CAMP Money

Now is the time of year that many college students are graduating with a degree, ambition, idealism...and a load of debt. Reducing the debt as quickly as possible is critical to helping young adults start their career off on the right financial foot, say Certified Financial Planner™ professionals. More than 60 percent of students graduate with student loans to pay back, according to a report by the State Public Interest Research groups, which evaluated U.S. Department of Education data. Exactly how much debt depends on which study you read, but it is substantial. The American Council on Education reports that the average student graduates with about $12,000 in student loan debt. The State Public’s Interest Research Group says the average student loan debt ran nearly $17,000 in 2000, and it described 40 percent of those graduate borrowers as having “unmanageable” levels of debt-defined as more than 8 percent of the borrower’s monthly income. These amounts do not include private college loans or credit card debt. A study by Nellie Mae, for example, says the typical student graduates with four credit cards and $4,778 in debt. One in five have credit card balances higher than $6,000.

For today’s graduates, debts like these couldn’t come at a worse time as they face a softer job market, few of the generous sign up bonuses offered in earlier years, and lower paying entry-level positions. While this debt may make it challenging for new graduates to pay their rent, car payments and other living expenses, its real impact is on the future, say planners. Take saving for your retirement, for example. Young workers have a financial advantage that they will gradually lose the longer they are in the workplace-time. Time is the Archimedes lever of investing. A dollar invested early in life can grow, through the power of compounding, far larger than the same dollar invested later in life. Say you join a 401(k) plan at work at age 23 and invest $100 a month for the next 30 years. If the account can earn 8 percent per year, you will earn $90,735 more over those 30 years than if you wait until age 33 to start saving the same $100 per month. This hypothetical example is used for illustrative purposes only and does not represent any specific investment. It assumes an account making annual deposits of $100 per month at an 8% rate of return compounded monthly. This example does not take into consideration investment expenses or the effect of taxes on distributions. Rates of return will vary over time, particularly on long-term investments. If a graduate is burdened with debt upon graduation, even scraping up the $100 may prove difficult.

The same goes for saving for other personal goals, such as graduate school, marriage or buying your first home. It’s not uncommon for debt-laden students to have to turn down lesser-paying but desirable jobs like the Peace Corps because they cannot afford it.

So what can you do if you’re faced with substantial debt? First and foremost, pay it down as quickly as possible. The longer the debt drags out, the more it costs you in interest and the longer it delays your pursuit of other life goals and dreams. For example, if you pay only the minimum monthly payment on a $3,000 credit card balance with an 18% interest rate, it will take you over 29 years to pay it off, at a total cost of over $10,000.

Unless you are earning exceptional money right out of school, the only real way to pay more than the minimum is to live below your means. New graduates-tired of being the poor college student-typically want to buy a new car, new clothes or go on a dream vacation. This not only doesn’t help pay off old college loans, it piles on new debt.

Consider consolidating your student loans. There are pros and cons to this, and rules you should be aware of, so talk to a financial advisor who is familiar with this before committing.

Generally, you can consolidate multiple, variable interest rate loans into a single loan and lock in the interest rate. Rates are at historic lows, so now may be a good time. The government is considering doing away with the ability to lock in these low rates. You can stretch out the number of years to repay the consolidated loan but as in the case of credit cards, you are going to end up paying more in the long run. Try to keep the repayment period as short as you can comfortably afford. You can speed up payments as your salary increases, but you must be prepared to make the minimum monthly payment when you start out. Giving this some thought now can ease the pain of repayment later.