amount of money provided by parents who contribute to their children’s college education?

Nearly 35 percent of young adults said their parents helped with college tuition, with those receiving help given an average of $10,147;

This comes from a University of Michigan study by Patrick Wightman and Robert Schoeni of the U-M National Poverty Center and Keith Robinson of the University of Texas at Austin.

More than 60% of young adults ages 19-22 received some type of financial help from their parents, averaging about $7,500 a year.  Children are taking longer to become “adults”.

“Young people in the U.S. are taking longer to leave home, finish their schooling, get stable jobs, get married, and have children,” says Wightman, who is the MacArthur Network on Transitions to Adulthood research fellow at the Gerald R. Ford School of Public Policy at U-M.  “And the slow transition to traditional adult roles has been accompanied by an increase in the financial support young adults receive from their parents.”

How parents help:

• About 42 percent of respondents reported their parents helped them pay bills, with those receiving help getting an average of $1,741;
• Nearly 35 percent of young adults said their parents helped with college tuition, with those receiving help given an average of $10,147;
• About 23 percent received help with vehicles (about $9,682 on average);
• About 22 percent received help with their rent away from home ($3,937 on average);
• About 11 percent said they received loans from their parents ($2,079 on average) and nearly 7 percent said they received financial gifts (average amount of $8,220).

Average figures blur the differences between how much high- and low-income families help pay for college.

“The gap is especially large for education related assistance,” he reports.  “While just 11 percent of low-income youth received tuition assistance from their parents, 66 percent of high-income youth did.  And among those who did get help, kids from high-income families received an average of $12,877, compared to $5,788 for those from low-income families.”

Parents tend to reward certain positive characteristics.

…  If parents reported that children age 12 and under were cheerful, self-reliant, and got along well with others, they were more likely to give them financial gifts or loans when they were young adults.

Parents have lowered their expectations about when adulthood should begin.

Reminder – college scholarships that pay for room and board are taxable

College scholarships that pay for room and board are taxable.  Here are more details from IRS Publication 970 on the types of scholarships and fellowships that are tax exempt.

Tax-Free Scholarships and Fellowships
A scholarship or fellowship is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution.

A scholarship or fellowship is tax free only to the extent:

• It does not exceed your expenses;
• It is not designated or earmarked for other purposes (such as room and board), and does not require (by its terms) that it cannot be used for qualified education expenses; and
• It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship….

Worksheet 1–1 is used to calculate the amount of scholarship aid that can be excluded from gross income.  If your only income is a tax-free scholarship, you do not need to file a tax return.

Work-study earnings are taxable, included in the IRS category of payment for services.

A summary from the IRS:  Parents and Students: Check Out College Tax Benefits for 2012 and Years Ahead

Related:  Tax season reminders about education tax benefits (Cost of College)

Practical New Year’s resolutions for college parents and students

The mother-daughter team of Julie and Lindsey Mayfield offer some money-saving New Year’s resolutions for college families.

For parents:

1. Complete the FAFSA: I bet few people look forward tofilling out the Free Application for Federal Student Aid, or FAFSA. Therefore, it’s something that’s easy to put off—or not do at all….

2. Prioritize communication:…

It’s especially important to communicate about expectations: what you expect of your student and what he or she can expect from you, especially as it relates to financial support.

For students:

1. Use my meal plan to its fullest: Meal plans are prepaid, so it is in your best interest to use them wisely. Next semester, avoid eating out or off-campus as much as possible.

Those frequent purchases can add up …

2. Track my finances: Do you ever avoid looking at bank statements because you’re afraid of what you’ll see? I think this is the No. 1 way to overspend, and can spell disaster for college students who aren’t used to monitoring their own expenses. I am certainly guilty of this….

3. Find at least one new form of financial aid: The search for scholarships and financial aid is usually in full swing during the senior year of high school, but there are plenty of options available for current college students as well. I’ve found these to be less competitive than the more traditional incoming freshman scholarships, so they may be easier to attain.

A little extra cash could also be a great New Year’s gift to you and your parents—so start searching!

I found these ideas to be practical reminders to act upon at the beginning of the year.

Tracking finances
One absent-minded college student I know decided the best way to track his finances was to maximize the use of  his debit card and to stop using his parents’ credit card.  If he remembers to check his bank account periodically he is able to guard against going over his budget.  Meanwhile, his expenses are efficiently tracked by his bank.  He had previously discovered he has little restraint when using a credit card, finding it exceedingly easy to go over his budget on the many enticements that attempt to separate a young person from his money.  So even though his parents would like him to carry a credit card to use in emergencies or for big-ticket items like flight reservations, he decided to leave the card at home.

Related:

• FAFSA deadlines 2013-2014 (costofcollege.wordpress.com)
• Top 3 FAFSA FAQs (ed.gov)

Fiscal cliff would hurt education tax benefits (and employment prospects)

If no agreement is reached on budget issues by December 31, many educational tax benefits will tumble over the “fiscal cliff”.

According to the New America Foundation’s Ed Money Watch, among the deductions that will expire or revert to lower levels are six that totaled $23 billion in 2012: the American Opportunity Tax Credit (AOTC); the exclusion from taxable income of employer-provided educational assistance; the exemption allowing parents to claim students aged 19-23 as dependents; the student loan interest rate deduction; several health care-related scholarships; and the Coverdell account provision allowing families to invest up to $2,000 annually in to an investment account for a child’s educational expenses with no taxes on earnings or withdrawals.

According to this chart from Ed Money Watch, many of these changes will affect low- and middle-income families.

Recession and higher unemployment
I suspect that many people are “blissfully ignorant” of these and other implications of the upcoming fiscal cliff.  For college students, the loss of these tax breaks is probably less likely to hurt them than would the lower GDP and rising unemployment brought on by higher taxes.

Related:

• Political outlook for the Pell Grant and other federal college aid (Cost of College)
• The fiscal cliff – higher taxes may not be so bad if you’re seeking college financial aid (Cost of College)

Did your 529 plan earn a gold metal?

In their annual evaluation of 529 plans, Morningstar awarded its top Gold rating to four plans.

In an annual review of the largest 529 college-savings plans, Morningstar analysts identified 27 plans that are likely to outperform their peers on a risk-adjusted basis over a full market cycle. These plans earned Gold, Silver, or Bronze Morningstar Analyst Ratings, which are forward-looking, qualitative ratings.

The 529 plans earning medals are a diverse group of direct-sold and advisor-sold plans, but all have a strong menu of investment options, solid management, and reasonable fees. The relatively large number of plans earning medals reflects meaningful improvements across the 529 industry in recent years. Very few plans still include options that have performed poorly due to weak management or extremely high fees. As such, only four of the 64 plans rated earned Negative ratings, with 33 plans earning Neutral ratings. Morningstar did not rate 22 of the industry’s smallest plans….

Gold Medalists
Among the plans earning Morningstar’s highest rating, two,  Maryland College Investment Plan and Alaska’s  T. Rowe Price College Savings Plan, feature T. Rowe Price’s topnotch investments. Morningstar has identified these plans as industry leaders for several years running because they offer high-quality active strategies at a reasonable price. The plans were largely unchanged in the past year, though each plan’s single age-based track now features more international equity and real-assets exposure, which should further diversify the plan’s returns.

The other two plans earning Gold medals from Morningstar feature passive investments from Vanguard. To be sure, indexing is increasingly common in direct-sold 529 plans like these, but fees vary dramatically from plan to plan.  Utah Educational Savings Plan and  The Vanguard 529 College Savings Plan of Nevada are well-established leaders at keeping costs low. In these plans, college savers have a number of low-cost age-based tracks to choose from that vary their asset allocation based on the savers’ risk profiles. A primary difference between these two Gold-rated plans is their respective minimum investment. While Vanguard requires $3,000 to get going in its namesake plan, Utah’s offering has no enrollment minimum.

You can start small.
If you or your child want to start saving for college but you only have a small amount to invest initially, the Utah 529 plan may be a good option.  Remember that in some cases there are tax benefits if you use your own state’s plan, but wherever you start your plan you can later exercise the option to move funds tax-free between 529 plans.

Related:  What you may not know about 529 plans (costofcollege.wordpress.com)

What you may not know about 529 plans

Adam Zoll at Morningstar reports on some common myths about 529 plans.

• Myth 1: You have to contribute to a 529 in your home state.
• Myth 2: You have to send your kid to a school in the state where his 529 plan is offered.
• Myth 3: You can only get a tax deduction if you contribute to your state’s plan.
• Myth 4: If you save in a 529 account for your child, it will hurt his financial aid prospects.
• Myth 5: If your child doesn’t go to college, you’ll lose the money.
• Myth 6: All 529 plans are the same.

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You can read the complete details on any of these points by clicking the Morningstar link above.  Myth 5 can sometimes be avoided if you spend 529 funds to pay for the education of other family members.  Financial planning can be complicated, and planning for college bills is no exception.  When you add in the complexities of how financial aid is awarded, it can make for a very stressful and confusing situation.  It makes sense to become more educated about saving and paying for college.

Related articles

• The ‘problem’ of extra money in your 529 plan (Cost of College)
• The ABCs of 529 college savings plans (fidelity.com)
• 529 or UGMA – which is better for college savings? (costofcollege.wordpress.com)

‘Shadow debt’ – unreported student loan borrowing

“Shadow debt” consisting of loans not captured in traditional reporting should be taken into account when the impact of rising college costs on families is considered.  A comment on CollegeConfidential explained it this way.

There’s several different ways to borrow for college which won’t show up with the current data mining techniques.
- Borrow from home’s equity
- Borrow against 401K
- Charge on credit cards
- Borrow from relatives

Given parent plus loans are fairly expensive (relative to this low rate environment) parents might be finding cheaper ways to borrow.

Interest rates on unsubsidized Stafford loans are 6.8% and Parent Plus loans are 7.9%.  By comparison, home equity rates averaged 4.58% this week.  Anecdotally, I can think of at least three families that have tapped into their home equity to help pay college tuition.  I borrowed from a relative when I was in college.

How much student debt goes unreported?

The question arises, then, of how much shadow student debt goes unreported.  Andrew Gillen did a back of the envelope calculation, based on Sallie Mae’s reporting of how families pay for college.  He concluded that the official student loan figures should be bumped up by about 31%.  I did a similar calculation and came up with a factor of 28%.

Official student debt figure has been reported to be more than $1 trillion.  Although it’s unclear whether it should be bumped up by 10%, 30%, or 100%, I’m convinced that a substantial amount of college debt is going unreported.

Related:

• Paying student loans in your 20s, 30s, and beyond interferes with saving for retirement (Cost of College)
• Federal student loan interest rate will stay at 3.4% for at least one more year (Cost of College)

Quick Takes – College scholarships by race, UVA in-state quota, managing student loans, etc.

—  The Distribution of Grants and Scholarships by Race  (Mark Kantrowitz, FinAid.org)

This paper presents data concerning the distribution of grants and scholarships by race. It debunks the race myth, which claims that minority students receive more than their fair share of scholarships. The reality is that minority students are less likely to win private scholarships or receive merit-based institutional grants than Caucasian students. Among undergraduate students enrolled full-time/full-year in Bachelor’s degree programs at four-year colleges and universities, minority students represent about a third of applicants but slightly more than a quarter of private scholarship recipients. Caucasian students receive more than three-quarters (76%) of all institutional merit-based scholarship and grant funding, even though they represent less than two-thirds (62%) of the student population. Caucasian students are 40% more likely to win private scholarships than minority students.  http://www.finaid.org/scholarships/20110902racescholarships.pdf

(This paper has lots of data on college financial aid.)

—  In-state student quota at University of Virginia

The Commonwealth of Virginia mandates that 2/3 of the students at the University be Virginia residents.  Beyond that, there are no quotas with respect to regions, counties, or high schools.
The UVA Admission Blog

California has a system-wide cap of 10% for out-of-state undergraduate students, and the University of North Carolina limits out-of-state freshmen to 18 percent on each campus.

Related:

• SUNY wants ‘D’ students, as long as they’re from out of state (Cost of College)
• The Not So Open Door (Inside Higher Ed)

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—  A Web Site That Aims to Help Manage Student Loans 

A new Web site called Loanlook.com aims to help current students and graduates manage their financial aid and loans with less confusion. The site allows users to access federal loans and grants, but will be expanded to include private loans in about a month. (Parents can also register to see information about PLUS loans taken out on behalf of their children.)
(The New York Times)

…

—  New York State pension costs ‘will rise 10.6% for state, local governments‘.

ALBANY — Public pension costs are again set to rise in the next fiscal year, with both the state and local governments facing an average increase of 10.6 percent, according to figures released Friday.

Starting April 1, the state, counties and municipalities will contribute an average of 20.9 percent of most employees’ salaries into the state’s pension system, state Comptroller Thomas DiNapoli said. The contribution rate is 18.9 percent.

…
—  ’Average people think the road to riches is paved with formal education. Rich people believe in acquiring specific knowledge.’

“Many world-class performers have little formal education, and have amassed their wealth through the acquisition and subsequent sale of specific knowledge,” he writes.
“Meanwhile, the masses are convinced that master’s degrees and doctorates are the way to wealth, mostly because they are trapped in the linear line of thought that holds them back from higher levels of consciousness…The wealthy aren’t interested in the means, only the end.”
From Steve Siebold, author of “How Rich People Think.”

21 Ways Rich People Think Differently (Business Insider)

Another one:

Average people would rather be entertained than educated. Rich people would rather be educated than entertained.

Thinking critically about your student loan burden

Maureen O’Brien took on student loans totaling $54,000 to help pay for her daughter’s first two years of attendance at an out-of-state university costing more than $49,000 each year.  She had told her daughter to “dream big” and to look beyond lower-cost state schools.

After realizing that in-state tuition is much more affordable, O’Brien’s daughter later transferred to Arizona State University where her brother will start as a freshman this fall.  The family expects to take on loans totaling $70,000 to pay for the children’s college.

In addition to the liability for her children’s student debt, O’Brien is paying on her own $60,000 student loan she took out in 2004 for retraining as a physician assistant.  She also has a small balance from her first college loan from 1996.  More than one-third of her take-home pay is going toward paying student loans.

She has no savings, no money put away for retirement and is thinking of taking on a second job to pay off her kids’ loans.

O’Brien believes college taught her critical thinking.

Despite her family’s growing student loan debt, O’Brien still believes in the value of a college education. She says it was her first degree — in French and international studies — that taught her how to think critically. And she wants the same for her kids.

On the subject of her kids, here is O’Brien’s daughter.

She says she’s determined to finish her degree in environmental studies.

“I can’t afford to go to college, but I’m taking out loans, I’m putting my foot forward and making sure I get an education so that I can get a really good job in the long run,” Emily says.

Environmental studies  -  I’m highly suspicious of the value of these types of interdisciplinary majors since I’m not sure they lead to good jobs.  A degree in environmental science would probably be better.  But that would be a harder course of study, with more rigorous requirements in math and science courses.

Related:  How’s that urban studies degree working out for you? (Cost of College)