Today I am happy to share a guest post from Syed at The Broke Professional. In this article, Syed examines the many financial challenges faced by recent graduates. Please be sure to share your thoughts and feedback in the comments section.
Times they definitely are a changing. I’m pretty sure it was someone who grew up in the Southern US who said that, but it applies to the whole world at the moment. And it couldn’t be more true for those that are graduating with a professional degree. Be it a new graduate in medicine, business, law, engineering, dentistry or optometry (my profession of choice), there is a whole different world to face after the years of living in the university bubble. And it can sometimes be a cruel world. Now I’m not trying to garner sympathy for these new graduates. After all they usually end up in pretty high paying jobs with plenty of room for advancement. But there is also a unique set of challenges newly minted professionals face that they should be aware of.
This is arguably the biggest reason for professional graduates getting into financial trouble. To become an optometrist, for example, you have to complete your prerequisite classes in college and get a Bachelor’s degree along the way. This usually takes about four years. After the grueling process of applying to schools and flying out for interviews, when you finally get accepted into an optometry school, four years of even more intense studying and clinical work await you. After completing these four years (and passing the nerve wracking board exams), you are finally free to find a job or open a practice and finally start making some money.
After years of schooling and (hopefully) living like a poor student, it’s only natural for one to get in the I “deserve” this mindset right out of school. As in, I “deserve” a new BMW because of all the work I put in (along with the $700 monthly lease payment). And I “deserve” a sweet new fancy townhouse since I’ve been living like a pauper the past few years (and the $2500 monthly payment plus maintenance that goes along with it). The examples of treating yourself or keeping up with the Joneses are endless. With inflation eroding buying power over the years and incomes not rising in the same manner, a dollar doesn’t buy as much now as it did 10 years ago. This is an essential point to realize, as simply having a certain title doesn’t enable you to get the goods right out of the gate.
Student Loan Debt
The issue of the high cost of tuition and subsequent massive amounts of student loan debt is a hotly debated one. And for good reason. Tuition is increasingly rapidly year after year, widely outpacing inflation. College was once thought to be an essential stepping stone for success. Sky high tuition prices are making many rethink that. While student loan debt is a big problem for all students, it is an especially big one for professional school graduates. For the graduating class of 2012, the average student loan debt was $29,400. This is not an amount to sneeze at, but I probably incurred that much debt sitting through my first 5 classes in optometry school.
While my final student loan debt (undergrad and optometry school) was around $140k, many of my colleagues were well into the $200k range. So my student loan debt was almost 5 times the national average. That’s a huge discrepancy and a problem that needs to be tackled hard. Many students, myself included, underestimate the effect of student loan debt while in school. And who can blame them? With tests every week and sweat inducing clinical practical exams to prepare for, who has the time to prepare for life after graduation?
Student loan payments will make up a substantial chunk of a new grad’s monthly payments. In a lot of cases it can be the largest payment one has to make per month. And if the banks have their way, this will continue for decades. That can end up being tens of thousands of dollars in interest payments. That’s money that you earned but you will never be able to use because it is lining the coffers of the country’s biggest banks (as if their coffers need more lining). Students and new grads should be prepared for the hit that student loan debt brings and get ready to hit right back. This means cutting back on your consumption and throwing whatever extra money you can towards your highest interest loan and then moving to the next one (also called the Avalanche Method). If you can be diligent in this process, you can reduce the time you pay student loans by years and save thousands and thousands of dollars in interest payments.
Building a Good Credit Score
Unfortunately, the importance of a good credit score is lost on many. Most people don’t know the difference between a credit score and a credit report, and why they should even bother checking them. I’ve noticed that this is especially widespread among new grads, as they’re focusing on finding their place in the world and spending their new found money. Eventually, most people end up applying for a mortgage or a car loan. Even if it’s not in the near future, it will most likely happen. This is the best time to improve your credit score, as it can potentially save you tens of thousands of dollars over your lifetime.
Applying for a mortgage or credit card will initiate a credit inquiry by the lender. They want to look at your past history to make sure you’ll pay them back. Instead of hiring a private investigator, your credit score gives them this info in a nutshell. A low score means you’re not a good borrower. You get the highest interest rate possible on your loan so the lender can recoup their loan quickly. A high score means you are a pretty dependable borrower, so you get the lowest interest rate offered. On a big purchase like a house, the difference between a low interest rate and a high interest rate can cost you potentially hundreds of thousands of dollars. That’s a lot of cheddar. Giving your credit score some attention even for just a few years will get it right where it needs to be. Focusing your efforts on improving your credit score can really pay off in the long run.
A professional degree isn’t a ticket to a lifetime of riches like it used to be. Many new grads are falling into financial trouble by not paying attention to these three big issues. If you can weather the student loan debt storm and resist lifestyle inflation early in your career, you will be setting yourself up for a lifetime of success.
What do you think of these challenges faced by new graduates of professional schools? Do obstacles like student debt diminish the value of obtaining advanced education? Any additional tips for graduates entering the “real world”?
Syed runs a personal finance blog at thebrokeprofessional.com and currently works as a full time optometrist. With his interest in personal finance and professional school experience, he focuses on educating new graduates on the financial transitions into the real world. He especially hates student loan debt and credit card debt. He loves using credit cards for cash back and cheap travel. He loves spending time with his wife and son, and is also a die hard New York Giants and Knicks fan.
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