- The Washington Times - Saturday, June 25, 2005

George Washington University Law School graduate Javier Lopez, 25, goes public with his student loan debt amount without missing a beat.

“It’s about $115,000,” Mr. Lopez says, “but I don’t complain about it. I think it’s amazing that the government has given me $70,000 to go to school.” The rest of Mr. Lopez’s loan was borrowed from private financial institutions.

Charlene Coleman, 22, just graduated from the University of Maryland and has more than $20,000 in student loan debt.

“I’m not too worried about it,” Miss Coleman says. “It’s an investment in my future.”

These loan amounts can seem high to some, but according to the National Center for Education Statistics, they’re not abnormal. The average loan debt for a four-year program in 2004 was $19,200, according to the NCES.

So, is student loan debt — when it’s in the tens of thousands, even hundreds of thousands of dollars — something to worry about?

“It depends on what way they worry about [the debt],” says Suze Orman, author of “The Money Book for the Young, Fabulous and Broke” and host of a television show on money matters. “They should make their payments on time, but I hope [the student loans] are the last loans they pay off.”

Interest rates on federal student loans are at a historic low, 2.77 percent, and Ms. Orman says any excess money can be used to pay off other debt a student or recent graduate might have, most likely credit card debt.

Sarah Bauder, director of student financial aid at the University of Maryland at College Park, agrees.

“This is not a loan that’s going to kill anyone,” Ms. Bauder says. “Lenders are willing to work with you, and interest rates are generally low.”

The average student loan at the University of Maryland for four-year college graduates is about $10,000, she says.

However, Brian O’Connell, author of “Free Yourself From Student Loan Debt: Get Out From Under Once and For All” and a former bond trader, advises striving to pay off all debt — including student loans — as soon as possible.

“Any debt is a problem,” Mr. O’Connell says, “and I think young people often don’t take it seriously. … I think left to their own devices, too many students would just take the bill and stuff it under the couch cushion.”

However, not making student loan payments on time — everyone agrees on this — can have serious repercussions because it affects credit ratings.

“Employers have started checking out your credit rating. And if they see you’re not paying your debts, they may say, ‘This person may not be the right fit for us,’” Mr. O’Connell says. “This is when it hits home that there are ramifications for not paying.”

Payback time

The very first step graduating students and recent graduates should take is to consolidate their federal student loans — locking in the interest rate — before Friday, Ms. Bauder says.

Interest rates as low as 2.77 percent currently are available. Come Friday, interest rates are expected to go up by as much as 2 percentage points.

“I don’t think we will ever see rates this low again,” she says.

Ms. Bauder says students or graduates can consolidate with a lender of their choosing, but most people go with the lender that already is processing their loan. Unlike refinancing a mortgage, consolidating a student loan can be done only once, she says.

Seniors and recent graduates can and should consolidate, she says, but even juniors can look into it.

“It can save them a lot of money in the long term,” she says.

Another step students should take, Ms. Orman says, is to set up automatic bill payment because lenders often are willing to reduce the student’s interest rate in return.

“That could knock off an extra quarter percentage point,” she says.

After a borrower has made payments on time for 36 months, lenders often are willing to reduce the rate even further.

“You could be as low as 13/4 percent,” she says.

Making the payments on time is important not just to keep doors to future jobs open, but also to get good interest rates on such things as car loans and mortgages, she says. Late payments and large debt will affect a person’s credit rating negatively, she says.

Also, establishing a relationship with the lender is crucial if and when recent graduates run into problems making those $150- or $200-a-month student loan payments, the typical repayment amount on average loans, Mr. O’Connell says.

“Knowing your lender is key,” he says. “Have an e-mail address and a name — it’s invaluable when you have a problem. The lender wants to work with you, they want you to pay off your bill. Keep them informed; show them you are committed to paying it off.”

Sometimes that means lenders will allow students to defer payment until a later date.

Also, some loans, or parts of loans, can be forgiven if the borrower takes certain public service jobs. Students should check with the lender and college financial aid counselors regarding forgiveness policies, he says.

If recent graduates are making good money, however, Mr. O’Connell recommends that they pay more than the minimum requirement each month. That way, he says, the loan is paid off sooner and recent graduates can start investing in their future.

Ms. Orman and Ms. Bauder, however, say high-interest loans should be paid off before any attempts are made to pay off the student loan more quickly.

“I would go with a 30-year loan,” Ms. Bauder says. “There’s no penalty for prepayment.”

Ten- and 20-year repayment plans also are available.

Credit cards

High-interest credit cards are a different matter, Ms. Bauder says.

“No question about it, I would tell students to try to make it without them,” she says. “If you need to, go part-time [to college] while you’re working. But don’t start charging things on credit cards.”

Miss Coleman, the Maryland graduate, says she had to rely on credit cards for a while.

“I hate them. Credit card debt is so much worse than student loan debt,” she says. “But it’s funny, the credit card companies used to offer me deals even when I was maxed out.”

Miss Coleman says she has about $2,000 in credit card debt.

Patricia McWade, dean of financial services at Georgetown University, says her office helps students find ways, such as securing student loans from private lenders, to make ends meet without relying on credit cards.

“These alternative loans usually are much cheaper than credit cards,” she says.

Student loan amounts for four-year graduates range from about $17,000 to $25,000 at Georgetown, she says.

She says Georgetown also gives scholarships and financial aid to meet student need and keep debt down.

Aside from trying to get more money during college by using credit cards, working, relying on private student loans and parents, students also should be aware of what they spend and whether those expenditures are necessary.

“Everyone should build a budget,” Mr. O’Connell says. “Write down all your expenses. … I know it can be tempting, but don’t pick up the tab. Pay off your loans and live cheaply,” he says, adding that he thinks many young people feel deprived if they can’t have the latest and greatest car or cellular phone.

Ms. Bauder agrees.

“Some of these students have never differentiated between needs and wants,” she says.

Mr. Lopez, the recent law school graduate with about $115,000 in student debt, says that’s not him.

“I only want to buy what I can actually afford,” he says. “I only use a debit card.”

Credit cards can serve a good purpose, too, though, Ms. Orman says.

“You can use credit cards to go where you want to go by buying what you need, not what you desire,” she says.

Instead of working two or three jobs in fields that have nothing to do with their career dreams, she recommends that recent graduates take a job in their field of interest and prove themselves in that job. They can use their credit cards to get by.

“If you work those second and third jobs, you will eventually exhaust yourself, and that eventually will sabotage your chances of getting where you want to go,” she says.

She recommends that recent graduates who rely on credit cards for daily needs should set a tentative timetable of a year or two. If their employer doesn’t realize and reward their efforts, it’s time to rethink and stop using the credit cards, she says.

Investing in themselves is the best thing that twentysomethings and thirtysomethings can do, she says.

She says she used to think of real estate and stocks as undervalued assets, but no more. The No. 1 undervalued asset today, she says, is Americans themselves.

“You become a valued asset by investing in yourself,” she says.

Ultimately, though they are saddled with some debt, many college graduates find that having a degree pays off for them.

According to the U.S. Census Bureau, people with bachelor’s degrees made an average of $51,206 annually in 2004, while those with high school diplomas made $27,915. Workers with advanced degrees made $74,602; those without a high school diploma made $18,734.

“I think it’s a great investment,” Mr. Lopez says. In his case, the return is direct. He says he’ll be making $115,000 a year in his first job at a law firm, starting in the fall.

“I guess it’s a pretty satisfying debt when I think about what I got for the money,” he says.

More info:

Books —

• “Free Yourself From Student Loan Debt: Get Out From Under Once and for All,” by Brian O’Connell, Dearborn Trade Publishing, 2004. Student loan debt has soared in the past few years. This book provides a plan for students to pay back their debt. It covers solutions to different scenarios, including how to persuade financial institutions to forgive loans, how to avoid defaulting on loans and how to consolidate loans.

• “The Money Book for the Young, Fabulous and Broke,” by Suze Orman, Riverhead Books, 2005. This book covers student loans and other topics pertinent to young people’s financial well-being, such as purchasing a new home or car as well as getting onto a rewarding career path. In terms of student loans, it includes information on consolidation, deferment, tax breaks and forbearance.

• “The Everything Personal Finance in Your 20s and 30s Book: Erase Your Debt, Personalize Your Budget and Plan Now to Secure Your Future,” by Debby Fowles, Adams Media Corp., 2003. This book gives step-by-step advice on working toward financial independence, including strategies on how to pay back debt and invest wisely.

Associations —

• U.S. Department of Education, 400 Maryland Ave. SW, Washington, DC 20202. Phone: 800/872-5327. Web site: www.ed.gov. The U.S. Department of Education provides information on grants and applying for and paying back student loans. Its Web site has several portals and links to information on student debt.

• National Foundation for Credit Counseling, 801 Roeder Road, Suite 900, Silver Spring, MD 20910. Phone: 800/388-2227. Web site: www.nfcc.org. This nonprofit group gives referrals and advice on financial issues such as debt management and home-buying.

Online —

• Students.gov (www.students.gov) is a Web site devoted to helping students and parents make the transition from high school to college. It offers advice and information on topics such as scholarships, grants, loans and repayment of loans. The site is a cooperative effort of agencies, students and other parts of the education community as well as the U.S. Department of Education.

• Youngmoney (www.youngmoney.com) is a Web site run by InCharge Institute of America Inc., a national nonprofit organization that specializes in personal finance education and credit counseling. The Web site has dozens of articles with financial lessons for young adults, including how to pay back student debt, the importance of knowing one’s credit rating and creating a budget.

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