Strategies For When You're Starting Out Saddled With Student Debt | KUOW News and Information

Strategies For When You're Starting Out Saddled With Student Debt

Mar 1, 2016
Originally published on March 8, 2016 8:19 am

When Samuel Smith graduated with a master's in engineering from Cornell, he thought the $190,000 in debt he incurred would pay off. But it took him a while to land job at a software firm in Austin, Texas. And now, after paying $1,750 a month in loan payments, rent and food, he says he doesn't have much left over.

He doesn't own a TV and says "it'd be nice to go out for drinks once in a while."

More people have more student loan debt than at any time in history. Average student loan debt has tripled since the mid-1990s. Last year, the average student debt for a college graduate was more than $35,000, according to Mark Kantrowitz, a student loan expert at Cappex, which connects students with colleges and scholarships.

Loans that hefty can take decades to pay off, affecting careers, homebuying and family plans.

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Smith, 26, laughs bitterly when asked about his earlier, carefree days. Replacing the tires on his car wiped out his checking account and ran up credit card debt. His debt burden, he says, has become a psychological burden.

"The best way I can handle it is to try to not think about it. Because when I do start thinking about it, I have some serious panic attacks," he says, chuckling.

Then he adds more seriously that he's not just joking: "For the past couple days I've been in panic attacks."

Experts say studies show rising student debt is limiting peoples' career options. They decide against graduate school. Or feel they can't afford lower-paying public service jobs or the risk of starting a new business. That's a problem, because new companies create new jobs.

Chris Costello, CEO of Blooom, a personal finance advice firm targeting lower-net-worth people, says one of the top questions his firm's clients ask goes something like this: "I've got student loan debt. Should I be contributing to my 401(k)?"

Many people think they need to pay off the loans first. But Costello says if your employer matches contributions to a retirement plan, such as a 401(k) or 403(b), it would be crazy not to take advantage of it.

"Please, please do not leave those free dollars on the table," he says.

But after maxing out on the matching contributions, Costello advises paying off the debt with the lowest balance. Some advisers say target the one with the highest interest rate, but he says there are psychological benefits to tackling the smallest balance first.

"It's called the debt snowball method, and it's an easy way to build momentum and mental confidence that you're actually making progress in getting debts paid off," Costello says.

Debt counselors also say graduates with debt should see if they can qualify for loan forgiveness, refinancing or debt consolidation — all while not incurring new debts. In other words, he says, live below your means.

Greg Deckard and his wife are trying to do all that. They live in Mobile, Ala. And he recently went back to school to get a software engineering degree. But now they owe $126,000 in student loans on top of a mortgage and day care for two kids.

"If I go with a 20- to 25-year plan, then I'm in my 60s when I finish paying. I'm 42 and I have very little saved for retirement," he says, let alone for his kids' college education.

Sheila Bair, a former head of the Federal Deposit Insurance Corp., dealt with the aftermath of the mortgage crisis. Now she is the president of Washington College in Chestertown, Md., and is focusing on the problem of student loan debt.

Bair has frozen tuition increases at her school. And she criticizes student loan policies that make it too easy to borrow and too hard to pay back. Bair, an adviser to Costello's firm, Blooom, advocates having more federal loan programs that cap monthly loan payments at a certain percentage of their income.

"That way, students that want to be social workers, or work for nonprofits in the inner city, they will only have to repay what they can afford to repay," she says.

That would benefit Rosette Cirillo, an inner-city teacher in Chelsea, Mass., who is the first in her family to go to college. She jokes about the $120,000 in college and grad school debt: "Oh, it's my tax on trying to become part of the middle class."

And it's an especially annoying tax, because she says even though she is making her payments, for a time she received hundreds of mistaken collections calls.

"My phone [was] buzzing in my desk while I was teaching, 10 times a day," Cirillo says. "There's not time to stop thinking about it," she says of her debt burden.

Nevertheless, she tells her students to go to college — because it leads to better careers.

"I taught 12th grade last year," Cirillo says, "and I told them the same thing: 'Go.' "

But these days, it's hard not to consider the price.

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More people have more student loan debt than at any time in history. In fact, average student loan debt in the U.S. has tripled since the mid-1990s. That's a much talked about problem. And as part of our money and life coverage, we're taking a look at how to tackle that debt when you're just starting out after college. NPR's Yuki Noguchi has more.

YUKI NOGUCHI, BYLINE: Samuel Smith graduated with a master's in engineering from Cornell and landed a job at a software firm in Austin. But he owes $190,000 in student loans. That means he's paying almost $2000 a month in loan payments. After rent and food, he says he doesn't have much left over.

SAMUEL SMITH: I don't even own a TV. You know, it'd be nice to go out for drinks once in a while.

NOGUCHI: When I ask about his carefree 20s, Smith laughs bitterly. Replacing the tires on his car wiped out his checking account and ran up credit card debt. And all this has become a psychological burden.

SMITH: The best way I can handle it is to try to not think about it because when I do start thinking about it, I have some serious panic attacks. For the past couple of days, I have been in panic attacks.

NOGUCHI: Experts say studies show rising student debt is limiting people's career options. They decide against grad school or feel they can't afford lower-paying public service jobs or the risk of starting a new business. That's a problem because new companies create new jobs. Chris Costello is CEO of Blooom, a personal finance advice firm targeting lower-net worth people.

CHRIS COSTELLO: Probably the number one question we get asked from our clients goes something like this - I've got student loan debt. Should I be contributing to my 401(k)?

NOGUCHI: Many people think they need to pay off the loans first. But Costello says that's the wrong call. He says if your employer matches contributions to a retirement plan such as a 401(k) or 403(b), do it. That's potentially thousands of dollars of free money, and it'd be crazy not to take it.

COSTELLO: Please, please do not leave those free dollars on the table.

NOGUCHI: Then Costello advises paying off the debt with the lowest balance - not necessarily the one with the highest interest rate.

COSTELLO: It's called the debt snowball method, and it's an easy way to kind of build momentum and mental confidence that you're actually making progress in getting debts paid off.

NOGUCHI: Debt counselors also say you should see if you can qualify for loan forgiveness, refinancing or debt consolidation. We have a lot more on that at npr.org. Then, of course, you don't want to incur new debts, which means living below your means. Greg Deckard and his wife are trying to do all that. They live in Mobile, Ala., and he recently went to school to get a software engineering degree. But now they owe $126,000 in student loans on top of a mortgage and daycare for two kids.

GREG DECKARD: If I go with, like, a 20 or 25-year plan, then I'm in my 60s when I finish paying. And so I'm 42, and I have (laughter) very little saved for retirement.

NOGUCHI: Let alone paying for his kids' college. Sheila Bair is former head of the Federal Deposit Insurance Corporation, where she dealt with the aftermath of the mortgage crisis. Now she's the president of Washington College, and she's focused on the problem of student loan debt. She's frozen tuition increases at her school, and she criticizes student loan policies that make it too easy to borrow and too hard to pay back. Bair advocates having more federal loan programs that cap monthly loan payments based on income.

SHEILA BAIR: That way students who want to be social workers or work for nonprofits in the inner city, they will only have to repay what they can afford to repay.

NOGUCHI: That would benefit Rosette Cirillo, an inner-city teacher in Chelsea, Mass., who's the first in her family to go to college. She jokes about the $120,000 in college and grad school debt.

ROSETTE CIRILLO: Oh, it's my tax on trying to become part of the middle-class.

NOGUCHI: And it's an especially annoying tax because she says even though she's making her payments, she often gets collections calls.

CIRILLO: My phone buzzing in my desk while I was teaching 10 times a day, so there's no time to really stop thinking about it.

NOGUCHI: Still, she tells her students to go to college because it leads to better careers.

CIRILLO: I taught 12th grade last year and I told them the same thing - like, go.

NOGUCHI: Go, but these days it's hard not to consider the price. Yuki Noguchi, NPR News, Washington. Transcript provided by NPR, Copyright NPR.