With recent college grads leaving the halls of academia and heading out into the world, many soon come face-to-face with a pretty rude awakening. No longer will Uncle Sam be sending them money to go to school; instead, he wants all of his money paid back over the next ten to thirty years with compounding interest. Oof.
Luckily, if you’re a recipient of federal student loans, you can usually bank on a grace period of six to nine months before you’ll have to start making payments. For private loans, on the other hand, there’s usually no grace period (bummer, dude).
If you’ve already got a job lined up, it can be tempting to exhaust your full grace period before biting the bullet on that first loan payment. It’s almost justifiable:
“I’ll get my own place, get settled, purchase some furniture—maybe buy a new car. After all, I’ve earned it. That way, when my loans kick in, I’ll have bought everything I need (and be much more comfortable financially).”
Unfortunately, there are two issues with this mindset: lifestyle creep and compounding interest.
First, let’s tackle lifestyle creep, the idea that as you earn more, you need more to be happy—and therein end up spending more to meet that need. That car you bought with cash before you went away to college is suddenly too embarrassing to be seen in. The Folgers drip coffee you drank during all of those late-night cram sessions just doesn’t cut it anymore. Now, only the finest small batch roast will do. The perfectly good phone you’ve had for the past three years—it’s obviously time to replace that, too.
And so, before you know it, you’re introducing a slew of incremental changes and “must have” upgrades during your grace period, only to find your budget in the red six months later when Uncle Sam comes knocking at the door. Just like that, the goals you had planned—building up your emergency fund, saving for a down payment on a house, purchasing a flight for your bestie’s destination wedding in Mexico—seem out of reach.
Oh, and don’t forget about compounding interest. You’ve got interest accumulating on your loans even during your grace period, and the less you pay against the principal balance, the more you’ll end up paying over time. Is the apartment, the new car, the (insert shiny new thing here) worth it? Might it have been better to buy a less expensive car, rent a cheaper apartment, and stick to Folgers, then put the difference toward your student loan payments? Well, that’s for you to decide.
It’s natural to want to reward yourself for earning something as important as a college degree. After all, college wasn’t exactly a cake walk. Rewarding yourself is appropriate, but try to think of ways to celebrate your success without putting yourself between a rock and a hard place.
Here’s a suggestion: find out the amount of your monthly loan payment, and account for that in your budget throughout your grace period. Put your future student loan payments into a savings account—the beginning of your emergency fund—to give yourself a cushion. That way, when the grace period ends, you’ll already be accustomed to not using that money in your monthly spending.
You’ve graduated from college—congratulations! The decisions you make today will absolutely impact your future (no pressure). So here’s to the new job, the new experiences, and a financially-promising future.