PETE THE PLANNER: New grad should pay down loan debt as quickly as possible

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Peter DunnDear Pete,

My son graduated from college in May and still doesn’t have a job. We believe he really is looking hard for his first job, but he’s yet to find the right opportunity. His student loan payments start in January, and, besides that, he doesn’t have any bills because he’s living with his mother and me. Is there anything he can do to make sure he’s in a good financial position when all this economic trouble ends?

—Bart, Indianapolis

One of the more humbling realities of our time is to take any group of people, then systematically observe how the economic ramifications of COVID-19 have altered their lives. For adults in the workforce, the pain and strife has been obvious. For school-age children, the pain has revolved around loneliness and confusion. But what happens when you aren’t yet a working adult and no longer a school-age child?

This is the troublesome existence for millions of Americans who’ve recently completed their last year of schooling, whether it was high school or college.

Let’s work backward off what I normally suggest for recent grads. The absolute first thing to do is to determine your student loan obligation, if you have one, and ensure your payment will eliminate your debt within 10 years. On top of that, I highly recommend starting your payback period as soon as possible, thus kicking the six-month grace period to the curb. In your son’s case, the grace period is exactly what he needs. He still needs to figure out what his payment will be in January and set that as the beginning of an income breakpoint.

The harsh reality is, he might not be able to get the type of job he planned on, which also means he might not be able to secure the level of income he planned on. This scenario can lead to decision paralysis, as it relates to searching for a less-than-ideal job.

The next financial cardinal rule to beginning a career is committing 12%-15% percent of one’s gross income to retirement investing. This level of commitment virtually ensures a successful retirement outcome. If you’re keeping track, so far I’ve taken a young person’s income and committed to his past (student loans) and his future (retirement). The people who execute on this plan before deciding on their lifestyle spending will hit the ground running and never look back.

But there’s a major problem with this piece of advice.

If a person starts his or her career earning less than living wage, the advice above is at best unrealistic, and at worst, tone-deaf. Once again, living wage is the hourly rate a person must earn to support basic expenses, taking into account the number of people he or she financially supports and residential location. For what it’s worth, since no one is currently financially dependent on your son, and he lives in Marion County, his living wage is $11.55, according to MIT’s Living Wage Calculator.

Following my first two rules will create an inordinate amount of stress if he were to earn at or below living wage, even if he is living with you and eliminating most of his living expenses. Because of that, the temptation is to ignore both of these maxims altogether.

If he absolutely must, encourage him to select income-based repayment for his student loans. This will lessen his monthly burden and adjust as income climbs. It’s still important for him to make repayment within 10 years a priority, but obviously his payments won’t be equally distributed over this 120 months.

Additionally, it’s still important for him to put something away for retirement once he secures any type of employment. His first retirement fund deposits will prove to be the most powerful contributions he ever makes.

The key to making all of this work is to get him very involved in the decision-making process, and to help him understand how the right amount of lifestyle indulgences will keep him both satiated and unburdened. Anytime a person is able to live with his parents or another relative as he’s attempting to get on his feet, debt reduction and/or asset accumulation must consume at least 50% of his income, or he won’t ever be able to afford a rent payment of his own.

Best of luck to both you and your son. You’re a great dad for taking continued interest in his future stability.•


Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to

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