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College graduation present: giant
debts
By Lucy
Lazarony • Bankrate.com
 The
pursuit of higher learning is not cheap. Lots of folks have to borrow
their way through school. The debt totals can be shocking.
The average combined loan and credit card debt
for graduate students in 2001 was $20,402, according to Nellie Mae,
a leading provider of student loans.
A recent grad with a master's degree in engineering
was shocked to learn that her student loan payments totaled $800
a month.
"She was devastated," says Nancy Bolitho, an
education coordinator at the Consumer Credit Counseling Service
in Austin, Texas. "She never stopped to think about it. She just
kept borrowing money to go to school."
The longer you stay in school, the more that
debt piles up. Law students and medical students have some of the
highest student loan totals around. It's not unusual for them to
start their professional careers $50,000 to $80,000 in the hole.
And don't forget credit
card debt. In 2001, a typical undergraduate
student had a credit card balance of $2,327
and students double their debt and triple
the number of cards in their wallets from
the time they arrive in campus until graduation,
according to Nellie Mae.
Denial or obsession
Reactions vary to this big salary/big debt dilemma. You either focus
on the big salary and live it up, or you obsess about the debt and
feel trapped.
"All too often, I see people waiting like deer
in headlights for all this loan stuff to pass," says Barry
Glassman, a financial planner in McLean, Va., who specializes
in giving financial planning advice to young lawyers.
"These students have been in school all their lives
and suddenly they're set free, and now they can go out in the world
and earn. But they're carrying this boulder of debt and they can't
imagine it ever being removed," he says. "I had a client who wasn't
going to get engaged until he got rid of all his debt. His girlfriend
was going to kill him. Don't stop your life."
Some folks go to the other extreme. They lived
in a dump for six years and drove a clunker of a car. Now they've
finally made it. They want a new car, a new wardrobe and a great
place to live. And they're not going to let a little thing like
$50,000 worth of debt get in their way.
"When you get your first real job, you have
the tendency to feel very rich," says Mari
Adam, a certified financial planner in Boca Raton, Fla.
"You kind of go hog wild at first."
Struggling on six figures
One of her clients, a young doctor, talked about driving a car with
a hole in its floor through medical school. Now he's having a hard
time making ends meet on a $250,000-a-year salary.
"It's an emotional response," Bolitho says.
"They feel like 'Wow, I'm finally making real money,' so they go
out and get into a car payment they can't afford or a fancy house."
It's easy to see how young professionals could
feel paralyzed by debt or get swept away with spending. Not surprisingly,
experts advise people to choose a financial path somewhere in the
middle. Get a handle on debt but don't let it keep you from doing
the things you want to do in life.
The hardest part is dealing with the debt. Bolitho
recommends setting up a budget based on 75 to 80 percent of your
net take-home pay. The remaining 20 to 25 percent should be divided
between debt and savings.
Attack that debt aggressively. The first thing
that has to go is the credit card debt.
"You really want credit cards paid off every
month," Adam says. "If you've got cash flow, there's no excuses.
If you've got a job, you shouldn't have it."
There are a number of
strategies for paying
down credit card debt, including making
biweekly
payments and transfering
your balance.
The next step is to face up to your student loan
debt. Pay more than the minimum payment whenever possible. Need incentive?
Take a good hard look at the amount of interest you'll be paying for
the length of the loan. The sooner you look, the better.
Bolitho recalls a young doctor who waited until
she was starting up her own practice to size up the interest costs
on her student loans.
"She took one look at all the interest she was
going to pay and she decided to double her payments," Bolitho says.
Consider consolidation
If you're having trouble making the minimum payment on your student
loans, you may want to consider a federal consolidation loan, which
can lower your monthly loan payments by 10 to 40 percent. This type
of loan bundles your old loans together and gives you a new loan
with a lower monthly payment and a longer repayment period.
Calculators and applications for consolidation
loans are available on the USA
Group and Nellie
Mae Web sites.
Don't forget to tuck some money away for savings
and to invest for retirement. Sign up for your employer's 401(k)
program. Don't wait until you pay down debt to start investing.
"A small amount of investing now for a long
period grows a lot. If you wait five or 10 years, you almost have
to save twice as much to be in the same place," Adam says.
"This is a critical time to get off on the right
foot."
And last but not least, don't let all this fiscal
responsibility get you too down. Enjoy yourself. You've earned it.
"By all means spend money on things you want
to do," Adam says.
"Have fun -- but not too much."
-- Updated: May 16, 2002
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