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Debt management tips for college students

December 31, 2007

Debt management is an important skill to master, no matter what life stage you are in. As a college student, you are laying the foundation for your future financial life. By understanding the difference between smart debt and dumb debt, you can become an expert at debt management.

Smart Debt
There are times when it is not only necessary to acquire debt, but it is also beneficial. Smart debt typically leaves you better off financially than when you started because it leaves you with an asset that was worth the cost of the loan. For example, a mortgage or student loan is considered smart debt. An important part of debt management is understanding the total cost of a loan (the principal, interest and fees) as well as whether or not the loan will help you or hurt you in the future.

Dumb Debt
Dumb debt is the easiest type of debt to fall into, and it usually results from neglecting debt management. Dumb debt occurs when you buy things on credit that you really cannot afford. It involves taking too long to pay off a debt so that you wind up paying an exorbitant amount of interest -- sometimes considerably more than the original cost of what you purchased. Dumb debt is also paying for something long after you no longer use it or even have it. Poor debt management can lead to dumb debt, stress, a limited budget and sacrificing long-term financial goals.

Student loans
Student loans are a very common way to pay for college. Choosing the right loans is a crucial step in good debt management, allowing you to acquire smart debt rather than dumb debt. Student loans are generally considered smart debt because of the asset that college gives you. Not only is it a valuable learning experience, but it boosts your employment prospects. Student loans, especially those from the federal government, usually have very desirable terms. It also helps that the interest from some of these loans is deferrable. For example, subsidized Stafford loans do not require repayment of interest until you have been out of school for six months, which is when you have to start repaying the loan. However, these loans are need-based, so may not be available for everyone. Unsubsidized Stafford loans are not need-based, so the interest accumulates immediately, but they usually still have low interest rates. It can help manage your debt to make interest-only payments while you are still in school. Since the interest will begin to accumulate anyway, making payments while in school will help you chip away at the interest before it builds up.

Credit cards
One of the biggest temptations for students to succumb to is misusing credit cards. This is, of course, poor debt management. College students are a magnet for credit card offers. Lenders know most college students have great financial prospects for the future as well as a current need for money. If a lender can get a customer at this stage, chances are the college student may stay loyal to that card in the future when his/her financial situation has improved. It is vital to control credit card for good debt management. Although it is tempting to use a credit card to go out to eat or buy new clothes you cannot afford, it is much better debt management to curb almost all credit card use. The interest on credit cards makes whatever you are purchasing cost much more than the ticket price. Credit cards make it easy to acquire dumb debt. Also, once you graduate from college, you will have student loans to pay off. By adding credit card balances to that, you are delaying your financial future by having to pay off the past.

Budgeting
As a college student, budgeting is one of the most important tools that you can learn, in addition to your coursework. Practice disciplined debt management by creating a budget that you are able to stick to. Remember -- sacrificing now and living within your means will make it easier for you to get out of debt faster once you have started on your career after graduation.


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