Paul Golden: Study Finds College Grads Confront Rocky Transition To Self-Sufficiency

Jun 27, 2014 by

An Interview with Paul Golden: Study Finds College Grads Confront Rocky Transition To Self-Sufficiency

Michael F. Shaughnessy

1. Paul, apparently students are having a difficult time transitioning to adulthood due to student loan debt—I will keep this brief—-Who is ultimately responsible? Parents that did not save or plan for their kids, the students not working part time or seeking out scholarships? Or the general climate of the country?

The recent economic downturn, and sluggish recovery, has made personal finance situations difficult for many. Student loan debt has surpassed the $1 trillion mark, which outpaces credit card and auto loan debt. Through a six-year study of college students, we are learning that this debt burden is a major cause of financial instability. Our research partners at the University of Arizona have discovered that 50 percent of recent college grads still are receiving support from their parents and nearly half (49 percent) of these adult children are employed full-time. And what is troubling is that these recent college grads are putting off life goals such as getting married, buying a home and starting a family. It’s important for parents to ensure their parental instinct doesn’t threaten their imminent retirement. In a separate study, we found that 26 percent of parents who are helping support their adult children are taking on debt and 7 percent say they are delaying retirement. It’s natural to want to help your children, but you should only do so if your financial footing is on solid ground.

2. What is the responsibility of the “lending institutions” or the banks or whatever lending organization these students use?

Ultimately, it’s up to the individual or family paying back the loan to bite off only what they can chew and execute on-time payments. Once the student graduates, they need to be responsible for their financial commitment. We’re finding that parents are stepping up to help with debt obligations and this provides a teachable moment to help children take on more responsibility and treat the loan as an adult transaction. Oftentimes, loans between family members are thought of as gift money and are never paid back, so it’s up to the parents to make it a serious contract by charging even a small interest rate. This way, their “child” doesn’t feel like they’re getting off free. Here are some other tips when dealing with adult children:

* Don’t be continuously used. If you agree to pay off your child’s debt, insist this is a one-time offer. If adult children believe you’ll bail them out every time they get in over their heads, they may never learn the risks and rewards associated with credit.

* Understand tax implications. Individual gift up to $14,000 is tax free each year; married couples can gift up to $28,000 tax free; gifts that exceed must be reported to IRS.

* Set a time limit. Before giving any assistance, work together to decide exactly how long the situation will last.

* Promote responsibility. Require adult children who live at home to help with household responsibilities, financial and otherwise. This tactic will encourage young adults to save and remind them that the situation is temporary.

* Establish a plan. When you have agreed upon a plan, draw up a written contract. The more seriously you take the situation, the more likely your child will, too.

3. Ultimately, is it not better to be in debt than to be trying to make it in this world with only a high school diploma?

Pew Research Center analysis, using Census Bureau data, estimates that the typical adult with a bachelor’s degree will earn $1.42 million over a 40-year career, compared to $770,000 for a typical high school graduate. That $650,000 difference narrows somewhat, to $550,000, according to the analysis, after factoring in the expenses of going to college and the four years of potential earnings that college graduates give up while they are in school. This makes the earning potential of a typical adult with a bachelor’s degree 1.84 times that of a high school graduate. Although debt can be a tough cycle to navigate out of, the reason for taking on debt-most often student loan debt-will set you up for a lifetime of financial and personal success far more than any life led debt-free.

4. Do lending institutions simply need to be more careful about their lending or does someone need to be monitoring students so that they are not in college for 5 or 6 or 7 years?

Care should be exercised on all fronts. Lenders have a responsibility to prudently underwrite and issue the loans, and they are being more stringent in their underwriting guidelines after the Great Recession. If students gained better financial education before entering college, they would understand the implication of accumulating debt and hopefully would begin to advocate for themselves. Once out of college, however, the problem is far from over. We’re seeing that personal finance needs to be reinforced throughout an economic lifetime. This cannot be a one-time inoculation; you need booster shots along the way.

5. Do you have a link to the complete report about this issue?

Follow the links on our website for official reports from all waves of APLUS: http://www.nefe.org/what-we-provide/primary-research/aplus-research-on-young-adults-wave-3.aspx

6. What have I neglected to ask?

NEFE believes personal finance education should be integrated into the middle or high school curricula, but ultimately it’s parents who have the most influence. Parents need to set positive examples and role model financial behaviors to help their children. Much of that comes from having open, and often, communication about money. Your readers may want to check out our Smart About Money blog which breaks down how to talk to kids about finance by age: http://www.smartaboutmoney.org/Your-Money/Life-Transitions/Talk-to-Your-Kids-About-Finances.aspx.

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