Debt-ridden grads should refinance loans, cut costs

NEW YORK -- Diplomas in hand, this year's college graduates now must face the real-world test of paying off the student loans and credit card debt they accumulated in school.

It can be daunting. A recent study by the State Public Interest Research Groups' Higher Education Project found that the typical graduate has accumulated nearly $17,000 in student loan debt, while a third hold loans in excess of $20,000.

Add in $3,000 or more on credit cards, and new graduates face the prospect of heavy debt payments at the same time they're trying to find jobs in a poor economy, rent an apartment, buy a car and acquire a wardrobe for work.

"New graduates should take a deep breath and take it slow," advises Jordan E. Goodman, a personal finance expert and author of "Everyone's Money Book." "That college debt is going to be with you for a while, so it's important to find a balance ... in spending, saving and repayment."

The most obvious steps new graduates can take involve holding down spending. That means moving back in with parents or renting with a roommate; buying a used car rather than a new model or, better yet, taking mass transit; and holding off on luxuries like a new DVD player.

They also can try to reduce their monthly payments on federal student loans, such as Stafford loans, by refinancing.

The interest on these variable-rate loans is adjusted annually based on U.S. Treasury auction results, and it will drop to a record low of 4.06 percent on July 1 from the current 5.99 percent.

Barry Morrow, chief executive officer of Collegiate Funding Services in Fredericksburg, Va., said those who have been out of school for up to two years can refinance their loans to lock in the new rate for the life of the loan. Many who refinance extend the standard 10-year repayment term to 20 years or more to hold down the amount due each month, he said.

Tough audience to reach

Members of the class of 2002 can lock in an even lower rate, 3.46 percent, if they act before the end of the year, Morrow pointed out.

"New graduates are a tough audience to reach," he said. "They're just out of school, and their heads are everywhere but worrying about their student loans. But they shouldn't miss this opportunity."

Morrow said he recently worked with a young woman graduating from Emerson College in Boston with $21,425 in student loan debt plus some $8,000 in credit card debt.

"If she can hold down the monthly payments on her federal loans, she can pay down that credit card debt a lot faster," Morrow said. With the interest rate on cards running at 14 percent or more, that can translate into savings of thousands of dollars.

Attorney Joe Magnas initially was paying off $90,000 of student loan debt at $1,400 a month after he graduated in 1999 from the University of Pennsylvania law school. He refinanced at a lower rate and extended the term to 25 years, and now owes $400 a month on the loan.

"It got me some breathing space," said Magnas, 32, who specializes in corporate and securities law at a New York firm.

He said that at the lower payment rate, he can begin setting aside some money toward the down payment on a home.

"I can step up my college loan payments whenever I want, because there's no prepayment penalty," he added.

Debt is no excuse

Goodman believes that even indebted new graduates should not ignore saving.

"People always say, 'I'm going to save later, but I have to pay off my student loans first,'" Goodman said. "Let's face it, you're always going to have debt -- student loans or mortgage loans or car loans. You shouldn't use debt as an excuse not to save."

Instead, he recommends, new graduates should "build your equity slowly while you reduce your debt slowly."

For some, that means refinancing a student loan and using the cash that's freed up to fund a 401(k) retirement plan. For others, it's holding down spending to make room for monthly savings, even if the amounts are modest.

"Compound interest will do wonders with your money if you start saving in your 20s and 30s," Goodman said. "People shouldn't miss out on that."