New college grads face perils of debt

July 1 college loan deadline will test a young person's financial acumen


Say goodbye to the pressure of tests; bring on the pressure of debt ... a lot of debt if you are like the average person graduating from college this year.

Until now, you may have paid little attention to the loans you've been taking out to pay for college. But usually about this time, after donning a graduation cap, moving out of the college hovel, bidding your friends farewell and stewing about your first job, the reality of debt starts to sink in.

The average graduate who borrowed for college leaves school with almost $20,000 in student loans and about $2,000 in credit-card debt. About two-thirds of students borrow for school, said Sandy Baum, a senior policy analyst for the College Board.

If this sounds familiar, do yourself a favor: Don't fret, act. You can reduce your burden by thousands of dollars, leaving more for fun and necessities.

There is a process called consolidating, and you can use it to reduce the interest you might have to pay on student loans. It is similar to refinancing a home mortgage. But you don't have to pay a cent to do it, you don't have to be smart about money matters, you can have rotten credit, and the entire process can be handled easily in a half-hour.

Don't put this aside. Once July 1 rolls around, it will be too late to nab fairly low interest rates, at least for the next 12 months and maybe a lot longer.

Here is what's at stake: Say you have just finished four years of college and you have $20,000 in federal Stafford student loans. Under the government program that has made it possible for you to borrow for college, interest rates on your loans will change every July 1 and can go as high as 8.25 percent.

But you don't have to accept that. You can have your interest rate locked in at 4.75 percent before July 1 so your payments never change, and pay $129 every month for the next 20 years.

Without consolidating, you have to pay off your loans in 10 years, and within six months the rate will jump to 7.14 percent, or $234 a month. Your monthly payment would be $245 a month if the 8.25 percent rate kicks in.

You might not see 8.25 percent and 4.75 percent as far apart. But when paying interest, a couple of percentage points make a huge difference. If you paid 8.25 percent over 20 years on $20,000, you would have to make payments that would total $40,899. If you instead locked in 4.75 percent for 20 years, you would pay $31,019, according to student lender Sallie Mae.

There is no assurance the rate will go to 8.25 percent, although it has been there many times, including the mid-1990s, according to Sallie Mae spokeswoman Erin Korsvall.

The rates, which have been among the lowest in 40 years, depend on economic conditions. When the economy is strong, and inflation is looming, it is easy for rates to climb to 8.25 percent.

In 2000-2002, the economy went through a tough time amid the terrorist attacks and a recession. Rates consequently dipped to the lowest level ever - 2.87 percent. But the economy strengthened, and rates have been rising since 2004.

Even students still in college should consider consolidating loans. They will never have another chance at holding onto the 4.75 percent rate, because the government is changing the rules for students who have not graduated by this July.

Parents with PLUS loans also can consolidate now.

If you are a recent college graduate, however, before consolidating consider your career plans. In a handful of public service-type jobs, your employer will pay some part of your college loans, but not those that you have consolidated.

So if you are going into the military, plan to teach low-income children or work in a program such as the Peace Corps or Head Start, check with your potential employer about the rules before consolidating loans.

To consolidate, you must go to your original lender. If you have several lenders, you can pick any one. And you should shop by asking your financial aid office for suggestions and using the Internet. While interest rates won't vary, and none will charge you a fee, some lenders such as Sallie Mae will cut a percentage point off your interest if you are reliable about paying for three years.

To make sure you receive this advantage, never miss a payment. And there is an easy way to do that: Set up an automatic payment plan through your bank, so that each month the lender just takes the payment from your account. Some lenders will cut 0.25 percent off your interest rate if you set up an automatic payment plan.

To start, you can find out who your lenders have been by going to the National Student Clearinghouse Web site ( and clicking on "Students and Alumni," then "LoanLocator." To understand your options, go to

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