ollege commencement marks a new beginning for graduates: a new job, perhaps a new location, and a new standard of living that doesn't include Ramen noodles and milk-crate furniture.

But graduation also brings with it a new responsibility: repaying student loans. According to a survey by Nellie Mae (New England Educational Loan Marketing Corp.) in Braintree, Mass., the average debt for all student loan borrowers is $18,800. Plus, undergraduates leave college with around $1,900 in "unofficial" school loans they took out on their credit cards; graduate students average almost $5,000 in credit card debt.

The one-two punch of student loans and credit card debt can take the wind out of new grads' sails. But if they explore the payment options available and adopt a lifestyle that accommodates their debts, they can set a steady course for financial freedom.

Student loans
and credit cards
go hand in hand.

Sticker shock
According to Nellie Mae, 60% of college students finance their education at least partially through loans. Yet as common as student loans have become, many borrowers experience sticker shock when the bills come due. "Students and their parents get into a daze," says Anne Stockwell, author of "The Guerrilla Guide to Mastering Student Loan Debt" (ISBN 0-06-273435-0). "The numbers being tossed around—$20,000, $30,000, $40,000—sound academic. Only when the students graduate does reality set in."

That reality arrives in the form of a monthly payment that can rival a car payment in size. And its arrival occurs just as the true cost of living is sinking in.

"These students are in a transitional period where they've just moved out on their own and suddenly have adult expenses—rent, transportation, food—they might not have been fully responsible for in college," says Diane Saunders, vice president of public affairs for Nellie Mae. "Their paycheck doesn't go as far as they might have anticipated."

The debt burden can prove overwhelming. Once borrowers miss a few payments, they may be afraid to ask for help. But the problems will only mount if they let their student loan slide toward delinquency and default. And default can scar a person's credit record for years.

"People don't like to admit they're having financial difficulties," says Patricia Scherschel, director of public relations for USA Group Inc. in Indianapolis, the nation's largest student loan guarantor and administrator. "But we can't help you if you don't wave the white flag. If you let us know, we can help you change payment options and make sure you're doing something that makes sense for you."

Payment plans
How can you cut the cost of repaying your student loan? The USA Group offers these tips:

  1. Pay back your loan as soon as possible. If you have a subsidized Stafford loan, take advantage of those first six interest-free months to pay down the principal.

  2. Choose the right repayment plan for you. Eighty percent of borrowers choose the 10-year, equal-installment repayment plan. "The advantage is that the payment won't increase, but hopefully your salary will," says Saunders.

  3. There are other options. The graduated repayment plan reschedules the debt so that payments start out lower and gradually increase over a 10-year span. Long-term repayment plans extend the loan anywhere from 12 years to 30 years. And income-based repayment sets payment according to your income. However, all of these options increase your total interest costs.

  4. Take advantage of incentive programs or rate discounts your lender offers. Nellie Mae and USA Group, among others, offer lower interest rates for paying your loan through automatic withdrawal and for making the first 48 payments on time.

  5. Check your eligibility for a deduction on your federal tax return for interest you pay on your loan.

  6. If you have sufficient income, prepay the student loan with the highest interest rate.

  7. If you're having trouble making payments, explore your options for short-term assistance. Deference and forbearance allow you to suspend payments temporarily. However, interest still accrues during that time and is added to your principal, making your loan even bigger. "Putting off repayment of your loans is hazardous to your health," Stockwell says.
   Never be afraid
   to call your lender
   with questions
   or concerns.

The average
student loan debt
is $18,800.
Credit crunch
Student loans and credit cards go hand in hand. According to Nellie Mae, undergraduates carry an average of three and a half credit cards; graduate students carry six cards. Whatever school expenses student loans don't cover often are paid for with a credit card.

"How you handle one always affects the other," Stockwell says. "But while you have to pay your student loan, you can choose the relationship you have with credit. You can be smart about picking the credit deals you make."

In addition to checking with your credit union for a card, Stockwell suggests you:
  1. Don't apply for more than two credit cards in six months. It reflects poorly on your credit report.

  2. Have no more than three credit cards; two is better. You'll pay more interest by scattering your charges over several cards.

  3. Seek out a card with no annual fee, a low interest rate, a grace period for late payments, and a helpful, friendly customer service staff.
You also may want to compare credit card rate and fee information at RAM Research Corp.'s Web site.

Credit cards usually carry a higher interest rate than student loans. If you find yourself with a windfall, pay off your credit card balance first. Also, consider using a debit card instead of a credit card, Stockwell says. It not only limits your spending but frees up your credit card for true emergencies that may require more balance than you currently have.

Rules to live by
You don't necessarily have to take an oath of monastic poverty in order to pay off your debts. However, you do need to set a lifestyle that accommodates, rather than ignores, the financial realities.

"The key is not to set your standard of living based on what your salary is right when you get out of college," says James Poer, who graduated from Texas Christian University, Fort Worth, in 1994 with almost $30,000 in student loans. "A lot of people think, 'I have this amount of money a month,' so they get a new car, a new apartment, run up the credit cards. When it comes time to start shelling out $200 to $500 a month for student loans, it kills them. They have to make sure they work it into their budget now to pay for the loans later."

Contrary to rumor, there's no escaping student loan repayment. Even bankruptcy doesn't wipe out an outstanding student loan. So in facing the inevitable, remember that there always is help. Nellie Mae's Web site has interactive calculators to help you manage your payments. Consumer Credit Counseling Services can help you establish a budget and prioritize debts. Call your lender if you have questions or concerns. Stockwell also suggests having a student loan buddy, maybe someone from your class you can commiserate with when there's too much month at the end of the money.

Things may be tight for awhile. You may have to take a second job, drive a used car, and sacrifice your tax refunds. But have hope. The USA Group found that, despite the fact today's students have a heftier debt load, they're doing a better job repaying their educational loans. As you pay down those debts, you're working your way toward your own financial freedom.

"They can't take your education back, so use it," says Stockwell. "That's the best revenge."

   Sixty percent of
   college students
   finance their education
   at least partially
   through loans.

Student Loan Stats
  • The average student loan debt level increased from $8,200 in 1991 to $18,800 in 1997.

  • In 1997, the average:
    undergraduate student loan debt: $12,200

    graduate student loan debt: $31,200

    professional student loan debt: $50,000
  • Of borrowers surveyed, 36% said repaying their student loans has caused them more hardship than anticipated; 26% said they'd borrow much less if they could do it over again.

  • Average total monthly payments for all respondents is $198; $161 on average for undergraduates and $272 for graduate students.

Source: Nellie Mae National Student Loan Survey '97

©1999 Credit Union National Association Inc.