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How to face a student loan debt disaster

Deep in hock and needing more to graduate, a student needs a repayment plan

By Gary Foreman

The New Frugal You
New Frugal You columnist Gary Foreman
Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website and newsletters. He writes "New Frugal You," a weekly Q&A column about frugal living, for CreditCards.com

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Question for the CreditCards.com expert

Dear New Frugal You,
I recently graduated college, and while I have a hefty $25,000 of debt from undergrad waiting to be chipped away, I won't have to begin paying until I complete my master's courses in 2012. By then, it will be a lovely total of $40,000. I am now an independent, living on the other side of the country from my family, alone, in a one-bedroom apartment. I need tips on the best places to save as a young professional. (Work clothing? Business meetings?) And how am I going to prepare myself for this 2012 debt disaster? -- A Doomed Grad

Answer for the CreditCards.com expert

Dear Doomed Grad,
(Somber pipe organ music playing in the background. Vincent Price voiceover:) "Welcome to the Temple of Debt Doom. We expect you to be staying with us for a long ... long ... time..."

There is indeed a dark shadow hanging over you, Doomed Grad. The same one that hangs over many college graduates. According to FinAid.com, the median cumulative debt for a four-year graduate was right at $20,000, with a quarter of them borrowing more than $30,000.
 
You're heading into scary territory. At current average student loan interest rates, you'll be paying about $315 each month in interest alone. And, depending on your loan, those rates may rise.

So how do you escape the horror of debt doom? The key is to quit living like a student. It's too tempting to spend as much money as a student can borrow. Students live as if a loan were income.

No rational financial adviser would suggest that you create a spending plan that treated borrowing as income. Yet, that's exactly how most college students budget. It's as if they can pretend the loans don't exist until they graduate and go to work in the "real world."

Instead, you should live like you've already finished school but haven't found a high paying job yet (a situation facing many recent graduates). Act as if you're making only $20k a year -- that's $1,666 per month before taxes.

That means that you can't afford to live in a one-bedroom apartment alone. Find a roommate. Professional clothing purchases should be put on hold until you have a high paying job. And, even then you need to shop sales, consignment and thrift stores.

Business meetings and any other expenses should be kept to a bare minimum -- certainly until you're able to score that big job and repay some debt. Any opportunity to reduce expenses should be taken.

The best thing that you can do is to keep the loan total from ballooning to $40,000. If you could keep the balance at $25,000, you would reduce your payments by a little over $100 per month.

The good news is that you have two years before you have to begin paying. So it's not inevitable that you'll owe $40,000. If you begin to adjust your spending now, your life will be much easier in a few years.

The alternative? Well, there's always our friend, Vincent, and the organ fugue ... Is that the sound of debt demons I hear cackling in the background??? 

See related:  How to repay student loans

For more than 35 years, Gary Foreman has worked to help people get the most for their money. Prior to founding The Dollar Stretcher.com, he was a financial planner and purchasing manager. Gary began The Dollar Stretcher website and newsletters in April 1996. Today the website features more than 6,000 articles on different ways to live better for less. Gary has been interviewed by The Wall Street Journal, The Nightly Business Report, USA Today, Reader's Digest and other newspapers and magazines. Gary answers a question about a budgeting or saving issue from a CreditCards.com reader each week. Send your question to The New Frugal You.

Published: June 17, 2010


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