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5 Steps to Killing Your College Debt

May 31, 2007 Jennifer Williamson, Distance Columnist | 0 Comments

Today’s college graduates have tougher financial prospects now than ever.
Entry-level wages have not begun to keep up with rising student debt.  College grads today are paying off an average of $19,000 in student loans and $3,000 in credit card debt—plus necessities such as apartments, cars, utilities, and food.  A starting salary of $30,000 may sound like a lot. But when stretched between crushing debt and day-to-day necessities, they soon find out it doesn’t add up to much.

But it’s still possible to come out ahead, if you get off to the right start.  Here’s how to effectively manage your debt in five steps.

First: Pay Yourself

Many people believe they have to get out from under their debt before they can start thinking about saving money.  But financial experts agree that your first priority should be saving for retirement—especially if your company offers a 401(k) with a matching contribution program.

Many companies will contribute a certain percentage of what you pay into your 401(k) account—some as much as 50%, or more.  If your company has a 50% matching program, for example, they’ll put in $.50 for every dollar you save.  You basically get $1.50 for the price of a dollar.  Even better, your contributions are non-taxed when you put them in.

Experts say that no matter what, you should start saving early for retirement.  Start saving $150 a month at age 25, with an annual accumulating interest of 10%, and by the time you retire at age 65, you’ll have accumulated almost a million dollars—most of it in interest. 

Wait just ten years, however, and you’ll accumulate under $400,000 by the time you’re 65.  The time you start makes a big difference—and you can’t afford to wait, no matter how much debt you have.  The vast majority of companies no longer offer traditional retirement plans, so it’s likely you’ll be largely on your own at retirement.

Second: Kill Your Credit Card Debt

Credit card debt is more dangerous than student loans.  The interest rate is usually much higher—many cards have interest rates of 20% or higher.  But even if your card’s interest rate isn’t that high, the issuer can raise the rates at any time.  It’s important to get your credit card debt paid off as quickly as possible.

For many, it’s a good idea to pay off credit card debt as aggressively as possible while making minimum payments on student loans.  Once you get your credit cards paid off, you can start to target your high-interest student loans for aggressive repayment.

Third: Pay Off College Loans, Highest-Interest First

Most online college grads have a mishmash of government-subsidized and private student loans.  When paying these off, the key is to target your highest-interest loans first.  Manage your other loans, but pay as much as you can afford toward your private loans.  These can have interest rates of 8% to 16% or higher—and many are variable, so the lender can raise the rates at any time. 

Once you’ve paid off your high-interest private loans, take a look at your government loans.  PLUS loans tend to have the highest interest, followed by Stafford loans. Perkins loans have the lowest rates of all government loans.  Make minimum payments toward lower-interest government loans while paying as much as you can on higher-interest debt.

Some loans can be consolidated, while others can’t.  It’s a good idea to look into it when you graduate from college. In many cases, consolidation can lower your interest rates.

Fourth: Set Financial Goals

It’s easier to be frugal with money if you’re saving for something you want.  If you have a long-term goal, the sacrifices you make in the short term don’t seem as painful.

If you want to keep your spending in check, it’s important to keep that goal firmly in mind.  Think about something you’d love to do with your money: a dream vacation, a new computer, some electronic equipment you’ve always wanted. 

Cut a picture of your goal out of a magazine and keep it in your wallet. Whenever you reach for it, you’ll remind yourself of what you’re saving for—and you just might decide to hold on to your money.

Fifth: Stick To A Budget

As soon as you can, sit down and work out a budget.  Chart how much you spend per month on rent, utilities, loans, food, and other expenses.  Whatever you have left over is discretionary spending money. 

Make sure you always know exactly how much you spend each month on essentials and how much spending money you’re left with.  This will help you immensely when you need to buy a car, rent an apartment, or make another major financial decision.  You’ll know exactly how much you can afford to spend.
It’s not unusual for young adults to feel overwhelmed by their financial obligations once they’ve graduated.  And it’s no wonder.  College debt can be crushing, and starting salaries aren’t rising fast enough to keep up.  But if you’re careful with your money, smart about your loan repayments, and steady with your 401(k) contributions, you can still come out ahead. 

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