‘Tis the season for fake commencement speeches and poignant advice for college grads. Steve at Think Save Retire issued a challenge to write a commencement address, and I’m tweaking mine to be more of a “coffee date message.” Because my advice isn’t eloquent or pithy, it’s purely practical.
My #1 financial message to recent grads would be: pay off your student loans. My #1 strategy for doing so would be: pretend to still be a broke college student. Lifestyle inflation is nearly inevitable after college, and that’s appropriate, but delay as much of it as possible until you slay those loans.
Hopefully you’ve landed a good job, but even if you have a great new income, you still don’t have money if you have debt. I know those new paychecks will burn a hole in your pocket, but try to think about the impact of keeping those student loans around for 10-15 years. Let me give you some perspective.
I graduated from college ten years ago. Many of my peers are married with kids, and some are still swimming in student debt. They may long to purchase a home, but cannot afford one because they graduated with mortgage-size debt. Others are struggling to afford medical bills or fertility treatments, because student debt still holds them back. And college funds for their kids will have to wait, because they still haven’t finished funding their own education.
Now, I don’t judge people for having a lot of student loans. When they were teenagers, the people they trusted most told them this was good debt. They said you had to do this to get ahead in life. But the people telling them this—parents, teachers, school advisors—went to college at a time when you could pay for tuition by working in the summer! Times have changed, and some of us were railroaded into massive debt before we were mature enough to understand the implications.
So that stinks, but it’s too late. After all, student loans are the one type of debt that can’t be forgiven through bankruptcy. Not that that’d be a great option, anyway. So what are you supposed to do?
How about, for starters, don’t take on any more debt?! No cars loans. No financed furniture or computers. No credit card debt. Definitely no mortgages! Just don’t go there, because you’re already in debt.
What are you supposed to drive? Sit on? Eat? Wear? Live in?
The same things you’ve been driving, sitting on, eating, wearing, and living in. Keep splitting the rent with roommates. Get hand-me-down furniture. Keep driving the beater. Shop thrift stores for your professional wardrobe. Pack your lunch.
My husband and I married while we were still in college, but even after graduating we declared that we wanted to keep living like college students. Not in the sense of late-night partying and living on ramen noodles, but we wanted to keep our lifestyle simple and inexpensive.
We did “upgrade” from beat-up college rental homes with many roommates, to a 1-bedroom apartment. Our little place felt like the lap of luxury, but it was actually cheaper than the combined rents we’d been paying in a college town.
I remember our newlywed grocery budget was $30/week (not adjusted for inflation). We shopped at ALDI and Save-a-lot, packed lunches, and cooked dinner at home most nights. We still sometimes got fast food or went out to dinner. For entertainment, we often invited friends over, went for long walks, or visited free community events.
We bought a new bed and a bookshelf, and that was it. All our other furniture we bought used or got for free as hand-me-downs or gifts.
None of this felt like a sacrifice; we had plenty of fun, traveled, and still bought things we didn’t really need. In fact, we splurged big time after Neil graduated and went to a Europe for a month! So it wasn’t like we 100% froze our lifestyle or refrained from all extra spending. But we were able to save up the money from my first year teachers’ salary to take this big trip.
We didn’t take our own advice perfectly. We even bought our home right before paying off the school loans. In the end it didn’t matter, because it was simply of matter of timing at that point. We were bound and determined to pay them off quickly, and we did. I’m so glad we paid them off before starting a family, so we could start college funds for our kids.
Even with major “slip-ups” in pretending to be college students, we were able to set ourselves up for a more flexible future. An overall mindset of delaying lifestyle inflation helped us make financial progress I know wouldn’t have been possible otherwise. It’s also made it easier to live on one income while I’m home with little kids.
It’s really hard to deflate your lifestyle, so keep it simple out of the gate. You had a ton of fun in college without a big budget; the same is possible now that you have an income. As you focus on your new stage of life, don’t lose sight of your real financial position. If your net worth is still negative, pretend you’re broke. Because you actually are.
What feels even better than graduating from college? Paying off your college loans!
My husband and I went to school for engineering and education, respectively. The cost of tuition at the state university we attended doubled by the time we graduated and we accumulated $25,000 in student loans. During our first year of marriage, I made $35,000 as a teacher while Neil finished his degree. We kept our expenses similar to when we were still students. Neil graduated and we did something very not frugal–we spent a month in Europe. This trip wasn’t cheap, but we knew it was a rare opportunity. Neil would start with only two weeks of vacation per year, I was off for the summer, we didn’t have kids, and we had saved up the money that year. Flexibility at its finest!
A year or so after Neil’s graduation we caught the pay-off-debt bug, mainly through exposure to Dave Ramsey, who famously says “your student loans aren’t a pet.” He means don’t keep loans around for 10-15 years by paying the minimum, because you’ll end up paying lots of interest and, I’d add, be less financially flexible. When we came to this conclusion we were living in our friend’s basement, paying a little rent and saving a lot.
At first we wrestled with the idea of paying off loans because the interest rates were lower than returns we could get elsewhere. But the very state of being in debt started to bother us. We felt like the money we were saving wasn’t actually ours if we owed it elsewhere. (In an upcoming post we’ll talk about why we never view money as truly “ours.”) One thing that crystallized the inflexibility of debt for us was the possibility of becoming overseas missionaries. Though we pursued different roles in supporting world missions, we thought how difficult and ridiculous it would be to have student debt as a missionary. If you have to raise financial support this would really increase your expenses and it seems possibly wrong to ask someone else to pay off your student debts. Plus we weren’t investing the money, we were just putting it in a savings account for a down payment, and the rates on that account were steadily dropping.
When it came to paying off debt, we didn’t do everything perfectly according to the normal personal finance rules. I left my teaching job and worked part-time. We bought a house before paying off our debt. We traveled a lot. We volunteered lots of free time instead of side hustling for extra cash. And all the while we gave away at least 10% of our gross income. So even if you’ve made mistakes, meandered off the recommended path, or value things like generosity and flexibility, now is the time to get serious about getting rid of school debt. Shortly after moving into our home we started attacking the school loans. Within a year and a half they were paid in full.
So how did we buy a house, travel, and pay off debt within 3 years of finishing school?
1. We kept living like we were in college (minus travel).
2. We avoided consumer debt.
3. We saved aggressively.
4. We bought a home we could afford on one income.
5. We didn’t buy new furniture and furnishings for the house. (Neil remodeled the kitchen using the 2010 home buyers tax rebate.)
6. We used extra savings and income (like bonuses, gifts, my income, and a little side hustle money) to pay off debt (as well as giving some away).
So there’s our story. We paid off the last of the student debt before our first child was born. We didn’t wait to have children until it was paid, but it worked out and we were able to start a college fund as his first Christmas present. Having our school paid for helped us start saving for our children’s education.
If you’re still in college, try to wrack up as little debt as possible. Lending institutions very liberal with student loans. Don’t take out loans for living expenses. Do courses at a community college. Save summer job money to pay for part of tuition. Apply and re-apply for scholarships every year. I could fill another post with tips, but do your future self a favor and take as little debt as possible, and keep it in proportion with your realistic starting salary. An $80,000-in-debt English degree is not a good investment (that’s coming from an almost-English major).
Living like you’re in a college until you’ve paid for college is the best way to pay off debt. I’m talking about keeping spending lean, not late-night partying. That means no car debt, no credit card debt, no new furniture or TV, low food and entertainment costs, etc. No Euro-trips either, I guess. Call it a crime of opportunity.
Student loan debt does NOT have to be forever. I know some people have more debt than we did, or may have a lower income. This means it could take longer to pay off debt, but just having the mindset and goal of getting rid of loans before your college years are a distant memory is a great starting point. If you live on less than you make, you will be able to put something toward getting out of debt. Now we’ve adopted this attitude toward paying off the mortgage. Less debt definitely increases your financial flexibility by freeing you up to save, give, invest, and take opportunities that come your way. Keep plugging away and you’ll get there!
What motivates you to pay off debt? What has held you back? If you’ve paid off student loans, how did you do it? How has it made you more flexible?