Let’s face it, the need for financial aid doesn’t magically disappear once a college diploma is earned. New college graduates heading out into the real world will likely come a knockin’ on family doors for some help in the early going. Here’s how to help a new college graduate without totally messing up your own finances:
… make sure they have health insurance. Even for graduates who’ve managed the not-so-easy feat of landing a full-time job in this rough job market, it may not come with full benefits.
No one, no matter how young and healthy can afford to forego health insurance. Parents can currently keep a child on their health plan up until the child turns 26. Just be aware that federal rule is part of the health reform case before the Supreme Court. Depending on the Court’s ruling-expected in June-this provision may be changed. Stay tuned.
Another option is to buy an individual health insurance plan. For young healthy folks the cost should be quite manageable. At a minimum aim for catastrophic coverage: insurance that has a higher deductible, but provides coverage in the event of a major illness or injury. This is one must-have that family should gladly chip in and help with, if necessary.
… jump start their retirement savings As great as it would be for every twenty-something to get cranking on retirement savings, we all know that’s a long shot given the long list of other priorities (see: student loan repayment, rent, covering the credit card bill etc…) This is where family can make a huge impact: help your college grad start socking away money in a Roth IRA.
As long as your grad has earned income, the money for funding a Roth can come from another source: i.e., the bank of Mom, Dad, Aunt, Uncle, Grandma, Grandpa etc. Any individual with income below $110,000 can contribute up to $5,000 this year in a Roth IRA. You could front your grad the full $5,000. Or consider a family match for every dollar they contribute. Could be dollar-for-dollar. Or given there are just starting out, maybe a $4 for $1 match. So if your grad contributes $1,000 you’ll kick in the other $4,000. Do that for five years and then let the sum just keep compounding at an annualized 6 percent, and today’s 22-year-old college grad could have more than $300,000 by age 67. That’s a pretty nice nest egg, jump- started by family.
… make sure they are on top of their student loans. Within six months of graduation, students must begin paying back their college loans. Doesn’t matter if they are employed or not. The penalty for not getting with the repayment program is fierce. Defaulting on a student loan is not a solution: wages will be garnished, credit scores will be eviscerated, and there is literally no escape as student debt is not discharged in bankruptcy. Cheery news, eh? That’s why helping to make sure your grad is on top of their repayment is so important.
If your grad has federal student loans there are some terrific options for deferring payments if they are unemployed, or getting on a low-payment plan tied to their income. But they must apply for both. Their financial aid office should have walked them through all this prior to graduation, but that may not have happened-or registered in the waning days of college. The Department of Education has a clear walk-through of the repayment options for federal student loans.
If your grad has private student loans, it is doubly important to make sure they don’t drop the ball. Private lenders have the right to pile on all sorts of fees and penalties that can cause a manageable balance to balloon out of control. Unfortunately, private lenders aren’t required to offer the same generous repayment terms as are available on federal loans. But playing ostrich is just going to make matters worse: while the grad has her head stuck in the sand, the loan will fall into default, and from there it’s a short hop over to a debt collector. And you really don’t want that fate to fall on your grad, right? So the best move is push the grad to stay on schedule with the payments.
… co-sign for a car loan. Sure, your freshly minted college grad might need a car to get to the new job. But don’t reflexively think it’s your job to co-sign for a car loan. If your grad flakes on the payments that means you are on the hook. And don’t think they will learn a hard lesson if the car is repo’d. You’ll take the hit as well: it’s going to show up as a major ding on your credit file.
Encourage your grad to shop for a less expensive car-new or used-that they can qualify for financing on their own.
… co-sign for an unsecured credit card. Sure, this one is unsecured debt, but it’s still got the potential to screw up your finances. The credit card issuer—or the debt collection firm that buys the account-can and will come after you for payment.
If your grad can’t land a card on her own, then encourage her to shop for a secured credit card that reports transactions to one of the three major credit bureaus. With a secured card the holder will need to fork over a deposit—that’s the secured part-and charges are limited to that sum. It’s credit on training wheels. The idea is for the grad to spend six months to a year being a payment angel on this card to start building a solid credit report. Then it will be no problem to graduate into a regular credit card; in fact, chances are offers will start pouring in once that payment history on the secured card is established. You can shop for secured credit cards at the creditcard.com website.
Now about the deposit: if your grad can’t navigate this speed bump, go ahead and chip in. Up to you whether you want to make it a gift or a loan.
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