Editor's Note: We are excited to announce the maiden voyage of The TBC Podcast, our informational blog designed to help everyday consumers make smarter decisions with their money! For this week's podcast, we visit FinCon, a financial planning conference held in Charlotte, North Carolina. There, we learned some important tips regarding personal money management. In Part 1, we delve into student debt, why it's such a problem, and what students and recent graduates can do about it.
We'd also like to extend a special thanks to the experts who took the time to sit down with us during the conference:
Whitney Hansen has a B.S. in accounting with a Master's in business, and she is the owner of Whitney Hansen Coaching. Her mission is to "coach millennials who desperately want to pay off debt and secretly yearn for financial independence.
Eric Rosenberg received both his undergraduate degree and MBA in finance, and is the founder and editor of PersonalProfitability.com. Eric has a passion for helping others "organize and simplify [their] financial [lives] to save time, money, and headache."
JG: This is the TBC Podcast, by bestcompany.com. I'm Jordan Grimmer. On this week's program, we go to FinCon, an annual gathering of the top digital content creators in personal finance and investment management. FinCon is an opportunity for bloggers and other money experts to network, promote your own brand, and get an inside look at the latest financial trends. Today you'll hear from some of those bloggers, as well as financial planners and other money experts who were kind enough to sit down during the expo.
But first, a little about what we're trying to accomplish with the TBC podcast. TBC stands for The Best Companys (that's companys with a "y"), our online review site where we've reviewed literally thousands of companies to help everyday consumers make smarter, more well informed decisions with their money. But while our company reviews can give you an honest, unbiased view of any given company, they don't really tell you much about the industry that company belongs to. For example, you might read one of our fantasy football company reviews, but still be scratching your head about how fantasy football works as a whole. That's where the TBC Podcast comes in: to provide a second tier of information that will empower everyday consumers like you, whether you read our company reviews or not. This episode will be divided into two parts: Part one: student debt, where we take a look at some of the main causes to the student debt crisis as well as some expert-driven solutions; and part two: personal finance, where we unearth the common mistakes people make when it comes to handling their own money. And now, let's start the show.
Part One: Student Debt. Back in May, The Wall Street Journal reported that the graduating class of 2015 carries an average of $35,000 in student debt per student, bringing the national student debt burden to just above $1 trillion. Not only is that the highest rate of student debt in history, but the number is still growing. And while politicians are trying to solve what the media has now dubbed "the student debt crisis" from a policy standpoint, the experts at FinCon all agree on one simple, yet ironic solution:
JG: Education.The fact of the matter is student entering college today may not completely know what they're getting themselves into when they make the choice to finance their education through student loans. When Whitney Hansen graduated from college, she owed $30,000 in student loans, which she successfully paid off in just 10 months. Now, she's the owner of Whitney Hansen Coaching, and she believes one of the main contributors to the student debt crisis is the fact that high schoolers are largely being taught the wrong things about personal finance management:
WH: High school students are not gaining the appropriate financial education they really need. They're learning how to balance a checkbook, when I haven't balanced a checkbook in years. I don't even do that. They're not learning the right skills, and because they're not learning the right skills at that young age, it's causing problems with student debt; students view it as free money.
JG: It's that element of financial illiteracy that encourages some credit card companies to specifically target new college students with free credit card offers. Many young adults are simply unfamiliar with how debt works, which can be dangerous. And if you look at a current personal finance textbook, like Whitney did, you might be surprised to find that not only are students vastly underprepared for taking on a huge financial burden like student debt, but they're sort of trained to expect it.
WH: I have a sister who is 17, and she came home and showed me this financial workbook. Some non-profit was putting together a class. And the workbook was fine; it had some good information, but the part that really bothered me was that it told students to immediately plan for debt. Just immediately like that was just imposed. That was very frustrating for me to see that students aren't really given an option. It's just, you're gonna have debt: get over it.
JG: So, let's say you do receive adequate education about student loans while you're in high school. How should that influence your decision to go college? Where do you go? What do you major in? For Eric Rosenberg, founder and editor of PersonalProfitability.com, the answers to those questions come from being honest about your current situation, and where you want to be. Like Whitney Hansen, Eric is no stranger to student debt; he graduated with about $40,000 in student loans, but was able to pay off those loans in a little over two years. In Eric's experience, being smart about student debt means facing the facts:
ER: Every degree is not created equal. I have a business degree, and my business degree has paid off quite well, and I have some friends who had liberal arts degrees, and there's nothing wrong with liberal arts, but there's not a great income potential.
JG: For the record, I have an English degree. And while Eric is right about the disparity of earning potentials among the different majors, that fact shouldn't necessarily dissuade college students from pursuing the major of their choice; what it should do is remind them that some majors simply take longer to pay off than others. Going to college with the sole purpose of finding which major will make you the most money misses the entire point of college. Anyway, that's enough out of me. Again, Eric Rosenberg:
ER: Sometimes people might reconsider the colleges they're picking as well. Just because you got into Harvard doesn't mean you're going to earn a ton of money when you graduate. And maybe if you went to the state school, you don't have quite as prestigious a resume, but you'll be able to pay off your debt in five years instead of 30.
JG: So maybe an Ivy League education isn't for everyone, but what about other institutions? In recent years, for-profit schools like DeVry University, The University of Phoenix, and Capella University have risen in popularity, promising a relatively inexpensive and much faster alternative to traditional schooling. But according to a recent study, graduates from for-profit universities are the most likely to default on their student loans. Yes, these graduates tend to have less debt per person, but they also lack four-year degrees and tend to take lower-paying jobs.
ER: I read a story recently, it was kind of a sad story. This guy went to the University of Phoenix, got a good degree, and ran into an issue where he was getting turned down for jobs because that was on his resume, and he found that he had better prospects with a high school diploma only than that degree, so he took it off.
JG: In other words, being honest about your situation and your expectations may also influence where you go to school. Just ask Matt Myers, one of the other experts we spoke to. Matt is from CommonBond.co, a company that specializes in refinancing student loan debt. Choice of school hits pretty close to home for Matt, whose wife's student loans amounted to . . .
MM: $50 - $60,000 in debt, and we're like "if I had really known the after-effects of student loans after I graduated it would have affected, you know, going to a state school on a full ride versus going to a $30k private school and taking out loans for the whole amount." but that's not something you think about when you're 17 or 18 years old, you know. You think about "I want to go to my dream school no matter what that cost is." So I think there needs to be a better education of 16, 17, 18 year olds when they're on their way to college, or financial literacy classes throughout college that really help explain the options out there. What is a loan? What is a promissory note? What does it really truly mean to pay these loans off over time?
JG: The lack of education with regard to student loans limits a student's perception of what kind of options are available to him. Students who are massively in debt may see no other option but to default, which an increasing number of students are doing. As of April 2015, 27% of college students have defaulted on their loans, meaning they don't make any payments. That's up from 17% in 2010. This is a huge problem! Why so much default? The process seems so straightforward: you receive a loan, and you pay off that loan plus whatever interest the loan accrues overtime. Easy right?
KC: It's actually really difficult to navigate.
JG: That's Karen Carr, a Certified Financial Planner from the SocietyofGrownups.com.
KC: Especially for a recent grad who's trying to figure out how to pay their rent and what does it mean to actually own your own car, and then also navigate the federal student loan landscape as well as private.
JG: So, what options, what solutions do students and recent graduates have? You won't be that surprised to find that there's no magic bullet answer. One option that many students are taking is to refinance their student loans. But what does that mean? Here's Matt Myers:
MM: What refinance is is we take a look at your credit, we take a look at your income, your job title, the school you went to, a bunch of different factors and basically say, "this is gonna be your interest rate." It's gonna be much lower than the federal government's; our starting interest rates are 1.94% for variable loan and 3.15% for a fixed-rate loan.
JG: And while Eric Rosenberg does believe certain individuals can find value in consolidation and refinancing, he also cautions:
ER: really read the fine print. Consolidations are great for some people. If you have five different loans at different interest rates, and they're high interest rates, maybe you've got private loans with a higher interest rate, they're not all subsidized loans like Stafford loans where interest rates are going to be locked pretty low. If you have a higher interest rate debt and you can consolidate to a lower interest rate that can be a good thing. Also keep in mind you can only consolidate once. You can only refinance student debt one time. That is the typical rule within the student debt. Time it, and make sure that it's something you really want to do, because you can't go back and you can't change it again.
JG: Unfortunately, not all of our experts agree on the value of debt consolidation and refinancing, because as Whitney Hansen sees it:
WH: it's kind of prolonging the inevitable. With debt consolidation, if you can get equivalent terms, lower interest rates, and your payments are still going towards your principle, then great! Do that. But that's typically not the case. Typically, it prolongs that entire process, so instead of being a standard 10-year repayment plan, now you're on like a 20-, 25-year repayment plan, which is what so many people are facing now. That's the reason why I'm not a big fan of that, because I truly believe if you work your butt off and save a little extra, you're gonna get results faster. So, it's generally not worth it, and it usually costs a lot more in interest.
JG: So, what does it all come down to? After you've taken the time to learn about student debt, carefully selected your school, your major, your future career, what's next? Most students will absorb some kind of student debt regardless of those decisions. And as was mentioned before, refinancing isn't for everybody - a lot of people don't even qualify for it. When dealing specifically with student debt, Whitney Hansen and Eric Rosenberg are experts. You might recall that Whitney was able to pay off her $30,000 in student debt in a little under a year, while Eric paid off his $40,000 in debt in just two years. But how did they do it? What's the process?
WH: There are a few different options for paying off student debt specifically. First is to, if they're still in school, continue making payments. Even though you don't have to pay those yet, do it anyway. Even if it's only $100 a month, figure out a way to make it work for your budget. That's the biggest tip I can give immediately, is just to get them thinking about how the future is right around the corner. It's pretty much tomorrow, so start planning for it right now, or they're going to have all that stress. That's the biggest tip. The second one is to always get a part-time job to pay off student debt.
JG: Eric Rosenberg echoed these sentiments with his own story:
ER: First thing I would do is really look at your budget. When I was still in student debt, I was living like a college student. I had a good full-time job, I was still living in a very cheap apartment, on a budget, taking public transportation to work. I was making huge extra payments into my debt, $500 twice a month extra payments. I was living barebones, putting as much as I could into those loans, and it helped me pay off my student loans while I was in school. I worked. And when I graduated, I was working and chipping away and chipping away and that's how I was able to pay them off so quick. So that's number one, is think about your budget and your spending, and really prioritize.
JG: Hence the need to make sure you're graduating from a school that has the best likelihood of landing you a job, or at the very least, being willing to work while you're in school. And Eric's comment about looking at your budget got us thinking, the $1.2 trillion from student debt, while enormous, is just one facet of America's debt problem. Student debt is one thing, but how are we treating our finances as a whole?
Part Two: Personal Finance. For many of us, personal finance amounts to little more than occasionally glancing over our checking account balance, paying off our bills, and then using whatever is leftover on whatever we want. It's about staying in the green, or making sure you have a credit account in place for when you start to go into the red. But is that really a safe strategy? Can we even consider that a strategy at all? When we asked the experts at FinCon what they considered to be the biggest mistake people make when it comes to personal finance, their answers were disturbingly consistent.
Next week, on the TBC Podcast.