smart spending

A grad's guide to fiscal fitness

Pay on time, all the time

Think missing a loan payment is no big deal? Think again. Missing or sending in just one student loan payment late can cost you thousands in fees, penalties and terminated loan benefits; it could also affect your credit score.

Grads who miss their payments by more than a few days, 270 days for federal loans, are considered in default and face even harsher consequences, including wage garnishment, garnishment of federal and state income tax refunds, withheld Social Security benefits and severe credit repercussions.

Anya Kamenetz says that while in default, the interest payments grads aren't making get tacked on to the principal amount, forcing broke graduates to foot an ever-increasing loan bill. "Let's say that you owe $26,000 for your education with a federal student loan that's gone into default. Once it goes into default, in two years it could increase up to $100,000 with capital interest, penalties and fees," Kamenetz explains. "Since you can't get rid of student loan debt through bankruptcy, that's a debt you're going to be carrying your whole life."

Knowing the terms of your loan, staying on top of your payments and communicating openly and honestly with your lender can prevent you from falling into a debt trap you'll be paying for decades after you've left campus.

Pay yourself too

Managing your student loans is only one part of the financial equation. To truly set up for a healthy, long-term fiscal future, grads also need to pay themselves, storing approximately 10 percent to 15 percent of their salary in a long-term savings or retirement account, says Doug Charney, senior vice president of Wachovia Securities in Harrisburg, Penn. "The number one mistake recent graduates make is they don't participate in their employer's retirement plan," Charney says. "Most 401(k)s have employer matching on their first 6 percent. Not participating is kind of like saying, 'I don't want a raise.'"

Norbert Mindel, Certified Financial Planner, or CFP, and partner at Forum Financial Management in Lombard Ill., agrees, stating that 401(k)s not only offer significant tax breaks, they also offer better returns than most savings vehicles available to recent graduates. "If you put a dollar in, you might save 25 cents in taxes. If your employer matches by another 10 cents, you have a 35 percent return on your money," he says. "A 401(k) is free money."

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Saving enough to pay off student loans and to begin contributing to a retirement fund means living simply, says Draut. If young people really want a solid financial start, they should consider becoming a boomerang kid: one who graduates from college and then moves back home to save money.

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