Now that you’ve graduated from college, it’s time to get started on the rest of your financial life. Tips on repaying student loans, building an emergency fund and saving for retirement will help you manage your money. But, such advice often overlooks a major life-cycle event that is just as important, and that’s saving for your children’s college education.
You might not have any children, yet. You might not even be married. But, you should start planning for all of your major future financial events, including eventually having children.
According to the CDC, the mean age of first-time mothers was 26.6 in 2016. Even if you add a year or two delay for college graduates, many people decide to start families just a few years after college graduation.
You can get a head start on saving for your children’s college education by saving before they are born. The sooner you start saving, the more time there will be for earnings to compound. If you start saving $250 per month five years before your children are born, you’ll add more than $30,000 to their college fund by the time they enroll in college. Saving more now will increase their flexibility in college choice and reduce their student loan debt.
This is also why it is important to pay off your student loan debt quicker. You should choose the repayment plan with the highest monthly payment you can afford. A higher monthly payment leads to a shorter repayment term. While it may be tempting to reduce the monthly payment through extended repayment or income-driven repayment, these repayment plans reduce the monthly payment by stretching out the repayment term to 20, 25 or even 30 years. That means you will still be in debt when your children enroll in college.
The first step in planning for your financial future is to get organized. Make a list of all your student loans, including the lender name, web site, telephone number, loan amount, interest rate and monthly payment. Note the date the first payment is due, and add a reminder to your calendar about two weeks before the due date. If you haven’t received a coupon book or statement by then, call the lender. Your monthly loan payments are due even if you haven’t received a coupon book or loan statement. You are responsible for telling the lender about any changes in your contact information, including your mailing address. You may have forgotten about your loans during the six-month grace period after graduation, but the lender hasn’t.
Next, increase awareness of your spending patterns. Get receipts for every expense and track the spending in a spreadsheet or a free program like Mint.com. Assign each expense to a broad category, such as food, clothing, housing, dining, entertainment, transportation, insurance and taxes. Total up each category at the end of the month. Just being aware of how you spend your money will help you exercise restraint.
Save money on student loans
Then, consider opportunities to save money on your student loans.
- Auto-debit discounts. Many lenders offer an interest rate reduction, typically 0.25% or 0.50%, to borrowers who agree to have their monthly student loan payments automatically transferred from their bank account to the lender. An added benefit of auto-debit is the borrower is much less likely to be late with a payment.
- Student loan interest deduction. Taxpayers can deduct up to $2,500 in interest paid on federal and private student loans on their federal income tax returns. Since the student loan interest deduction is an above-the-line exclusion from income, borrowers can claim the deduction even if they don’t itemize.
- Employer LRAPs. About 8% of employers provide their employees with financial assistance in paying down their student loan debt. These LRAPs, or employer-paid student loan repayment assistance programs, typically provide $100 a month, helping most borrowers pay off their student loans a few years earlier. Employers find them to be an effective recruiting and retention tool.
A few years after graduation, if you pay every bill on time, by the due date, and have a steady job, your credit scores may improve enough for you to refinance your student loans at a lower interest rate. You can also save money by targeting the loan with the highest interest rate for quicker repayment.
Keep in mind refinancing federal student loans into a private student loan means a loss in many benefits – income-driven repayment plans, any possible federal forgiveness, generous deferment periods, a death and disability discharge, and more.
Use our Loan Prepayment Calculator to see how much you can save and how much sooner you can pay off your loans by making extra payments.
Plan for the rest of your financial life
There are also opportunities for saving money and prepare for the rest of your financial life.
- Maximize the employer match. Many employers will match employee contributions to their 401(k) or other retirement plans. Aim to gain the full match offered by your employer, since that’s free money. Of course, it is always better to save more. Most people don’t save enough for retirement. You should save at least a fifth of your income for the last fifth of your life.
- Create an emergency fund. Save half a year’s salary in an emergency fund, to help you handle unemployment or other unforeseen events.
- Never carry a balance on your credit cards. Ever since passage of the Credit CARD Act of 2009, most students get their first credit card around the time they graduate. Credit cards are useful tools for consolidating bills. But, you should always pay the bill in full each month, so that you don’t have to pay interest on the credit card balance. If you can’t afford to pay off the balance in full each month, you are living beyond your means and should cut your spending. If you don’t carry a balance, get a no-fee rewards credit card, to earn some cash back or other rewards on your spending.