College and university graduates this year face a difficult job market, and their mortarboards come with a heavy debt burden, Freedom Debt Relief vice president Kevin Gallegos said this week, making it more important than ever that grads know how to handle their debt. Two-thirds of students graduated with some educational debt in 2008, with an average debt of more than $23,000. With average cumulative educational debt increasing by 5.6 percent a year, that total is likely almost $26,000 this year. And a report issued earlier this year found that 25 percent of indebted students borrowed $35,500 or more. All of those loans add up: The projected total U.S. student loan debt outstanding for FY2010, when both public and private loans are included, is about $763.4 billion. Put another way, that’s $2,704 for every person in the nation. Those figures do not include other debt, such as credit card debt or loans. In fall 2009, 84 percent of students had at least one credit card, and half of them had at least four credit cards. The average undergraduate has $3,173 in credit card debt before even leaving school. “These statistics make it painfully clear that many college graduates have far more than the average debt,” Gallegos said. “This year’s graduates are entering one of the toughest job markets in our nation’s history, and it is crucial that they know what to do to handle their debt in the coming months and years.” 1. Pay on time. Paying bills on time is the No. 1 way to build a strong credit rating – and avoid getting into more debt. “The track record graduates establish in the first years of working and paying bills will help build a stronger financial future,” said Gallegos. “Setting up a system to support good record-keeping and paying bills on time is extremely important.” 2. Be aware of income-based loan repayment options. Graduates (and students) who are struggling with debt have some options for getting relief with student loan debt if their loans were issued by the federal government program. As of July 2009, an income-based repayment plan caps the amount graduates must pay on student loans at 15 percent of discretionary income. After 25 years, any remaining balance will be forgiven. If the borrower works in public service, the balance can be forgiven after 10 years. New laws make the program even more generous in the future: For loans issued after 2014, the repayment cap will be 10 percent of discretionary income, and the loan program will forgive outstanding balances after 20 years. To benefit, borrowers will need to provide paperwork proving that they have worked in public service for 10 years. 3. Pay credit card debt first. First and foremost, use caution when using credit cards, and if already paying off student loan debt, it is helpful to put away the cards completely to avoid racking up more debt. Using cash or a debit card for most purchases helps anyone stay within a healthy budget. For new grads who have already incurred credit card debt, there is no better investment than paying this debt off, as credit cards typically carry extremely high interest rates (typically 15 percent to 30 percent). While paying the minimum on student loans, grad should pay as much as possible to eliminate credit card debt – while they avoid charging anything new. 4. Pay other loan obligations next. After credit cards, graduates should pay other debt — like personal loans and auto loans — as quickly as possible. “If you must pay interest, you are better off paying it on student loans, where you can receive a tax deduction, rather than on consumer loans, which offer no tax benefit,” Gallegos explained. 5. Take tax benefits. Most new graduates can deduct up to $2,500 per year in student loan interest payments. In 2009, the deduction phased out for taxpayers with annual incomes between $60,000 and $75,000 ($120,000 to $150,000 for those filing joint returns). New graduates also might qualify for additional education credits based on the amounts paid for education during this tax year. A tax advisor can help graduates receive all the education-related deductions and credits for which they qualify. 6. Save for an emergency. Whatever their budget, new graduates should set aside some cash to cover unexpected expenses. “Everyone needs an emergency fund of at least $500 to start with, building to enough to cover basic living expenses for at least six months,” Gallegos said. Graduates can begin by saving money from graduation or other gifts, or simply begin putting an extra few dollars into a jar every day or week. 7. Know what to do if paying is not possible. Students who cannot pay student loan obligations should immediately contact the lender. Many student loans can be deferred for a time, although interest will continue to accrue. Do not stop paying the loan — this is called “default,” and damage from defaulting can prevent borrowers from buying a home or car or getting a job, apartment or insurance for years to come. 8. Begin saving for retirement. The early working years are prime time to save for retirement. Investments made early on have many years to grow. If a new grad has a job where his or her company matches a portion of funds employees contribute to the employer-sponsored retirement plan, the grad would be wise to take advantage of that program. Not doing so is like giving money away.
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