Are you a college student or a recent graduate? Chances are, you’re saddled with a hefty amount of student loans as well as consumer debt, like car payments and credit card balances.
Two-thirds of undergraduates emerge from college with student loans, with the average amount from federal loans alone (Stafford and Perkins loans) just above $19,000. Throw graduate school into the mix, and those numbers get even scarier.
Some students and graduates have already learned how to make smart borrowing decisions and manage their debt. Others are in for a rude surprise — it can take years to get out from bad financial decisions you made before you even started your first real job.
That’s a pity, because one of the main reasons for going to college is to invest in yourself, to increase your earning power down the road, and to open doors for yourself. If you make stupid financial decisions while you’re in college and as you transition into the working world, you’re squandering your big investment and limiting your choices. Think money gives you freedom? Not if it’s borrowed and badly managed. Why close doors on yourself?
Whether you’re still in school or have already graduated, keep these rules in mind as you make borrowing and spending decisions.
1. Smart debt vs. stupid debt
Not all debt is bad. Student loans, for example, are a smart investment if you invest that debt in the right program and do well there. When is educational debt bad? When you’re wrecking your transcript because you’re out partying all the time, for example, or you borrow for a school or a degree that won’t enable you to pay that debt back.
Even smart student loans need to be managed wisely, however. Your tuition and school fees are fixed costs, but you have a choice to make about every dollar you borrow above and beyond that amount to finance your lifestyle. Every dollar you borrow to live on your own instead of sharing space with a roommate, to eat out instead of feeding yourself, to buy the latest and greatest video game systems or cell phones, to go out drinking, and to have someone paint your nails is stupid debt.
Don’t get me wrong — I love a yummy restaurant meal as much as the next person, but don’t borrow in order to have those things. If you borrow stupidly, you’ll find yourself living a lot less glamorously after college than you did in college. Who wants to move backwards like that? Consumer debt is stupid debt.
Borrowing to fund illegal or addictive activities is also stupid debt. If you find yourself "having" to borrow in order to pay for alcohol or Internet gambling (the latter is also illegal in many states), you have bigger problems to worry about than just your finances. If you can’t stop doing either of those things to preserve your financial health, you need help quitting. Now.
2. Know how much you can borrow
If you’re still in the planning stages, use the excellent calculators and resources at FinAid.org to figure out how much student debt you can manage.
3. Consolidate student loans
The lowest consolidation interest rate is available to people who are still in school or have graduated within the last six months, but even if you’ve already been out of school longer than that, you’d be crazy not to consolidate. It’s like someone handing you free money.
If all your student loans are from the same lender, you’ll have to consolidate with that lender. If you have multiple lenders, shop around for the best consolidation deal. (NelNet.com, SallieMae.com, and MyRichUncle.com are three providers to check out.) Word to the wise: some lenders offer great price breaks if you commit to paying your bills on time. Unless you are religious about paying all your bills on time (most recent grads aren’t — more on that below), don’t use that lower rate as you’re comparing offers.
4. Paying off debt
If you find yourself with different kinds of debt, pay off any consumer debt before you pay more than the minimum monthly payment on your student loans. Compare the interest rates you’re paying on your various balances — pay down the debt with higher rates first.
5. Pay your bills on time
Many of the college students and recent grads I interact with are bad about paying their bills on time. You’ve got to treat your bills as sacred, because even one late payment will show up on your credit report and lower your all-important FICO score, a number derived from your credit report that summarizes your credit-worthiness. You want that number to be as high as possible, ideally above 700. The lower your score, the more money you’ll pay to borrow.
Who looks at your credit report and FICO score? Everyone from credit card companies to educational lenders to prospective employers to landlords to mortgage lenders to car and health insurance companies. Get a free copy of your credit report at AnnualCreditReport.com, and pay the small additional fee to find out your FICO score.
6. Think hard about grad school
Many college seniors who aren’t sure what to do after graduation rush off to graduate school (often law school, because that admissions process requires neither work experience nor a specific undergraduate curriculum). More often than not, their parents are also pushing them into grad school. Big mistake.
Graduate school, especially law school, is expensive. It will set you back six figures and three years of lost work experience and income, all for a career that most applicants know nothing about.
Go out and experience the working world before you commit to a particular graduate program. If you think your current student debt is scary, imagine how much more indentured you’ll be with an additional six figures of debt. If you’re going to make that kind of investment, make sure it’s a smart one.
Grad school isn’t going anywhere. You owe it to yourself to learn more about what you want out of a career, and out of life, before committing to a particular track.
Copyright © 2006 Anna Ivey
Anna Ivey, JD is the author of "The Ivey Guide to Law School Admissions: Straight Advice on Essays, Resumes, Interviews, and More" (Harcourt; 0156029790; $14.00US). She served as dean of admissions at the University of Chicago Law School. She now runs Anna Ivey Admissions Counseling, a counseling firm for college, business school, and law school applicants. Please visit Anna’s website for more information on her books and tips on the admissions process www.annaivey.com.