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It's Graduation: Now College Students Will Get a Real Education in Finance


Colleges will churn out thousands of graduates this month, and for some, financial realities are quickly setting in.

Many pressures are hitting at once: Some grads will be knocked off their parents' health insurance policies; others face higher rent and the need to buy a car. Besides the expense of getting started on their own, students today commonly graduate with thousands of dollars in credit card debt. Here is a look at what college officials and financial experts say are the key issues facing new grads and their parents:

* Insurance. Once students are out of school, their parents' health insurance policies on them won't last much longer. Grads need to buy interim coverage for the time between graduation and when health benefits kick in with their new employers, experts said.

Some colleges offer temporary health coverage for graduates. New grads also may be eligible to extend their parents' coverage for up to 18 months under COBRA, a federal group health insurance plan, said Harriett Hankin, an employee-benefits consultant in Malvern, Pa.

New grads planning to travel abroad should make sure their health insurance covers them in foreign countries, experts said.

On the job, grads may be offered life and disability insurance. Life insurance is nice, but disability coverage is far more important to young adults who have no one else dependent on their income, Hankin said.

If you are injured and unable to work for a prolonged period, long-term disability insurance often will pay 60% to 70% of your salary while you're laid up or retrained.

Students should also get their own car insurance, said Shaun Eddy, a financial planner in Columbia, Md.

Not only will that keep parents' insurance rates from skyrocketing if the child is in an accident, it will prevent the other driver from going after the party with the deepest pockets--the parents--Eddy said.

The good news for parents is that their auto insurance premiums may be cut by as much as two-thirds once a younger, higher-risk driver is off their policy, according to Independent Insurance Agents of America, a trade association.

New grads renting an apartment should also consider renters insurance in case their possessions are stolen or destroyed, Eddy advised.

* Legal matters. New grads and their roommates need to realize that whoever's name is on the lease and utilities is liable for the bills, said Alma Ferro, associate director of the Career Center at the College of Notre Dame of Maryland.

Roommates may want to see if a landlord will allow more than one name on the lease to spread the responsibility, Ferro said.

Graduates with no job, no credit history or a poor record of paying bills may need parents to co-sign a car loan or apartment lease. If parents do, they will be on the hook if the child reneges on payments.

"I would encourage parents to explore every alternative before co-signing," said Richard Flaherty, president of College Parents of America, a Washington association. "This is a time where you do want the student or new graduate to start establishing himself or herself as financially independent. If you do co-sign, you are holding up that process."

* Taxes. Who gets the tax deduction when young adults are supported by parents part of the year and self-supporting the rest?

Parents providing more than half of a child's cost of living for the year are entitled to take the deduction. "If a parent makes less than $250,000, it is almost always advantageous for the parent to claim the exemption," said Matthew Wagner, an accountant in Annapolis, Md.

For parents in the 28% tax bracket, for example, the deduction is worth $770 in real dollars compared with $412 for a child who is taxed at the 15% rate.

At incomes of $250,000 and higher, parents lose the benefits of the exemptions and the child is better off claiming the deduction, he said.

* Compensation. Salaries for new graduates this year range from the upper $20,000s for education and nonprofit jobs to the high $40,000s for technical work, said Mark Kenyon, program director of the University of Maryland's Career Center.

When negotiating a salary, graduates should compile a list of expenses, including student loan payments, to figure how much money they will need.

Don't forget to factor in benefits when weighing offers. "For a student married and with children, receiving a wonderful health package can offset a lower salary," Kenyon said.

* Loans. About half of college grads leave school with debt. Graduates of public colleges owe an average of $11,950, and their counterparts at private schools owe $14,290, according to the American Council on Education. Generally, student loan payments kick in six months after students leave school.

If graduates have extra cash, they should put it toward paying down the loan with the highest interest rate or the one that starts accumulating interest the earliest, recommended Deborah Voso, a financial planner in Frederick, Md., whose daughter recently graduated from law school with about $45,000 in debt.

Those entering fields that are fiercely competing for workers should ask prospective employers if they would help pay student loans, Voso said.

* Saving and investing. It's hard for new grads to save when they are weighed down with rent, a security deposit, new work clothes and student loans.

"It's never too soon to start planning [to save], even if it can only be $10," Ferro said.

Financial experts recommend that young workers participate in an employer's 401(k) plan or a Roth individual retirement account.

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