College grads: Consider financial actions for your next steps

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 05/31/23

As millions of college students graduate this year, many have already started making progress on career and lifestyle changes. Still, building a solid financial strategy may be the most important first step to help grads achieve their dreams.

From budgeting to creating a thoughtful savings plan, financial planning actions taken today may help support future goals.

Moving on from caps and gowns

Over 4 million students are graduating with college degrees in 2023 (National Center for Education Statistics). Almost half — about 2.1 million — will earn a bachelor’s degree.

A lot has changed in four years. This year’s bachelor’s degree graduates started their programs in 2019, just before the pandemic. They are graduating into a job market in transition. In some fields, the market may be tighter than others. Still, graduates are optimistic. According to a recent survey, more than 88% of grads are confident they will secure a job soon after graduation.

And with the growing trend in remote or hybrid work models, the class of 2023 may find they can work from anywhere and can access a new set of opportunities not previously available.

While securing a job is a priority for many, paying attention to individual financial health can be equally critical. It is important that graduates get off to a good start in their transition from college to the job market and other “real world” moves.

Steps to consider

  • Assess your assets. Do you have leftover funds in a 529 plan in your name? Beginning in 2024, those funds can be transferred to a Roth IRA (for more details, read our recent article).
  • Manage leftover funds from a custodial account. If there is remaining money in a custodial account (UGMA/UTMA) set up for your college expenses, find out what you need to do to take ownership of the funds. Account ownership should be transferred at the age of majority, which is age 21 in most states.
  • Create a new budget. Leaving college requires a fresh look at expenses and income. Track and estimate expenses. Define expenses as fixed (rent, student loan payments, etc.) and variable (dining out, entertainment, etc.).
  • Be mindful of loan deadlines. It is important to budget appropriately, especially for those with federal student loans that typically require payments beginning six months after graduation. While the government approved a pause on federal loan payments during the pandemic, it is likely this will end this summer, according to the Department of Education.
  • Consider planning ideas for student debt. There may be an opportunity for students to refinance or consolidate loans. Be aware of government programs that may allow you to lower payments through income-driven repayment plans.
  • Explore tax deductions. At tax-filing time, be mindful that there is a tax deduction for student loan interest. This deduction is available to taxpayers whether or not they itemize deductions. The provision is relevant to recent college grads since they will typically claim the standard deduction on their tax return.
  • Make smart decisions about expenses and debt. Avoid buying a new car. If you do buy a car, find out if there are special rates or financing for new college graduates. If you relocate from an urban area to a suburban area, check in with your car insurer to see if there are lower rates.
  • Review discretionary expenses. Add up social media, internet, and entertainment subscriptions. Can you afford to cover these expenses, or do you need to cut back until you start earning more money?
  • Choose an efficient place to live. Is there an opportunity to live with parents for some time to build up your savings?
  • Begin establishing credit. Focus on maximizing your credit score since this can impact future financial goals such as securing a mortgage in the future.
  • Maintain health care coverage. Is there an opportunity to stay on a parent’s plan until age 26?
  • Save more. Once employed, participate in an employer retirement plan, if available.
    • Try to defer enough salary through contributions to maximize employer matching contributions, if available.
    • Consider directing salary deferrals into a designated Roth account (Roth 401(k)) within the plan since generally you will be in a higher marginal tax bracket in the future.
    • The recent SECURE 2.0 bill signed into law in late 2022 also allows plan participants to request employer matching contributions into a designated Roth account (if the plan allows).
    • If there is no access to a retirement plan at work, consider funding a Roth IRA.
  • Build an emergency fund to cover unforeseen expenses.
  • Keep good records. You will be filing income taxes on your own in the future. Also, keep track of important documents. Store them in a safe deposit box at a bank, or at your parents’ home. You may want to secure or renew a passport in the future and will likely need copies of vital records.