Back to School: Student Debt 101

08.20.09
By Credit.com

Kim Prewitt of Baltimore is drowning in debt. Recently graduated from law school with $140,000 in loans and no job offers, she took a job at a bank and was laid off months later.

“I do not know which way to turn,” she told USA Today in May. “Even once I have that full-time job so I can make the monthly payments, I am looking at 15 to 30 years to pay this off.”

For many college students, debt is an unavoidable fact of life. But debt can be a good thing, helping you to build a solid credit history that will enable you to buy a car or house later on. Here are just a few ways to help you avoid debt problems and use credit to your advantage.

• Borrow only what you need. Be aggressive about finding every possible grant, fellowship and financial aid opportunity you can to reduce the amount you have to pay back later.


• You’re stuck with your college loans. Before the 1990s, graduates could get out of paying their loans by declaring bankruptcy. New laws changed that for federal loans in 1998, and private loans in 2005. The only slack you can find is by taking a short-term deferral if you find yourself making less income. Otherwise, the same old rule applies: Pay your bills on time.


• Buy only what you need. Restraining your spending now could save you years of crippling bills later. For example, explore your living options carefully – maybe it’s cheaper to live on campus. Don’t binge on clothes. Get a cheaper cell phone plan.


• Get a credit card. But use it only for purchases you needed to make otherwise. And pay the entire bill every month. Borrowing $7,000 at 18.9% interest and paying only the minimum payment every month will more than double your bill, forcing you to pay an extra $7,173 in interest over the next 16 years. Why let the credit card companies make such huge profits from you?


• Pay your private student loans off first. Interest rates on federal loans are fixed, while most private loans have variable interest rates. In today’s topsy-turvy economy, who knows how high rates could climb. Use any extra money to pay down some of your private loan principal.


• Know your credit score. Your score is based on your bill-paying history, late payments, outstanding debt, and the number, type and age of your accounts. The better your score, the more you can borrow in the future, and the cheaper your interest rate will be. Knowing your score lets you know if you have credit problems to fix. Order your free annual credit report at www.annualcreditreport.com, or by calling 1-877-322-8228.

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Managing debt wisely can help students build solid credit histories for the future.