Graduates have several options for managing debt Refinancing, consolidating and investing can help


NEW YORK -- As graduation season winds down and many students prepare to repay their education loans, innovative grads are taking steps to lower their college debt and invest for the future.

Amanda Barton, who earned a graduate degree in nursing from the University of Pennsylvania two years ago, is among them.

"We hate debt," said Barton, 24, of the attitude she and her husband, Adam, have toward the $18,000 she amassed in college loans. "We're trying to pay it off as quickly as we can."

College students borrowed $25.5 billion last year, according to the U.S. Department of Education, up from $16.5 billion in 1993.

Undergraduates who take out loans have an average $11,500 in debt, according to the Student Loan Marketing Association, or Sallie Mae, a government-chartered purchaser of one in three federal student loans.

While most grads entering the work force have limited resources for anything beyond basic expenses, there are several ways to pay down their debt, including tailored refinancing, consolidating loans and investing.

"We looked at paying off loans in terms of where we could get the most bang for the dollar," said Barton, who opened an individual retirement account after graduation and invested in an income growth fund.

Some 4.5 million students took out federal loans last year, the Department of Education said. While 45 percent of students in four-year programs are borrowers, the figure is more than 50 percent for graduate students, said attorney Robin Leonard, author of "Take Control of Your Student Loans," to be published in July.

That fact notwithstanding, most financial planners agree that recent grads should first focus attention on another financial thorn affecting many of them -- credit card debt.

When Tad Benson earned his graduate degree at the University of Southern California's School of Public Administration, he had close to $19,000 in outstanding loans.

The 28-year-old fund-raising consultant in Pasadena, Calif., also had several thousand dollars in credit card debts, which he must repay at twice the 8.25 percent interest rate he carries on his college debt.

Paying back the student loans is easy, Benson said: "It's the credit cards that are the problem."

Benson is not alone.

"Right now we're seeing students with $10,000 to $20,000 in student loans and matching amounts on plastic," said Jennifer Reihm, a school relations representative at Chela Financial, a San Francisco-based lender that holds about $1.3 billion in loans. "You can be eaten alive by interest rates."

While making minimum monthly loan payments on an entry-level salary can be very taxing, it's not impossible. People who can't afford standard minimum payments -- typically $120 for each $10,000 borrowed on a 10-year term -- can arrange a plan to fit their budget constraints.

"Figure out what your comfortable level is," said Sallie Mae's Miller. "You probably can find a repayment plan to meet that amount."

An income-dependent plan lets the borrower pay a percentage of income. Chela's plan lets borrowers pay as little as 4 percent of monthly gross income or the monthly interest due on the loan, whichever is greater.

In a graduated payment plan, a borrower can begin with smaller payments that increase in size as income grows. For instance, a borrower with $11,000 in loans at 8.25 percent interest under a standard plan would pay $135 a month. The same loan in a graduated plan would be $76 a month in interest-only payments at the outset, increasing to as much as $194, according to Sallie Mae. Of course, smaller payments at the start mean higher finance costs later.

Some lenders reward borrowers who make the first 48 payments on time by knocking as much as two percentage points off the interest rate on the rest of the loan. Sallie Mae reduces its rates by a quarter percentage point for borrowers who have their payments automatically deducted from a bank account.

Another way to ease monthly loan costs is to pool debts and lengthen the repayment terms.

Matthew Robertson, 38, graduated from the University of Chicago's business school 10 years ago with about $20,000 in debt from more than one lender. Consolidating the loans enabled him to make a single, lower monthly payment.

"By refinancing, I got a great interest rate and was able to make lower payments when I was just starting out," said Robertson, a money manager at Neuberger & Berman in New York.

Through the consolidation plan offered by Sallie Mae, a borrower can reduce monthly payments by as much as 40 percent by extending the repayment term on some loans to up to 30 years.

While lower monthly payments are appealing, longer terms translate to more interest paid out to lenders -- a price many borrowers aren't willing to pay.

Barbara Poskanzer, 28, works as a marketing analyst at the Ford Motor Co. in Detroit. Her annual income -- close to $75,000 -- enables her to aggressively pay back the $35,000 in loans she took on while earning an MBA degree at North Carolina's Duke University.

"I steeply stepped up payments," she said. "Between rent and monthly bills and loan payments, I'm really not saving any money. In the short term I'm taking a hit, but in the long run I'm going to owe less money."

Before her loan payments began, Poskanzer opened an IRA and saved up enough to tide her over for emergencies. And when her debts came due, she began paying back $2,000 a month on one loan, more than five times the standard amount, and about $300 on the other, more than seven times the basic payment.

Poskanzer estimates she'll have the balances paid in two years, saving more than $20,000 in interest payments.

Many advisers recommend that borrowers looking to invest as they pay down college debts set aside an emergency fund and take advantage of an employer's 401(k) retirement plan, then look for investments that yield more than the interest on loans.

Pub Date: 5/26/97

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