Graduate, do you have a post-graduation debt plan?
6 tips for minimizing the pain of of all those student loans
By Pat Curry
If you're graduating from college this spring, you're probably taking more with you than your diplomas and a futon. On average, you're also leaving school with $23,200 in student loan debt, according to the Washington, D.C.-based nonprofit Project for Student Debt. Tack onto that the average $4,100 in credit card debt carried by graduating college seniors, according to Sallie Mae's 2009 study on undergraduate credit card usage.
When the economy was robust, it wasn't that worrisome of a situation, but many graduates today won't have a job waiting for them.
Here are six steps you can take to get off on the right foot financially:
1. Check your credit report.
With all the demands of college, it's possible that you forgot to pay a bill or two (such as parking tickets), or ran out of cash and had to make some late payments. Those kinds of things can put dings on your credit report, which can make a difference in getting a job, renting an apartment, getting a car loan or even buying a cell phone. You're entitled to a free copy of your credit report once a year; you get them by visitng annualcreditreport.com -- a website the three major credit bureaus were required by federal law to create. Get your report from each of the credit bureaus. Inspect your payment history and dispute any erroneous information.
Also look for any accounts that don't belong to you. Identity theft is a major problem, and the last thing you want is to get turned down for a job because someone used your name to run up a big credit card debt.
2. Make plans to deal with student loans.
The standard line on student loans is that graduates have to start repaying them six months after graduation. In the current job market, it may take longer than that to find employment. Don't freak out.
"There are remedies for practically every situation," says Sam Wilson, assistant vice president of customer assistance for TG, a national nonprofit student loan guarantee agency. "If you're having trouble finding a job, there's an unemployment deferment and a financial hardship deferment. It keeps you from having to make payments." The government pays the interest on federal loans that are in deferment.
Also, look into income-based repayment (IBR). Under this program, your loan payments won't be more than 15 percent of your disposable income. No income means no payments, and part of your loans could be forgiven, Wilson says.
You also can have your loans forgiven if you work in the public sector, at a nonprofit, as a teacher or in an area of national need.
If you're making some money, you can enroll in a graduated payment plan that will increase over time as your salary increases.
As a last resort, you can ask for forbearance, Wilson says. In this program, you can delay making payments, but the interest will accrue and will be added on to the loan amount at the end of the forbearance period.
The worst possible thing you can do is ignore those letters saying it's time to start making your payments. Your lenders have many tools at their disposal to get their money back, including garnishing any paychecks you eventually get, seizing your income tax refund or even snatching inheritance money. Plus, you'll seriously damage your credit -- and you'll never get another student loan.
"Don't hide from your situation," Wilson says. "Everyone wants you to succeed. There are many, many contingencies available to help you."
3. Start saving for emergencies -- and retirement.
It may seem like precisely the wrong time, but the financial pros say there's no better time in your life than right now to start socking money away. If you're like most new college grads, you aren't married and don't have kids, a mortgage or maybe even a car payment. Even if it's $10 a paycheck -- or whatever income you have -- get in the habit now of setting aside cash for emergencies. That way, you'll avoid paying credit card interest for things like unexpected car repairs because you'll have the cash on hand. As for retirement, starting now will give you a massive head start, and give compound interest an extra decade or so to work its magic for you.
"Put the money away and let it sit," says Mitchell Franklin, assistant professor of accounting in the Whitman School of Management at Syracuse University. "If you start fresh out of school, you can put away a couple dollars a day and retire very comfortably."
4. Establish a habit of responsible credit card use.
If you've made it through college with a credit card and without any credit card debt, props to you. You're already a veteran at using your card responsibly. If you don't have a credit card yet, it's time to look into getting one, especially if you do any traveling. Having a card makes it easy to book a hotel or a rental car. Making purchases with a credit card also gives you an advocate if you have trouble with a merchant, such as online purchases that never arrive or return policies that aren't honored.
Warwick, R.I-based certified financial planner Kevin R. Worthley suggests to his clients that they self-impose a low credit limit -- say $2,500 -- that would cover most major emergencies and reduce the risk of running up unmanageable balances.
If you have credit card debt, this is the time to start paying it off. The most efficient way to pay down multiple card debts is to pay them off in the order of interest rate, paying the highest rate first. But many people have better luck if they start with the smallest balance, pay it off, and then apply that money to the next highest balance.
"It gives you a sense of accomplishment," says Jason Deshayes, a CPA based in Albuquerque, N.M. "Once you have that out of the way, take one month's payment, have some fun with it, then apply that to next debt. It's highly effective."
5. Sponge off your parents.
With the financial pros telling you to pay off debt and start saving at the same time, it's not unreasonable to wonder how you're going to accomplish that on an entry-level salary, if and when you can even find a job. As ghastly as it may seem, they're unanimous in advising that the best way to do this is to move back in with your folks for a year or more.
"There are some tremendous advantages," says Stuart Schultz, founder of GradSpot.com and co-author of "GradSpot.com's Guide to Life After College." He should know. He did it. "You might be visited by the laundry fairy, the refrigerator fairy or the rent fairy," he says. It also help you career-wise by allowing you the financial ability to take an unpaid internship that could help you become a better job candidate.
There are strings attached, though, Schultz says. "This might not be what your parents expected," he says, "so treat them respectfully. Maybe you do some chores for them, and really take advantage of the opportunity. Don't sit on the couch and play video games all day. Use that time to get ahead."
6. Make a plan for graduation cash.
This is one of the few times in your life when a lot of people are going to send you money. Depending on how many graduation announcements you send and how well off your well-wishers are, you could be looking at some serious loot. While it may be tempting to spend it all on something like a well-deserved trip or a post-graduation bash, you'll thank yourself later on if you apply at least a portion of the money to paying down debt and establishing that emergency fund.
The easiest way to approach it is to have a plan for the cash before the first card arrives in the mail. For example, you could set aside 25 percent of each check for debt reduction, 25 percent for savings and the remaining 50 percent to cut loose. After all, you've worked hard.
"You don't have to save every penny you've ever earned," says Los Angeles-based financial educator and speaker Shay Olivarria. "You can have fun. Just spend consciously. If you want to go hang out with your friends, go during happy hour when things are half price."
See related: 5 steps to tackling debt while unemployed, Glossary terms for first-time credit card users
Published: May 13, 2010
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