Early steps help avoid trap of college debt

On the Money

Your Money

May 13, 2007|By Gail Marksjarvis | Gail Marksjarvis,Chicago Tribune

I will be attending college in the fall, and like many other graduating seniors, I am worried about managing my finances. ... I have no job experience or a savings or checking account, and I know nothing about credit. I'm afraid my lack of knowledge and poor spending habits could leave me with a lot of debt. What is the best possible solution?

- Patrick Anderson of Chicago

You are halfway there because you are thinking ahead. Most students don't consider the impact of debt until they are buried in it at the end of college. Then, escaping it can be difficult and painful. If you were busy with classes and missed credit-card payments, you will have blemishes on your credit score, the number that indicates how you have handled debt.

Any mistakes stay on your record for seven years, and can keep you from getting an apartment and a job. In addition, the score affects the interest rate on every loan you want. So a bad credit score could add hundreds, or even thousands, to the cost of buying a car or home later on.

The solution is to take control now. A good starting place would be to take a personal finance class through a university extension office this summer. They offer classes to the public, and there are no entrance tests or requirements. You aren't graded on your work. Sometimes, community education classes also are available.

If you aren't in an area with such a class, consider enrolling in a personal finance class once you get to college. Not all provide them, but there is a growing trend at colleges to give students the basics they need about financial matters. The classes cover everything from budgeting to credit scores and basic investing.

An alternative would be to get the book Complete Idiot's Guide to Personal Finance in Your 20s and 30s by Sarah Young Fisher and Susan Shelly, or to use the many resources on college Web sites. For example, you could try http:--financialsuccess.mis- souri.edu. Under the "student issues" tab, go to "student survival" and then "financial path to graduation."

Mark Oleson, the director of the Office for Financial Success at the University of Missouri, said the financial path to graduation worksheets get you thinking about what you are spending for college. He worries that too many students take on more debt than they should, given their career choices.

Oleson said students might be able to decrease the debt they assume by working during the summer, or while in college. You might want to try to finish college more quickly than four years, or even take longer if you can work more.

If you borrow money for college, seek federal loans - such as Stafford loans - from your school's financial aid office, and try to skip private loans. The federal loans generally carry much lower interest rates than private loans from banks. That means that over the next 10 or 20 years, you could save yourself thousands of dollars in interest.

There is a limit on how much money you can borrow - $23,000 over four years for Stafford loans. If you need more than that, ask if the government of your home state or of the state where your college is located offers low-interest loans with interest rates close to the 6.8 percent that federal loans charge. Also, parents can borrow the entire cost of college with what are called PLUS loans - a cheaper choice than going to a bank for a private loan.

For information on loans, including calculators that let you compare interest rates, use www.finaid.com

gmarksjarvis@tribune.com

Gail MarksJarvis writes for Your Money and is the author of "Saving for Retirement Without Living Like a Pauper or Winning the Lottery."

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