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From the Baltimore Sun

Lessons for graduates: Financial considerations take on new importance

By Megan Hartley, Sun reporter

May 11, 2008

College graduates are saying goodbye to all-night study groups, pizza diets and midafternoon naps. And many will need to accept more financial responsibility.

But some of those about to leave college for good worry they are not up to the task of handling issues such as insurance, investments, student loans and real estate. And many have some big financial decisions to make as they move beyond classes and into their careers.

In a survey conducted by the Jump$tart Coalition for Personal Financial Literacy, college seniors answered about 65 percent of personal finance questions correctly: That's a D grade for these academic achievers.

Those kinds of results worry financial experts, who argue that today's graduating classes need to know more about their finances than generations before them, given the loss of pensions and the shifting responsibility for workers to manage their own retirement accounts.

Alisa Trunzo, a senior majoring in art history and archeology at the University of Maryland, said her parents pay for most of her bills, such as rent, car insurance and tuition.

As a result, Trunzo said, she has "literally no idea" how to handle her personal finances well.

She worries about finding a job that will enable her to live in expensive Washington, D.C.

"Car insurance would be one of those expenses that would just fall upon me and probably crush me," Trunzo said. "You think about your rent and other big expenses, but you kind of forget about all those other little things."

Here are a few things that graduating seniors should be ready for after they pick up their diplomas.

-- Housing costs

Before graduates pack their cars full of small refrigerators and other belongings, they must decide where to go.

Should they move back home to save money? Rent an apartment near their job--if they have one? Or should they try to purchase property in what many are calling a buyer's market.

Most financial experts agree that buying a home should be one of the last things on a graduate's mind. More effort should be put into saving money, paying off loans and building up savings.

"My perspective is, you shouldn't try to time any market, whether it's a housing market, a stock market or a Britney Spears concert market," said Stuart Ritter, a financial planner with T. Rowe Price's Financial Planning Services group and an instructor of personal finance at the Johns Hopkins University. "Your primary consideration is how long you are very sure that you are going to be in the same place."

Moving home is one way to save money, but graduates should set up ground rules with their parents, said Janet Bodnar, deputy editor of Kiplinger's Personal Finance Magazine and author of "Money Smart Women."

"The parents and kids should talk up front. Kind of say, `If I'm going to come home, what's the deal here?' " Bodnar said. "Parents may not charge rent but expect the kid to invest the money he saves."

Those who choose to rent should consider insurance. The policies, which can cost a few hundred dollars a year, provide coverage for your belongings and if a guest gets hurt in your home.

-- Health insurance

According to the Commonwealth Fund, nearly 40 percent of college graduates are uninsured during their first year after graduation. Many are not eligible for their parents' health coverage unless they qualify as a dependent or remain a full-time student.

Besides an employer health plan, the most common and least expensive option is to sign up for a temporary private health plan, experts said. Many insurance companies offer month-to-month plans that cover an individual for major health disasters.

Golden Rule Insurance Co., for example, offers up to a year of short-term coverage with deductibles ranging from $250 to $2,500. The plans are designed for healthy individuals looking to bridge the gap in their health-care coverage.

For graduates with existing health conditions, the federal Cobra plan might be a better option. The law allows for the continuation of a graduate's previous health insurance for up to 36 months at the price of the group rate.

This option, however, is generally more expensive than a short-term private plan.

"The parent's employer no longer pays any part in the cost, so it's going to be expensive. It's more for those with pre-existing health conditions, like diabetes or cancer," said Shelly Johnson with StudentHealthInsurance.com.

-- Investing

With the stress of finding a job, paying off student loans and looking for a place to live, investing can be the last thing on a graduate's mind. But financial experts say it should be a priority.

"I encourage young people to put at least something into a retirement account," Bodnar said.

"When you run the numbers, it is eye-opening to see how important the small amount of money you save when you are young is. It's the power of compounding."

Because many companies are shifting all retirement responsibilities to workers and phasing out pension plans, this generation needs to plan more for its retirement than its predecessors, financial experts said.

When starting a new job, find out if the employer offers a 401(k) plan, an employee-sponsored retirement account that defers funds from your paycheck before taxes.

Often, the employer will match up to a certain amount of the funds that an employee chooses to put into the account. Most financial experts encourage new workers to invest as much as they can in these accounts.

If an employer does not offer a 401(k) plan, or a graduate does not have a full-time job, a Roth individual retirement account is another option. These dollars grow tax-free if they aren't used before retirement and can be withdrawn tax free.

As for student loans, graduates have some time before they need to start making payments. Federal Stafford loans, the most common type of student aid, have a six-month grace period before payments begin.

Bodnar also said consumers should build an emergency savings fund with a few thousand dollars in case a car breaks down or the laptop implodes.

"Parcel it out and don't be overwhelmed," Bodnar said. "You can save $100 a paycheck and put $50 into retirement and $50 into" an emergency fund.

Ryan Minnehan, a senior business major at Towson University in Maryland who holds three part-time jobs, is on top of his personal finances. He contributes to a Roth IRA and has an online savings account that offers high interest.

"My thought is that every dollar I have, I want to be invested or earning interest," said Minnehan, who plans on traveling abroad before finding a full-time job in the fall.

-- Car insurance

Graduates who move back home often have the option of staying on their parents' multiple-car policy.

But those who plan on moving out need to buy their own insurance.

Among the things graduates should consider: Know who owns the car, how much it's worth and whether they qualify for a "good student" deduction, said Kevin Grenier, assistant vice president of Geico Insurance.

Graduates can expect to pay more than they did on their parents' policy.

Good driving records, older cars and good grades will help to reduce the premiums.

Graduates also should check for discounts through their school's alumni association.

Megan Hartley is a staff reporter for The Baltimore Sun, a Tribune Co. newspaper.