7 Debt Managment Tips for College Grads

This year, college graduates are facing a merciless job market and that makes it all the more critical to handle debt advantageously.

According to Freedom Debt Relief, two-thirds of students graduated with some educational debt in 2008, with an average debt of more than $23,000. Since average cumulative educational debt is increasing by 5.6% a year, that total is likely almost $26,000 this year.

The projected total U.S. student loan debt outstanding for fiscal year 2010, when both public and private loans are included, is about $763.4 billion. Put another way, that's $2,704 for every person in the nation.

Those figures do not include other debt, such as credit card debt or loans.

In fall 2009, 84% of students had at least one credit card, and half of them had at least four credit cards. The average undergraduate has $3,173 in credit card debt before even leaving school.

"These statistics make it painfully clear that many college graduates have far more than the average debt," said Kevin Gallegos, vice president of Freedom Debt Relief. "This year’s graduates are entering one of the toughest job markets in our nation's history, and it is crucial that they know what to do to handle their debt in the coming months and years."

Freedom Debt Relief provides consumer debt settlement services and is a subsidiary of Freedom Financial Network, based in San Mateo, Calif. The company is a member of The Association of Settlement Companies and the International Association of Professional Debt Arbitrators.
Here are seven pointers from the company on how to handle debt responsibly:

1. Pay on time.

Paying bills on time is the No. 1 way to build a strong credit rating – and avoid getting into more debt. "The track record graduates establish in the first years of working and paying bills will help build a stronger financial future," Gallegos said. "Setting up a system to support good record-keeping and paying bills on time is extremely important."

2. Be aware of income-based loan repayment options.
Graduates (and students) who are struggling with debt have some options for getting relief with student loan debt if their loans were issued by the federal government program. As of July 2009, an income-based repayment plan caps the amount graduates must pay on student loans at 15 percent of discretionary income. After 25 years, any remaining balance will be forgiven.

If the borrower works in public service, the balance can be forgiven after 10 years.

3. Pay credit card debt first.

First and foremost, use caution when using credit cards, and if already paying off student loan debt, it is helpful to put away the cards completely to avoid racking up more debt. Using cash or a debit card for most purchases helps anyone stay within a healthy budget.

For new grads who have already incurred credit card debt, there is no better investment than paying this debt off, as credit cards typically carry extremely high interest rates (typically 15 percent to 30 percent).

4. Pay other loan obligations next.
After credit cards, graduates should pay other debt -- like personal loans and auto loans -- as quickly as possible. "If you must pay interest, you are better off paying it on student loans, where you can receive a tax deduction, rather than on consumer loans, which offer no tax benefit," Gallegos said.

5. Take tax benefits.
Most new graduates can deduct up to $2,500 per year in student loan interest payments. In 2009, the deduction phased out for taxpayers with annual incomes between $60,000 and $75,000 ($120,000 to $150,000 for those filing joint returns). A tax advisor can help graduates receive all the education-related deductions and credits for which they qualify.

7. Know what to do if paying is not possible.
Students who cannot pay student loan obligations should immediately contact the lender. Many student loans can be deferred for a time, although interest will continue to accrue. Do not stop paying the loan -- this is called "default," and damage from defaulting can prevent borrowers from buying a home or car or getting a job, apartment or insurance for years to come.