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Financial Planning > College Planning > Student Loan Debt

Guiding New Grads

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Good news! Employers intend to hire 19.2% more new college graduates in 2007 than they did last year, according to a recent poll by the National Association of Colleges and Employers. As grads enter the job market, terms such as PPO, HMO, POS, PCP, COBRA, FSA, 401(k) and ESPP will be thrown at them, making them long for the carefree days of organic chemistry midterms or philosophy lectures on Rene Descartes. Working through an employee benefit package can be an intimidating experience and most employers do not tend to spoon-feed this information to employees. The best new hires can expect is to be given a link to a variety of Web sites and, perhaps, an 800 number, which when contacted, may direct the caller to another 800 number.

Matriculate in Retention

As this is an initial step into independence, many college grads may be hesitant to ask their parents for help. A third party–like you–who can look at issues from a more detached and informed perspective can be a very appealing alternative.

Much has been written about this generation of baby boomers’ offspring, known as “Generation Y,” this group is regarded as pampered, excessively nurtured, and overly programmed for activities since childhood. The best way to approach them is to show that you are going to make things easier for them. Help them feel independent but, at the same time, spoon feed and guide them through the process.

The benefit to you could be twofold: grateful parents and starting a strong connection to the next generation.

To get started, determine which of your clients’ children are recent college grads, then call the parents and let them know of your value-added service. Get their permission to text their kids with an invitation to learn how to select the best financial options for their situations. Offer to meet with them to help them to understand what their options are and get started with a strong financial foundation for success. It would be best to meet them in person, but you can use e-mail and the phone.

Help your clients’ offspring answer the following questions: How much do they need to set aside to pay off debt? What are their health benefits going to cost? How much do they need for basic necessities? What is a realistic figure for regular savings? And what can they spend on new clothes, cars, or homes? With some concrete answers, their parents will greatly appreciate this service and their children will be off to a stronger start on their financial futures.

The obvious easy win is to help the newly employed determine their contribution rate and allocation to their 401(k) plan, and develop an overall “spending plan.” For many new grads, “budget” may sound too restrictive for their new-found freedom.

Remind them that if they do not have access to an employer-sponsored retirement savings plan, they can consider an Individual Retirement Account (IRA) or, most likely, a Roth IRA.

Here are areas where you can add value that may not be that apparent to your clients and their children.

Easing the Debt Burden

Student loans are no longer exclusive to the working class. Many of your affluent clients are using loans to help fund their children’s education. In fact, 60% of college students finance at least a portion of their education, according to the National Postsecondary Student Aid Study (NPSAS).

According the American Council on Education, student loan debt averages:

  • $14,671* for a public four-year college;
  • $17,125* for a private four-year college.

    (*Data for 2003-04 graduates)

If you add grad school into the mix, the amount can be staggering.

So, what can you do to help? Do what you do for all your clients: get them organized and aware of their existing and future financial plans. For many of your clients’ children, this is their first borrowing experience. Very importantly, it is the beginning of their credit history, which affects their future buying (i.e., house, car, etc.). Therefore, it is imperative that they are well informed about their options and develop very good pay-down habits.

Make sure that they are aware of all their loans–organized by federal or private sources–and discuss the possible benefits of loan consolidation. When Congress eliminated variable rates for federal Stafford loans, consolidating no longer affected the interest rate those borrowers will pay. All loans issued after July 1, 2006, have a fixed rate of 6.8%. Review the outstanding loans of your clients’ children to determine if consolidating makes financial sense. Do they have older, variable-rate loans? Do they need more time to pay back the loan(s)? While repayment of a Stafford loan is 10 years, consolidation could allow up to 30 years at a reduced monthly cost for repayment.

Additionally, inform them about special incentives from lenders. For example, some offer interest rate reductions for automated debt repayment or for having a history of on-time payment.

According to the American Institute of Certified Public Accountants, as of 2004, 76% of college students had credit cards and their average debt was $2,169. Do they have credit card debt? Is the interest rate high? You may be able to help them to find a more favorable situation or suggest ideas to get their credit card debt paid down as soon as possible? For example, do they have a uniform gifts to minors act (UGMA) account that they may not be aware of that could be used to pay off or reduce the debt?

Making Smart Choices

Most grads are not ready to purchase a new home, so they will rent. A frequently overlooked necessity is renters’ insurance. The first reaction a 20-something may have is: “I don’t have anything worth insuring.” Not so fast. Consider that high-definition television, laptop computer, iPod, jewelry, furniture, and any other valuables that could be stolen, lost, or damaged.

Assist them in analyzing what type of policy is right for them. Discuss the basic concepts of a cash value policy versus replacement value policy. The replacement value policy is usually more costly but allows them to get an amount equal to what it would cost to buy those items new again, rather than for its value at the time of loss.

Purchasing a car will most likely be at the top of their shopping lists. Financial options once again will dictate the type of car and whether it will be bought or leased.

Have a chat about their expectations. Is this the type of person who would want a new car every two or three years or does she come from a family that drives a car into the ground? Will he drive an above-average number of miles? Finally, and most importantly, what will work best for the expected cash flow of that individual?

A new world is waiting for these new grads. With a bit of guidance and a financial roadmap, they will be able to see that financial success is not as daunting as they assumed and, more importantly, they will learn from you about how to make it possible. Reach out to some of these promising young individuals who might be your clients–and the CEOs–of tomorrow.

Susan L. Hirshman, CFP, CPA, CFA, CLU, is a managing director for JPMorgan Asset Management in New York. In that position, she develops strategies to provide wealth solutions to the affluent market. She can be reached at [email protected].


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