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3 Ways to Get a Smart Start With Your Money

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During the tumultuous period that the stock market has gone through for years now, many have focused on the effect that the market meltdown of 2008 and early 2009 had on retirees and those approaching retirement. Yet while there's no denying the big hit that those investors took, young adults are facing even more difficult financial challenges right now -- and if they aren't careful, the mistakes they make could be far more costly and difficult to correct.

The downward spiral
Today's terrible job environment has created a seemingly unbreakable vicious circle for young people. For decades, young people understood that the key to a better standard of living was getting a college education. As the costs of going to college have skyrocketed, most people have justified the expense as a necessary investment that would pay off after graduation in the form of better jobs and higher salaries.

Yet the rules of the game have changed. Now, a college education doesn't guarantee you anything -- except perhaps another set of loans to pay back. Consider the most recent bad news for those who are just getting started on their own:

  • Student loan default rates have jumped to 8.8%, according to the U.S. Department of Education. For those who attend for-profit colleges, the default rate is an even more staggering 15%.
  • 5.9 million young people ages 25 to 34 -- roughly 1 in 7 -- now live with their parents.
  • Student loans now represent $931 billion in debt for young adults. For the first time, that figure beat out the estimated $798 billion in outstanding credit card debt.

So what should young people do about these threats to their financial lives? Here are three lines of defense.

1. Don't be dumb about getting smart
Getting a college education can still be a valuable learning experience that opens doors that would otherwise remain closed to job-seekers. But you can't afford to pay so much for your college education that you dig a debt hole you'll never climb out of.

It's more important than ever to get the most from financial aid. Although outright grants are hard to come by, low interest rates at least make student loans more borrower-friendly. But a simple rule of thumb is that if your total debt coming out of college will be greater than a year's salary, you need to take a closer look at alternatives that could save you money. Otherwise, you could find yourself in over your head after you graduate and the time comes to try to pay those loans back.

2. Steer clear of bad debt
Having a credit card is almost a necessity in today's financial world. But just because you need a card to do things like rent a car doesn't mean you should do the one thing card-issuing banks want: carry a balance.

Student loan debt is tough to repay, but it at least can carry relatively attractive interest rates with reasonable repayment terms. By contrast, most credit cards charge sky-high rates with fees to match. Once you add credit card debt to an already sizable student loan load, it becomes very difficult to make ends meet.

3. Don't expect the government to save you
Recently, lawmakers have pushed greater regulation as a solution to the problem. Credit card reform included provisions to keep credit card issuers off campus, although Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and General Electric's (NYSE: GE  ) GE Money all have agreements with institutions of higher education that pay millions of dollars to colleges when students and others open credit card accounts.

Similarly, the Department of Education has sought to put tighter restrictions on for-profit schools such as Apollo Group (Nasdaq: APOL  ) , Bridgepoint Education (NYSE: BPI  ) , and Corinthian Colleges (Nasdaq: COCO  ) in order to try to bring student loan default rates down. Washington Post Co. (NYSE: WPO  ) unit Kaplan is among those schools that intend to meet new standards for refundable grace periods, despite their being costly to implement.

In the end, though, it's up to students -- and the parents who advise them -- to be smart about what they do. Learning fiscal responsibility at an early age is the best defense against opportunistic businesses seeking to exploit young people.

Be on your guard
It's unfortunate that young people have to defend themselves in order to avoid financial mistakes that could stay with them for decades. But with the right safeguards, you can protect yourself and get your financial life started on the right foot.

For more on protecting your credit from potential harm, be sure to take a close look at our Foolish Credit Center.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here

Fool contributor Dan Caplinger hopes to protect his daughter from the worst of the student loan mess when her time comes. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Bridgepoint Education, JPMorgan Chase, and Bank of America. Motley Fool newsletter services have recommended writing puts in Bridgepoint Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy gets you off on the right foot.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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