March 11, 2009

College Loan Crash Course

2009 1507 page27 caparah* graduated from an Adventist college, got a master’s degree, and then went to medical school at Loma Linda University in California. She took out loans to pay for her education, living expenses, and books, and she estimates that she is now $300,000 in student loan debt.

“I don’t think I will ever have it paid off,” Sarah says. “If you think about it, $300,000 is like a house. For a house, people usually get 30-year mortgages, and in 30 years I will be close to retirement.”
She counsels students to think hard about their futures before starting graduate school. “Don’t start grad school without knowing your job in the end will support the cost of your education,” Sarah says. “And don’t go back to school because you can’t find a job or you are bored.”
There is no doubt that higher education in the United States is expensive. And in many cases, spending money on a good education is money well-spent. The important thing is to make informed choices when deciding what and where to study, and to use money wisely when you are a student and after you graduate. Being a good steward in financial matters is not only beneficial to you; handling things wisely can also serve as a witness to others. We are God’s stewards, and “the money that God has intrusted to us is to be carefully husbanded. We are to increase in efficiency by putting to the best use the talents given us, that at God’s coming we may return to Him His own with usury” (Ellen G. White, The Advent Review and Sabbath Herald, Sept. 10, 1901).
Here are five tips that will help you avoid debt and get value for your money.
2009 1507 page27 cap1 Don’t pay more than you have to for college.
While the importance of getting a good education cannot be overemphasized, there are ways to get the best deal possible.

How to Get out and Stay out of DebtUseful Web Sites

2009 1507 page27 link Up to 85 percent of Adventist college students, at all income levels, receive financial assistance—much of it in grants and scholarships that do not have to be repaid, according to the Association of Adventist Colleges. Grants can range from $2,000 to $14,000 or more a year. Some are based on financial need, but many are based on merit in different areas. Before choosing a college, check out what different schools might offer you. And if you’re already a student, you should talk to your financial aid office every year and find out which awards you might be eligible for.

If you will be applying for loans, start the process early, advises Vicki Thompson, associate director of Student Finance at Andrews University. She suggests starting your research at the beginning of your senior year in high school.
“The first thing every student should do is file the FAFSA [Free Application for Student Aid],” Thompson says. The FAFSA determines if you qualify for government grants or low-interest loans. The earlier you file, the more likely you are to receive some of the money available.
If money is tight, you could also find out whether you can do some of your coursework online. Doing extra classes in the summer can also be a cheaper way to fulfill some of your course requirements.
Getting a job is another thing you should not forget about, Thompson says. “Actively pursue employment on campus,” she says, and go for summer employment, whether it’s working at a summer camp or selling literature door-to-door. A scholarship often comes with these jobs, in addition to the salary—the less loan-funded education you’re able to secure, the better.
2009 1507 page27 cap2 Live within your means.
This one is really about attitude. When you’re a student, and you have a lot more bills than you have income, don’t live like you have a lot of money. But this is even more important to remember once you graduate.
“I know a lot of doctors (especially men) who graduate and go out and buy a really nice car, even though their beginning salary is less than a teacher’s,” says Sarah. “They have to prove they are rich and successful or something. But just because you are earning a paycheck now doesn’t mean you don’t have debt.”
Maybe you can start buying a more expensive brand of cereal now, but in general, try to keep your spending in check. You can do this by not adjusting your lifestyle too much, and living like a student for a while longer. (No, you really don’t have to have matching furniture at this point.)
“You have to understand that your parents haven’t always had the kind of lifestyle they have now,” says Todd Washburn, a certified financial planner in Durham, North Carolina. “You might have grown up having everything from day one, but it took your parents a while to buy their own house, get cable and high-speed Internet. Don’t try to match your parents’ lifestyle right away.”
Washburn says it’s great to have a nice stereo system, a new computer, and a new car. But those are purchases that you should spread over a long period of time. “You may actually have to get a roommate . . . and split expenses,” Washburn says.
2009 1507 page27 cap3 Prioritize your debt.
If you have debt when you graduate, look at paying that off before you spend money on anything else.
First, you should tackle any credit card debt, as those generally have the highest interest payments.
2009 1507 page27One study shows that 25 percent of college students graduate with more than $5,000 in credit card debt. If you have a credit card charging 16 percent APR (annual percentage rate), and you owe $5,000 on your card, that’s an $800 interest payment on top of your principal. And you will be charged interest every month that you do not pay off your card in full. If you are paying only the minimum amount due every month, your debt could actually be increasing.
If you have more high-interest debt than you can pay down, you should consider taking out a bank loan at a lower interest rate and using it to pay off the higher-
interest debt.
The high-interest debt is your first priority.
Your student loans are your last priority, because they are flexible and usually offer the best interest rate—generally somewhere around 3 to 5 percent. And you can usually deduct the interest you pay on student loans from your taxes if your income is below a specific threshold.
While paying off student loans can usually be safely put off, you should concentrate on paying down debt before you save. This is because the interest rate you are required to pay on debt is almost always more than the interest rate you can earn on savings.
“Attack existing debt first,” says Washburn. “It makes you look better if you go to borrow in the future.”
2009 1507 page27 cap4 Avoid impulse purchases—save before you buy.
Before you make any big purchase, save up as much of the cost as you can, instead of buying on credit. Of course, not many of us can pay cash for a house or a car, but paying a big down payment helps to avoid paying more in interest. And when it comes to buying furniture or other expensive items, saving a large down payment will keep the payments from dragging out beyond the life of the item.
Sarah advises, from personal experience, that saving for something you want is the way to go. In some cases, you might change your mind and decide you don’t really want it after all and save yourself some cash. Otherwise, it will help you learn what you can really afford.
“Before you buy anything that requires a monthly payment, live as if you are currently paying that amount, and put that amount of money aside into a savings account every month,” Sarah says. Do this for several months—at the minimum. Then you can determine if that level of monthly payment is doable with your income. If not, go for something less expensive. If so, you have a good down payment already lined up.
2009 1507 page27 cap5 Use your credit card wisely.
When you are buying with your credit card, make sure you will have the income to pay the money back. It sounds obvious, but it’s a lot easier to spend than it is to repay.
To get the most out of your credit card, choose a card with no annual fee, and pay off the balance every month. That’s how to avoid paying anything extra—interest, fees, or penalties.
“Credit cards are a convenience, and hard to function without,” says Washburn. “There are lots of transactions you can’t make without a credit card. But you have to remember that a credit card is not a tool to buy things you can’t afford. Don’t buy now and plan to pay it off in a few months.
“Paying off your credit card at the end of the month shows you can handle credit and not get into trouble. It will help you to build a credit rating. On the other hand, using up a lot of your available credit hurts your rating.”
Getting in Trouble With Debt
But what if you are already in trouble? Your debt is bigger than you can pay and you don’t know what to do?
Don’t ignore the bills, Washburn says. That is often your first instinct, but it only makes things worse. If you are having trouble paying on time, talk to the lender. Often a plan can be worked out—you might be given a short vacation from paying, or your payments might be reduced. It is in everyone’s best interest for you to be able to pay your bills.
“Be aggressive about letting people know what’s up,” Washburn says.
He’s talking about lenders, but you should also squash the tendency to keep financial matters totally private. Some friends might have similar experiences and can tell you how they solved the problem, while older people might have valuable advice.
Don’t be afraid to get help. You can call the National Foundation for Consumer Credit at 1-800-388-2227 to find a counselor in your area, or see
A counseling service can help you figure out how to consolidate your debts, help you decide how to prioritize your debts, and can often be the intermediary between you and the people to whom you owe money.
A nonprofit service will usually work on a sliding scale fee, based on how much you can afford.
Money is a tool—use it wisely and your life will go much more smoothly. Who knows—if you manage your money well, people might start coming to you for advice. 

*Name changed to protect the privacy of the indebted.
Alita Byrd is a freelance writer who writes from Dublin, Ireland.