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 (www.nslc.org) and clicking on "Students and Alumni," then "LoanLocator." To understand your options, go to www.loanconsolidation.ed.gov.
Once you consolidate loans, stay on top of them. Ask your lender to give you a six-month grace period at the start so you can get your feet on the ground without making any payments. But after that, if you lose a job or can't get one, don't just hope matters get better. Under the federal student loan program, lenders can give you help if you request it. They may defer, or put off your payments, until you get yourself on better financial footing. You also can delay payments while attending graduate school.
But don't just miss payments.
Be aware that the way you handle your payments will have a major impact on what you can buy during the rest of your life. You will be starting to build a credit history, and that history is used to determine everything from the interest you must pay on credit cards to the rate on a car or home.
Every time you have a loan of any kind, there are agencies that keep track of whether you pay on time. They give you a FICO score. It tells lenders whether they can trust you to pay your bills, and they charge you a higher interest rate if they think they are taking a chance on you.
So if your score is at the highest levels - 720 to 850 - you usually get the lowest, most attractive interest rates. If your score is low - 500 to 580 - you will probably have to pay about $100 more a month on car payments for a $20,000 car.
To consider what your actions might do to your credit score, read material at www.myfico.com. You can also get a free credit report each year to see how you are doing. Get it from www.annualcreditreport.com, or call 877-322-8228.
At this point in life, try to moderate the debts you take on. If you have credit card and college loan debt, pay off the cards first: The interest rate is probably about17 percent, compared with college loans at under 5 percent. Think of ways to economize, such as buying a used car rather than a new one.
Bill Gustafson, a personal financial planning professor at Texas Tech University, said many students fail to think through the burdens they are going to give themselves before stacking on financial responsibilities as they finish college.
They move to expensive cities, thinking their annual salary in their first job sounds high. Then they are shocked by unaffordable rent, he said.
He suggests comparing the cost of living in the city you might select with the one you know. And if you choose an expensive city, you can select housing options that won't be as burdensome, perhaps taking on roommates or moving to a cheaper suburb. Try the calculator at www.bankrate.com/brm/movecalc.asp to compare cost of living in various cities.
Tamara Draut, who has written about the financial problems of graduates in the book Strapped: Why America's 20- and 30-Somethings Can't Get Ahead, suggests putting two people into a one-bedroom apartment or living with parents. That way, she said, people in their 20s won't be haunted by their debts later.
People in their 30s are delaying home purchases and having children because their debts are too great, she said.
As a rule of thumb, people shouldn't spend more than 28 percent of their income on housing. So on a $35,000 salary, that's $816 a month, almost impossible to achieve if you rent alone in areas such as New York, Washington, Chicago and San Francisco.
To understand your debt and how to manage it better, go to Bankrate.com and click on "debt management." You will also find useful tools at Smartmoney.com.
Messages for Gail MarksJarvis also can be left at 312-222-4264.
Useful Web sites
To find out about your college loans, go to the National Student Clearinghouse Web site (www.nslc.org) and click on Students and Alumni, then LoanLocator. To understand your options, go to www.loanconsolidation.ed.gov.
To consider how your actions might affect your credit score, go to www.myfico.com. To get a free credit report each year, go to www.annualcreditreport.com, or call 877-322-8228.
To understand your debt and how to manage it better, go to Bankrate.com and click on Debt Management. You also will find practical tools at Smartmoney.com.