New college grads face crash course in debt

Christine Brown's romance with plastic began three years ago with just a single department-store charge card used to buy a couple of bathing suits.

Then came the college textbooks, drinks with friends, and more frequent outings to the mall.

By the time Ms. Brown graduates from the American Intercontinental University in Buckshead, Ga., next year, she will have racked up some $8,000 in credit-card debt, piled on top of $20,000 in student loans.

"It's a big burden," admits Brown.

That combination of growing student loans and ballooning credit-card balances is shackling a generation of 20-somethings just as they should be enjoying their first years of independence.

And as recent college graduates use easy credit as a crutch to maintain lifestyles during a recession, the number of young people turning to credit counselors or bankruptcy for some relief continues to rise.

The financial challenge for recent grads keeps mounting. Two-thirds of college students graduate with loans that average $16,928 – more than double the amount of just eight years ago.

When they start their first jobs, about 40 percent of those students find the debt unmanageable, meaning it eats up more than 8 percent of their monthly income, a study by the State PIRGs (Public Interest Research Groups) Higher Education Project found.

Added on top: credit-card debts racked up in college that keep growing in the first years after college. The average credit-card debt held by college students rose to $2,748 last year and a third of all college students now own more than four cards, a Sallie Mae study found.

And it's not just textbooks being charged. Ms. Brown, for example, bought everything – even gas for her car – on her seven credit cards.

"It's very easy to walk into a store and ... write up an application and charge it," Brown says.

Credit counselors say that impulse toward instant gratification helps fuel debt among those just entering the workforce. "They want the best things when they start out," says Laura Ritcey, a certified consumer-credit counselor in Toccoa, Ga. "They have a sense of freedom, and they overspend."

That spending habit that often develops in college, where students are thrown together with classmates from vastly different socioeconomic backgrounds, says Rochester Institute of Technology Prof. Robert Manning, author of "Credit Card Nation."

Ms. Ritcey says it's hard to to persuade young clients to give up perks they've come to view as necessities. There are cellphones, premium cable packages, and cable modems for the computer. "They need to be able to distinguish between a want and a need," Ritcey says.

Jason Anthony and Karl Cluck, who wrote "Debt-Free by 30: Practical Advice for the Young, Broke & Upwardly Mobile," advise squeezing more money for paying off debt by cutting back on small items that add up, such as frequent ATM fees, $3 coffees, and taxi rides in cities that have good public transportation.

"It's 80 percent of the problem," says Mr. Anthony. "Twenty-somethings don't have the big bills yet, and can reward themselves with the little things that accumulate and slip under the radar."

Often, small measures aren't enough. Increasingly, young debtors are looking toward bankruptcy as a quick solution. Some 100,000 debtors in their 20s filed for bankruptcy last year alone, according to Harvard University's Consumer Bankruptcy Project.

Bankruptcy has lost much of its stigma among younger people, says John Waskin, executive director of www.getbillfree.com. "It's seen as a real easy fix," he says.

In reality, experts say, bankruptcy actually can ultimately do more harm than good for young debtors with relatively little debt. Bankruptcy stains credit records for a decade. As a result, higher interest rates on mortgages or car loans can far exceed the amount of debt eliminated by the bankruptcy declaration.

Plus, employers increasingly look at credit reports as indications of past behavior. "It's something they should look to avoid," says Rus Halsey of Greenpath Debt Solutions in Lansing, Mich.

As an alternative, Heather Bullock of Lakeworth, Fla., sought credit counseling for help with the $15,000 in credit-card debt she's acquired, at 23, on a dozen different cards. Ms. Bullock says she finally realized she needed help when her monthly payments made no dent in drawing down the balance.

She now pays $500 a month as part of her repayment plan, and says she's had to learn that there are things she may want but simply can't afford. "Groceries are obviously more important than buying a CD right now," she says. "Paying a phone bill or electric bill is more important than going out to dinner the next night."

Ritcey tells young clients that making tough choices about how to spend their money is the key to getting out of debt. "Sacrifices have to be made," Ritcey says.

College grads weighed down by student loans can find some relief by consolidating debt. And the potential savings is likely to increase this summer.

Consolidation, which works like refinancing a mortgage, involves combining all student loans into a single loan and locking in an interest rate for its remaining life.

The rate paid is the weighted average of all outstanding student loans. The interest on federal student loans is recalculated every July 1 based on short-term Treasury bill rates during the previous year.

With T-bills at historically low levels, borrowers could see the rate to consolidate student loans as low as 4 to 4.5 percent this July – as much as two percentage points below this year's level. That translates into savings of about $100 a month for students carrying a 10-year $100,000 debt, says Barry Morrow, president of Collegiate Funding Services.

To lower payments further, consolidated loans may be stretched out from the traditional 10 years to as long as 25 years in some cases.

"If people are not in a crunch, I'd suggest waiting [until July]," Mr. Morrow advises.

The number of people seeking consolidation – including students who haven't yet graduated – keeps rising, along with the cost of higher education, says Bob Kling, manager of the US Department of Education's Loan Consolidation Program. The popularity of consolidation may help explain why the Bush administration quickly backed off a budget proposal to switch from fixed- to variable-rate consolidations.

But not every loan should be rolled into the consolidation, experts advise. For example, a Perkins loan may be forgiven for a student who becomes a teacher, but only if it remains with the original lender.

Students are also advised not to consolidate immediately after graduating. By doing so, they forfeit a six-month postgraduation grace period in which no payments are required. As a result, loan officers recommend consolidating either while still in school or after this grace period ends.

Consolidation can also make deferring loan payments more difficult for those who want to return to school. "Borrowers need to get good advice because consolidation is a one-time-only event," says Pat Scherschel of Sallie Mae, the nation's largest student-loan lender.

Finally, those seeking to consolidate should shop around for a lender. Some banks knock off about a quarter of a percentage point for those who pay by debiting a checking account. Lenders also offer to lower rates to borrowers who pay on time for three or four years.

$16,928 Average cumulative federal-student-loan debt*

64% Percentage of students who take out federal student loans

32% Percentage of students who have four or more credit cards

$2,748 Average student credit-card debt

10% Percentage of students who owe more than $7,000 on credit cards

Source: Sallie Mae, State PIRGs' "The Burden of Borrowing" *1999-2000