Postcollege Life Requires Financial Transition

by Center for Personal Finance editors

College graduates are ready to take on the world. But first, they need to take a good look at what's in their wallets. Many recent college grads lack the funds required to simultaneously establish a career and a home of their own. Many parents offer to help, but want to combine good advice with clear boundaries that eventually will lead to full financial separation.

You can meet both goals by reviewing the financial demands that are part of the transition to postcollege independence:

Health insurance often tops the list of financial concerns for recent college graduates. During college, many students are used to obtaining free or low-cost coverage through their parents' policies. Typically, these policies end at graduation or shortly after; however, rules for work-related insurance policies that extend coverage from parents to their college-age children can vary significantly.

Examples of rules governing the end of parents' work-related insurance coverage for college graduates include:

• Ending health coverage for students on the day they graduate from college.
• Ending health coverage on the final day of the month of the student's graduation.
• Continuing to offer coverage as long as the student takes enough credits to remain a full-time student for any type of degree.
• Offering coverage for adult children until age 25 or until they obtain coverage through an employer, regardless of whether they attend college or when they graduate.

Rules for health, dental, and vision elements of coverage also can vary.

Linda discovered that her employer's health coverage continued for her daughter, Nora, 23, until the end of the month when she graduated from a Midwestern college. By that time, Nora's health coverage from her new job already had kicked in. Unfortunately, Linda learned too late that her dental insurance had separate rules that ended coverage on the date of Nora's graduation. As a result, the family had to pay for Nora's dental care.

Many recent graduates find they have a gap between the end of their parents' policy and the start of policies an employer offers. To fill that gap, some insurance companies offer low-cost, high-deductible policies for recent college graduates, then move students to high-deductible plans with a higher price tag if long-term coverage is required.

The money gap

Many parents also expect to transfer responsibility for other types of expenses to college graduates, including payments for rental or homeowners insurance, vehicle insurance, and cell phones.

In addition, some students may need to get their first apartment and begin purchasing their own groceries, instead of relying on a college meal plan. Unfortunately, these expenses may come due before the graduate receives his or her first postcollege paycheck. As a result, many parents pitch in to cover part or all of these costs as either a gift or a loan.

A place to call home

A growing number of college graduates become "boomerang kids"—they live at home after graduation. Unless you want to experience the boomerang effect indefinitely, it's wise to negotiate clear limits on free room and board.

Brandon, from Wisconsin, graduated in December 2007 and started a new job in January 2008, with the knowledge that he would travel on behalf of his new employer for at least five weeks. His parents offered to let him live in the family home rent-free until April 2008, when he began paying them $400 a month for room and board. His parents kept half of that amount to help cover expenses and deposited the other half in their savings account with a promise to return it to Brandon when he moved out. That way, they could be sure Brandon would have enough to pay for first and last month's rent as well as a security deposit and utility fees.

Brandon can stay at his parents' home as long as he wants but he understands that in February 2009, his parents will begin keeping the entire $400 a month for room and board. "We want to help Brandon get started, but we also wanted to set clear limits," says Marie, his mother.

A place to call home

Parents also can help college graduates plan ahead to manage costs and gain financial stability. Steps that can help your graduate achieve independence include:

Create a budget. A budget can help graduates stretch their money to cover weekly, monthly, quarterly, and annual expenses. Get started by using the Budget Blueprint calculator. Build a credit score. A good credit score can affect options and costs for housing, insurance, cell phones, and other services. Educate graduates about the importance of monitoring their score, using credit responsibly, and making payments on time. Comparison shop. Emphasize the need to shop for the best value, instead of simply accepting the first option offered. Take advantage of compound interest. Help graduates understand the value of growing money over time by establishing retirement savings and other long-term accounts now.

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