Advice to All You Advisers

We need a better way of thinking about graduates' debt than the tired language of "personal responsibility."
This post was published on the now-closed HuffPost Contributor platform. Contributors control their own work and posted freely to our site. If you need to flag this entry as abusive, send us an email.

Ok, so it's been a whole week, and enough parents are still emailing their kids this NYT article ("Advice to All You Graduates: Let's Start With That Daily Latte") to keep it at the top o' the list.

Among other exhortations, the article says to set aside 10% of your salary in a "savings or brokerage" account in addition to matching your 401(k) (which few graduates have at this point).

Financial literacy for people of all ages is a good idea. This article is mostly quite sensible. I just want to point out one thing. Two-thirds of graduates are carrying loans. Interest rates on federal student loans are going up to 6.8% on July 1. Now interest rates on savings accounts are currently at about 4.5%. So saving obviously doesn't make sense in the short term if you have loans to pay off. The long-run real historical return on stocks, after inflation, is about 7%. And that's after decades, not a return you can rely upon from year to year.

How in the hell does it make sense to invest with a pinky nail's worth of margin like that? Besides a small emergency fund, and 401(k) contributions if you're lucky enough to have an employer match, (which is equivalent to a 100% return) all your extra money should be going to pay off the loans. And credit card debt if you have it. That means for your first decade out of school you can't take advantage of the miracle of compound interest.

It would be great if all graduates could follow some neat formula to solve this debt problem. But people are really in a bind. We need a better way of thinking about it than the tired language of "personal responsibility."

Popular in the Community

Close

What's Hot