Wednesday, January 6, 2010, 5:18AM ET - U.S. Markets open in 4 hours and 12 minutes.

Anya Kamenetz Generation Debt

Anya Kamenetz, Generation Debt

Answering Money Questions From Recent Grads

by Anya Kamenetz

Email this Page IM this StoryBookmark this StoryAdd to your Del.icio.us accountDigg this StoryPrint this Story
Good (224 Ratings)
2.450892/5
Posted on Wednesday, June 4, 2008, 12:00AM
As a follow-up to my last column, I decided to take financial questions from real-life recent grads. Thanks to everyone who wrote in with suggestions!

Elizabeth, who is graduating from law school, asks:

I always wonder which debt to pay off first -- private student loans, federal student loans, or credit cards. And which to pay off first -- interest or principal.

Also, I think a clear explanation of the different sorts of repayment options might be interesting. 

Ideally, you'll cut back on other expenses and keep current on all debts. However, if you must prioritize repayment, there are two things to consider: interest rate and penalties.

Private student loans have a current national average interest rate of 8.36 percent, but many are above 10 percent. Also, they come with fewer repayment options and no bankruptcy protection, so you really want to stay current on private student loans as a top priority.

However, it could be a good idea to temporarily defer your federal student loans (Stafford, PLUS, or Perkins loans), which have a fixed rate of 6.8 percent, in order to pay down substantial high-interest credit card debt, since average credit card rates are above 11 percent and run up into the 20s or even 30s if you miss a payment.

Now, by "defer," I'm not suggesting that you skip a student loan payment. I'm talking about taking a formal deferment, which is among several repayment options for federal student loans. Here they are, briefly:

Standard repayment: a 10-year term. A rule of thumb for calculating your monthly bill under standard repayment is to take the first two digits of your loan balance and multiply by 11.5. For a $20,000 loan at 6.8 percent, your monthly payment is $230 a month; for $50,000, the monthly payment is $575.

Extended or Graduated repayment: With extended repayment, you stretch the payments out over 15, 20, or 30 years, which lowers your monthly payment but increases the total interest; this can double the full amount that you're paying back.

Graduated repayment is similar, except the payments start smaller and get bigger over time. You can compare repayment options for the same loan using this calculator.

Income-based, income-sensitive, and income-contingent repayment: These special plans allow lower-income graduates to repay loans based on their income, rather than a fixed amount. Income-based repayment becomes available to all lower-salaried borrowers starting in 2009.

Consolidation: Consolidation means combining your loans for each year of school into a single loan with a single interest rate. Consolidation can simplify your repayment process and maybe lower your monthly payments, but it may not save money on the interest. These loans are becoming less widely available due to the overall credit crunch. If you have at least one direct loan, you can consolidate into the Federal Direct Loan Program, which has some more borrower-friendly policies.

Deferments and forbearances: Deferments and forbearances involve putting off your loan payments because of illness, unemployment, graduate school enrollment, or other economic hardship. You must apply in writing to your lender and be able to prove your income. These are granted one year at a time for up to three years.

Prepayment: Finally, you can "prepay" both federal and private student loans without penalty. If you send in an extra or higher payment, it should always go toward the principal, and you must include a note to that effect with the check, or the money will be applied to your next month's bill. Prepay your higher-interest loans first.

Ben, class of '06, asks:

What are some affordable financial advising firms for post-college professionals? And how much risk should young people take in their investing strategy, assuming that there is no immediate need for the money?

If you want good investment advice that is both objective and personalized, I would suggest turning to a Certified Financial Planner. Find one who charges a flat fee or a percentage of your portfolio (typically 1 percent) rather than working on commission.

Many are thrilled to help young professionals and don't even charge for an initial consultation, and you can learn a lot from just one or two sessions.

Look for someone who is teaching a workshop at your local community center, college, or professional organization. Or go to the Financial Planning Association Web site.

And there are two aspects to investing: the bread-and-butter retirement planning and the more fun stuff. First, I would ask that you max out your 401(k) and/or IRA contributions and choose a strategy that will keep costs as low as possible -- that means reducing your overall number of transactions, rebalancing no more than once or twice a year. In your 20s it's fine to make your portfolio 100 percent stocks (in no-load index funds, of course), and if your risk tolerance is on the high side, you can buy more international and emerging-market stocks.

Finally, Sarah, '08, asks:

I'm just wondering how people deal with paying back student loans, saving money for the future, and still coping with all the costs that come with just graduating, like having to relocate for a new job and other expenses.

I would recommend checking out an online community of 20-somethings where you can share successful strategies with others in the same boat, such as wesabe.com, iwillteachyoutoberich.com, or Qvisory.org.

Also, go online and automate as much as you can. If your student loan payments, plus at least $50 into savings and $50 into a Roth IRA (more if you can afford it) are automatically deducted from your checking account each month, you'll have taken care of the most important financial priorities without having to do a lick of painful budgeting. You won't be tempted to spend the money if it's not in your account.

Email this Page IM this StoryBookmark this StoryAdd to your Del.icio.us accountDigg this StoryPrint this Story

Rate This story

Good (224 Ratings)
2.5/5
Sign-in to rate!

100 Comments

Showing comments 6-35 of 100<< PreviousNext >>
Sort: first to last

  • Game_Dude - Monday, June 9, 2008, 2:33PM ET  Report Abuse

    • Overall: 3/5

    I have a question and comment for Michael S below. First, I'm glad that you're doing so well. But, by my calculations, you must be making a crapload of money. In fact, you must be making nearly $400K every year (minus 35% for federal/state taxes and $44K to live on). This would leave you with enough to amass $1550K (with eliminating your $150K school debt). I applaud your monetary acumen, but most people won't be able to land a job that provides them that much income. Secondly, your advice to work overseas does not guarantee vast wealth. Your emphasis that places like the UAE don't charge income tax is faulty. Americans MUST pay US income tax, regardless of where they live and where they earn their money. Simply because you live in and earn your money in the UAE does not mean that you are absolved from US taxes. On the contrary, the UAE is an expensive place to live, so you need to be making a lot of money in order to simply live there.

  • Yahoo! Finance User - Monday, June 9, 2008, 7:59AM ET  Report Abuse

    • Overall: 1/5

    oh shut up already.

  • Michael - Sunday, June 8, 2008, 10:15AM ET  Report Abuse

    • Overall: 1/5

    Are you kidding me? I completely agree with the other commentators. Not only are the idiotic questions obviously contrived, the advice simplistic and incomplete but the very fact that this person can get published is just another sign of what appears to be a complete sociological and economic collapse. As a Columbia College, '96, Columbia Law '01 and a guy from a lower middle class background who paid off over 150k in loans and has amassed almost 1.4 million in assets in 7 years of working I offer this advice: (i) stop spending your time and money on the bread and circuses of this age, (ii) wake and realise you are entitited to nothing and need to earn everything and (iii) research (gobally) where the opportunities are- aim and take your shot. Today, you young grad can find great jobs in places like the UAE (Abu Dhabi, Dubai) (No income tax), HK, Singapore etc. Do what your ancestors did - get on a boat, plane etc. to a land where there really is opportunity. Most of all, quit your complaining and WORK!!! Be the master of your own destiny. You are entitled to nothing.

  • ElizabethS - Friday, June 6, 2008, 12:14PM ET  Report Abuse

    • Overall: 1/5

    Many of the people I graduated high school with went to Ivy League and private colleges. Even though I got into those same schools, I decided to go to a state university. I was shunned by my former high school friends for going to a state school as they would not even consider any school costing less than 20k per year. I can now sit back and laugh at them. I worked 2 jobs and graduated in 5 years with two degrees and less than $2k in student loans. They on the other hand did not work, partied like a rock star, and wound up with 6 figure student loans. Going to a state school did not make me a less attractive candidate to employers at graduation as I had a ton of work experience and good marks. At 16 and 17, kids are brainwashed into thinking if they don't go to an Ivy League and fit in with the ridiculous sororities and fraternities then they will never amount to anything as an adult. I did not buy into that mold and at 29 I am completely debt free and have managed to max out my 401k and IRA every year since I graduated. Now I am on track to retire before 50 and I can sit back and watch my Ivy League high school classmates work until their 60's and 70's. Isn't life sweet!

  • Yahoo! Finance User - Friday, June 6, 2008, 8:43AM ET  Report Abuse

    • Overall: 2/5

    How's this for advice???? - Get as many credit cards as possible, slowly over 18 to 24 months. They generally will increase your credit limit after 12 months. Then put every normal expense on credit and put your monthly salary into a safety deposit box in cash. After 24 months, take the cash you never spent and pay off the student loans. Then declare bankruptcy on the credit cards. Your credit score will recover in 12 to 24 months. No one will suggest strategies like this because it is patently dishonest and does have some downsides. But LISTEN UP - Federal student loans is today's modern form of indentured servitude. In other words - SLAVERY! I live debt FREE! Don't own an iPod, and will never pay for a Crack-berry. I buy $3 shirts at Walmart and drink lots of tap water. Anyone that would borrow over $50k from the federal gov't is gonna have to pay for their mistake in some way.

  • Merie - Thursday, June 5, 2008, 5:11PM ET  Report Abuse

    • Overall: 4/5

    I think some people who commented on this article fail to understand the intent of the article. People assume everyone in college get a finanicial class, also assuming every college graduate has someone to explain all these terms to them about debt. I finish my degree in 2000- and I took it upon myself to learn all this information and weighed in on my finances myself but since some people are lazy they rather just get direct advice from someone. I think one advice that needs to be given is that fact making sure college graduates do not take out so much student loans that their degree is worthless. Lucky for me I am engineer I make good income and unlike many of my friends I only took out the basic loans every year, I took out the average for my school. I refuse to indulge in the loan borrowing, I rather be broke in college but many college kids do not have those values . Most of these values are taught and apparently these new grads in debt were not taught this... and the people who should have taught them are their parents!!

  • Yahoo! Finance User - Thursday, June 5, 2008, 5:02PM ET  Report Abuse

    • Overall: 2/5

    First of all, the questions by these recent grads are some of the dumbest I've ever seen. What kind of law school graduate doesn't understand basic personal finance topics like these? It doesn't take a lot of gray matter to know that you always pay off bad, high interest revolving debt like credit cards before student loans (contrary to what you're advising, Anya). I had to laugh at the 2nd part of her question: "which to pay off first - interest or principal?" DUH....who in their right mind would make extra interest payments and leave the principal untouched? I also disagree with relying on Financial Advisors for stuff you should be able to figure out on your own with a little common sense and resourcefulness. You my be a writer but you are no Suze Orman hun.

  • JOel - Thursday, June 5, 2008, 12:32PM ET  Report Abuse

    • Overall: 2/5

    So you graduate with 100,000 in loans. If you follow the pay back schedule the cost is 200,000. However the unconsidered veiw is what does one need to make to pay back the 200,000. Assuming one pays about half of what they make in taxes , the real cost is 400,000. THis price should make all of us question the cost of higher education. The rationalization is one will make more money than one that has high school degree. In the end this may not be true. A previous writer mentioned being a wage slave. The kids who drop out of college probably dropped out looking at this issue. All of us need to consider what this behavior is telling us!

  • Ice - Thursday, June 5, 2008, 11:16AM ET  Report Abuse

    • Overall: 3/5

    Give Anya a break! Her target audience are recent grads. If you already know it all, why are you reading her articles?

  • Mike G - Thursday, June 5, 2008, 10:19AM ET  Report Abuse

    • Overall: 1/5

    I just read Anya's Bio. Sure she has plenty writing experience, but where does her financial advice come from, a crystal ball? I don't see how anyone could take advice from someone without a finance background?? I'm willing to bet if Anya was selling magic beans that will grow into a money tree, many reading this would hope in line to buy them. lol

  • JohnEBoy - Thursday, June 5, 2008, 3:20AM ET  Report Abuse

    • Overall: 3/5

    One of her better articles with practical advice even.

  • Dave - Thursday, June 5, 2008, 3:06AM ET  Report Abuse

    • Overall: 3/5

    Is Anya single?

  • JoshaS - Thursday, June 5, 2008, 1:47AM ET  Report Abuse

    • Overall: 1/5

    It doesn't take alot of intelligence to do well in the real world. Just suck up to your superiors, borrow as much money/put as much stuff on credit as humanly possible. While its not an honorable life, people do it to get by anyway and are all flash/no cash. I do find that a potential law school grad having difficulties choosing what to do with her finances very disturbing and it makes you wonder about the quality of our education system here in America. If our education system taught people how to solve crucial life issues/problems than making people obsess about hypothetical abstractions, than maybe millions of people would be better off today. In other words people, you really didn't didn't earn your stripes in college, you just paid $100,000 for the piece of paper.

  • JamesP - Wednesday, June 4, 2008, 10:51PM ET  Report Abuse

    • Overall: 1/5

    Just read "The Total Money Makover" by Dave Ramsey and forget this idiotic advice.

  • Yahoo! Finance User - Wednesday, June 4, 2008, 10:00PM ET  Report Abuse

    • Overall: 1/5

    You have just got to love Elizabeth graduating from Law School asking which types of debt to pay off first. I wonder how many math, economics, or finance classes she had to take to get that Law degree? Maybe one day Elizabeth will finally pay off her loans in her 40's and go into politics. She live in a duped 1.5 million dollar home and argue that the rich aren't paying their fair share, we should raise cap gains taxes, dividend taxes, and increase the size of our government. Elizabeth could have little to no experience but talk real loud, wave her finger, and run her entire campaign on "change".

  • Ted L - Wednesday, June 4, 2008, 8:56PM ET  Report Abuse

    • Overall: 1/5

    This is advice for people who recently graduated college? If you don't know to pay down your higher interest debts first then you most likely don't have a college degree because you are an idiot. Also $50 in savings a month will get you nowhere fast. Again, people with college degrees have real jobs. Maybe advice on how to invest in our company's 401k, how to have emergency savings or how to invest in a recessed economy would be more appropriate for an advice column directed towards college graduates. Horrible article Anya.

  • Yahoo! Finance User - Wednesday, June 4, 2008, 8:55PM ET  Report Abuse

    • Overall: 1/5

    ... duh ...

  • Dan - Wednesday, June 4, 2008, 8:48PM ET  Report Abuse

    • Overall: 1/5

    What is yet amazing, but not surprising, is that yet again, we lead another class into the slaughter, called the American Economy. When I graduated in 2003, I was in a job market that really stunk, and yet again here we are again, another recession (oops...I wasn't supposed to use the "R" word). EARTH TO ANYA: Just come out and tell it like it is. Most of the Class of 2008 is going to face prolonged unemployment, and possible loss of their homes. There are people who graduated in 2005, who are having to change careers again, due to lousy advice, and a lousy economy. ALSO, admit it.......we are in RECESSION (Can you say Recession Anya??). Stop sugar coating the new grads, and have them meet the real world for what it is....a very tough place to make a living!

  • Yahoo! Finance User - Wednesday, June 4, 2008, 8:35PM ET  Report Abuse

    • Overall: 5/5

    Nice and informative article weighed down with a lot of sophomoric comments. Too bad - Anya addresses some relevant issues with good sound advice. Not everyone (including many commenting here) has the foresight or discipline to keep out of debt during college or any other period of their life. Keep up the good work Anya!

  • Russell - Wednesday, June 4, 2008, 8:07PM ET  Report Abuse

    • Overall: 1/5

    I need some kind of a macro to automatically give Anya one star every week... and don't be fooled... those questions are not real... only an aid to beat a deadline.

  • Ken - Wednesday, June 4, 2008, 7:35PM ET  Report Abuse

    • Overall: 2/5

    I am not surprised that recent college graduates do not know anything about finance or anything else for that matter, since they never really cared about the purpose of college.

  • derek - Wednesday, June 4, 2008, 7:20PM ET  Report Abuse

    • Overall: 2/5

    I guess some people do need the cookie cutter advice, such as invest early and get the advantages of compounding. Or, pay down the debt that hurts you the most. It seems to just make sense, but I was a finance major. I guess I take it for granted. Anyway, I also have a gripe about Yahoo posting articles about luxury homes becoming more affordable. "5MM dollar houses are dropping 10 to 15 percent." Oh really? Let me go get my loan lined up now. Oh wait, still only 1 percent of the population can afford this house. What is the use of this article for the other 99 percent of us. I dont understand some of these articles on here.

  • Yahoo! Finance User - Wednesday, June 4, 2008, 7:08PM ET  Report Abuse

    • Overall: 5/5

    I am a 36 year old accountant and I have been amazed at how little people just out of college know about finances, even those who are accountants. I'm not sure why everyone is so angry that Yahoo is providing advice for those who may not have extensive experience in finances. For all of the men out there who seem to have this uncontrollable juvenile need to comment on her looks, you lack character and your immaturity is quite evident and discounts the substance of everything you write. Hopefully, these people are not responsible for managing others in their careers.

  • Love2Fly - Wednesday, June 4, 2008, 5:52PM ET  Report Abuse

    • Overall: 4/5

    Many people complaining that this is obvious. It might be obvious to those of us who's been out in the real world for years, but not to all college grads. College is an academic education pertaining to the DEVELOPMENT of the mind and contrary to many beliefs; you do not come out knowing everything (not even in your whole life). That's why college grads are welcomed to the 'real world' when they get their first job and what better way to welcome them than giving them advises.

  • Yahoo! Finance User - Wednesday, June 4, 2008, 5:45PM ET  Report Abuse

    • Overall: 1/5

    God awful article. Who is she sleeping with at Yahoo? That's the only explanation of how MANya still has a job.

  • Yahoo! Finance User - Wednesday, June 4, 2008, 5:24PM ET  Report Abuse

    • Overall: 1/5

    How could she not even understand a simple question like which debt do I repay first. Any person with even the slightest grasp of the common meaning of that phrase would understand that the person asking the question means pre-pay. The person would ask a question more like, which bill should I skip if I'm short on cash if they meant the question this "expert" answered. I couldn't bear to read the rest.

  • Bobbie M - Wednesday, June 4, 2008, 5:11PM ET  Report Abuse

    • Overall: 1/5

    Common sense..duh..payoff the credit cards...they are ALWAYS going to be higher than student loans...also you don't need some dopey financial planner that will only sell you what they make money selling. Buy V and MA...wait 10 yrs...you're rich!!

  • Derek C - Wednesday, June 4, 2008, 4:39PM ET  Report Abuse

    • Overall: 1/5

    NO CHILD LEFT BEHIND. Law school graduate with no common sense. It's just like asking "Which number is larger, 2 or 3?" I HAVE NO RESPECT FOR THESE PEOPLE!

  • Manoj - Wednesday, June 4, 2008, 4:19PM ET  Report Abuse

    • Overall: 1/5

    If not body taught you doesn;t mean you are sitting dumb and waiting for a course or someone to tell you. It is important to know 'how to fish'. No fish will be handed over. Live in real world with all your senses alerted to the maximum. Students are very lucky as they have internet. Information is readily available online. I think that is the disadvantage actually as all they do is copy and paste.

  • Da Big Guy - Wednesday, June 4, 2008, 4:14PM ET  Report Abuse

    • Overall: 3/5

    Have to mention volunteer and pro bono work that youngsters can use tax advantages from and gain great experience as well as connetions!

Showing comments 6-35 of 100<< PreviousNext >>

More from Anya Kamenetz

Read the Generation Debt Book

According to economics professor Laurence J. Kotlikoff, Generation Debt offers "a truly gripping account of how young Americans are being ground down by low wages, high taxes, huge student loans, sky-high housing prices, not to mention the impending retirement of their baby boomer parents." Generation Debt will inspire you to take charge of your financial future.

Read more from Anya Kamenetz here and here.

More from Yahoo! Sources

  • CNN Money
  • Consumer Reports
  • Kiplinger
  • The Motley Fool
  • Business Week
  • Wall Street Journal

Sponsored Links

Refinance Now at 4.2% Fixed
No hidden fees, 4.4% APR. No obligation. Get 4 free quotes. No SSN req.
MortgageRefinance.LendGo.com
Obama Urges Homeowners to Refinance
APR as low as 3.616%! Calculate New Mortgage Payment Now.
www.LowerMyBills.com/Refinance
Student Loan Consolidation
Find all student loan here-Get free advice and info…
www.loanmanaging.com
Student Loan?
Get your much needed student loan info here now.
Top-StudentLoan.com
Student Loan?
Don't Click Unless You Need Student Loan Info
StudentLoanCombo.info
Student Loan Info?
Get Your Free Student Loan Loan Info Now
StudentLoanSave.com

Historical chart data and daily updates provided by Commodity Systems, Inc. (CSI). International historical chart data and daily updates provided by Morningstar, Inc. Fundamental company data provided by Capital IQ. Quotes and other information supplied by independent providers identified on the Yahoo! Finance partner page. Quotes are updated automatically, but will be turned off after 25 minutes of inactivity. Quotes are delayed at least 15 minutes. Real-Time continuous streaming quotes are available through our premium service. You may turn streaming quotes on or off. All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.

Yahoo! Answers is provided for informational purposes only, and no Q&A is intended for trading or investing purposes. Yahoo! shall not be responsible or liable for the accuracy, usefulness or availability of any Q&A information, and shall not be responsible or liable for any trading or investment decisions based on such information. View Complete Answers Disclaimer.