November 2007

Rising debt puts pressure on graduates to be good money managers

After earning diplomas, many of today's college graduates can look forward to another "rite of passage" — paying back student loans. Graduates of four-year private and public universities in 2004 owed an average of $19,000 in student loans according to figures from the National Postsecondary Student Aid Study 1993-2004 (NCES) — a 100 percent increase from 10 years before.

For graduate and professional students, loan debt averaged about $40,000 — again, an increase of 100 percent from the previous decade. The debt problem is also compounded by the growing number of college graduates with loans to repay. In 1993, less than half of college graduates had loans to repay, but the number is closer to two-thirds today.

For many graduates, a form of sticker shock sets in once they pick up their degree, says Tanisha Warner, a spokesperson for Consumer Credit Counseling Service, a nonprofit service agency.

"Fresh out of college, it is not uncommon for student loan payments to represent the largest financial obligation many graduates face," said Warner. "These students find it difficult to keep up with their obligations in addition to the new student loan payment."

Given the prospect of having debt and a lengthy repayment period, students need to be savvy money managers early on.

"Many recent graduates have become accustomed to living on the borrowing system," said Warner. "They may not be ready to face expenses such as rent, car payment, utilities, and the big student loan payment."

To prepare students for repayment, more and more colleges and universities are requiring loan counseling for borrowers of Federal Stafford loans. The training focuses on the financial rights and responsibilities that borrowers assume with a loan and offers tips on managing money, which Warner applauds.

Warner said that most students are novices at handling their own finances and need a foundation in the very basics of budgeting and planning — and distinguishing between "needs" and "wants".

Learning how to manage money is relatively easy, aside from any tutorial a college offers. Students can also find online resources or contact consumer counseling services, which offer free advice. However, the key to any successful money management plan, according to Warner, is developing a budget.

"Creating a solid budget that includes a savings cushion for emergencies, periodic expenses, and possibly the occasional splurge allows consumers to manage all their financial obligations effectively," she said.

Financial success often occurs by adhering to a smart management plan. A variety of sources offer similar principles or recommendations for managing money well. A general plan recommended by Mapping Your Future™, a national public-service organization that provides free college, career, and financial aid services to students, offers good insight:

• Establish and maintain a spending plan: Budgeting basics are the foundation of strong financial management. Students need to determine expected monthly income and expenses, set categories for expenses, and track those expenses.
• Distinguish between financial needs and wants: Students have to make judgments about what constitutes a "need" or necessity and a "want" or luxury. Getting a roommate, shopping at thrift stores, and taking a part-time job are all options for reducing expenses and increasing spending ability.
• Minimize debt: A basic for a student is to borrow conservatively, only what is needed. Earning potential plays into this: what can the borrower hope to earn and how does this measure up to expected repayment? Credit cards are especially tempting during college, but there are strategies for mitigating credit card debt, such as limiting use to one credit card or paying off balances each month.
• Keep good financial records: A good way to plan for future expenses is to keep copies of old receipts, and to track expenses.
• Invest in your future: Establishing a savings account promotes good money management, and serves as an investment.

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For tips on how to establish high expectations for students as early as middle school and for assistance in planning for higher education academically and financially, visit www.AIE.org. TG provides this Web site has a public service to help all families and students achieve their educational goals and career dreams.

About TG
TG is a public, nonprofit corporation that administers the Federal Family Education Loan Program (FFELP). High resolution files suitable for publication are available as a free download from TG's Web site at http://www.tgslc.org/edufacts/index.cfm. For more information, please e-mail or call ray.perez@tgslc.org or (512) 219-4990.

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