that the stock market has gone through for years now, many have
focused on the effect that the market meltdown of 2008 and early
2009 had on retirees and those approaching retirement. Yet while
there's no denying the big hit that those investors took, young
adults are facing even more difficult financial challenges right
now -- and if they aren't careful, the mistakes they make could be
far more costly and difficult to correct.
The downward spiral
terrible job environment
has created a seemingly unbreakable vicious circle for young
people. For decades, young people understood that the key to a
better standard of living was getting a college education. As the
costs of going to college have skyrocketed, most people have
justified the expense as a necessary investment that would pay off
after graduation in the form of better jobs and higher
Yet the rules of the game have changed. Now, a college education
doesn't guarantee you anything -- except perhaps
another set of loans to pay back
. Consider the most recent bad news for those who are just getting
started on their own:
- Student loan default rates have jumped to 8.8%, according to
the U.S. Department of Education. For those who attend for-profit
colleges, the default rate is an even more staggering 15%.
- 5.9 million young people ages 25 to 34 -- roughly 1 in 7 --
now live with their parents.
- Student loans now represent $931 billion in debt for young
adults. For the first time, that figure beat out the estimated
$798 billion in outstanding credit card debt.
So what should young people do about these threats to their
financial lives? Here are three lines of defense.
1. Don't be dumb about getting smart
Getting a college education can still be a valuable learning
experience that opens doors that would otherwise remain closed to
job-seekers. But you can't afford to pay so much for your college
education that you dig a debt hole you'll never climb out of.
It's more important than ever to
get the most from financial aid
. Although outright grants are hard to come by, low interest rates
at least make student loans more borrower-friendly. But a simple
rule of thumb is that if your total debt coming out of college will
be greater than a year's salary, you need to take a closer look at
alternatives that could save you money. Otherwise, you could find
yourself in over your head after you graduate and the time comes to
try to pay those loans back.
2. Steer clear of bad debt
Having a credit card is almost a necessity in today's financial
world. But just because you need a card to do things like rent a
car doesn't mean you should do the one thing card-issuing banks
want: carry a balance.
Student loan debt is tough to repay, but it at least can carry
relatively attractive interest rates with reasonable repayment
terms. By contrast, most credit cards charge sky-high rates with
fees to match. Once you add credit card debt to an already sizable
student loan load, it becomes very difficult to make ends meet.
3. Don't expect the government to save you
Recently, lawmakers have pushed greater regulation as a solution to
the problem. Credit card reform included provisions to keep credit
card issuers off campus, although
Bank of America
) , and
) GE Money all have agreements with institutions of higher
education that pay millions of dollars to colleges when students
and others open credit card accounts.
Similarly, the Department of Education has sought to put tighter
restrictions on for-profit schools such as
(Nasdaq: APOL) ,
) , and
(Nasdaq: COCO) in order to try to bring student loan default rates
Washington Post Co.
) unit Kaplan is among those schools that intend to meet new
standards for refundable grace periods, despite their being costly
In the end, though, it's up to students -- and the parents who
advise them -- to be smart about what they do. Learning fiscal
responsibility at an early age is the best defense against
opportunistic businesses seeking to exploit young people.
Be on your guard
It's unfortunate that young people have to defend themselves in
order to avoid financial mistakes that could stay with them for
decades. But with the right safeguards, you can protect yourself
and get your financial life started on the right foot.
For more on protecting your credit from potential harm, be sure
to take a close look at our Foolish Credit Center.
Tune in every Monday and Wednesday for Dan's columns on
retirement, investing, and personal finance. You can follow him
Fool contributor Dan Caplinger hopes to protect his daughter
from the worst of the student loan mess when her time comes. He
doesn't own shares of the companies mentioned in this article. The
Motley Fool owns shares of Bridgepoint Education, JPMorgan Chase,
and Bank of America. Motley Fool newsletter services have
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