The Journey

Understanding the Good and Bad of Debt
By Erica Schrader

After graduating from Whitworth in 2005, Chris Gilliam found himself owing $50,000 in federal student loans and approximately $2,000 in credit card debt.

He was in good company. Eighty-three percent of all undergraduate students attending private colleges and universities received some type of financial aid in 2004, much of it in loans, according to the National Center for Education Statistics. As the cost of tuition is rising at more than twice the rate of inflation, students are facing financial difficulties when it comes to balancing education, cost of living, and finding the difference between a need and a want.

For most students, financial aid is a must. According to the September 2006 issue of Money magazine, "two-thirds of students borrow to pay for college and one in 10 have loans of $35,000 or more." Often, students are not considering the fees and the long-term commitment to pay this off, with payments generally starting six months after you've graduated. If you value your education enough then the cost might be worth it.

But, when you're 18 and choosing your college, you don't consider how debt can affect you in the future. If your parents didn't recognize this and help you learn early on, you might be facing debt that you never intended to take on in the first place. "I didn't have a good model to follow so I've had to learn this all on my own," Gilliam said. He is currently employed with Countrywide as an Associate Account Executive.

Like Gilliam, as an alumnus or an alumna, you may be facing a difficult financial situation as you balance your student loans, credit card debt and your current expenses. Debt can be an ongoing burden but it's important to understand good debt versus bad debt and how to successfully manage and conquer both.

When people hear the word debt it often comes across as a bad thing. Not always. In today's world it's highly unlikely someone doesn't have a car payment, a mortgage payment, or student loans to pay off. This is considered good because when you make payments on time you are continuing to establish credit that could be beneficial to you in the future. However, holding high balances and/or missing payments of any kind can easily damage your credit history and cause problems when applying for loans in the future. To put this into prospective, 50 percent of people don't pay their bills on-time.

Unfortunately credit card debt does not share the same terms or interest rates. According to that same Money magazine article, college seniors graduated with an average of $2,864 in credit card debt. If you carry a high balance on your cards it can be a never ending cycle with high interest rates. Because most people pay only the minimum amount each month, you end up paying only a small fraction over the interest making it harder to get rid of. In 2007, reported that the average bank credit card interest rate topped 19 percent. "At times, people try to blame debt on credit card companies and their manipulative tactics, but, it's all about self-control," Gilliam said.

Here are a few helpful tips that can help you manage your debt:

1. If you have more than one federal or private student loan, Traci Stensland, associate director for Financial Aid at Whitworth, suggests looking into this website, for a free application. Representatives can help you consolidate your loans into one low monthly payment and this company also be able to help you lower your interest rate.

2. If you can't afford the monthly payment on your student loan, talk to your lender and see if you can lower your payment and extend your loan period.

3. If you're in real need of help Roger Long, special assistant for marketing and development in Whitworth's School of Education, suggests credit counseling. Long counsels students and couples who are struggling with debt. "Credit counseling can help people become more aware and refocus so they're making the best use of their money," Long said. Do some research to make sure you choose the right company; these companies are relatively inexpensive and provide you with tools to help manage your debt.

4. Whether you're in debt or not, creating a budget can be a helpful tool in managing your money. It allows you to track your spending and know where your money is going. Whitworth's Traci Stensland advises, "Create a budget and target paying off the most expensive debt first." This will allow you to conquer your highest debt, and possibly one with the highest interest rates, first. You want to eliminate those as soon as possible, Stensland says.

How can your family benefit from this? If you have children and plan on helping them pay for college, encourage them to exhaust all federal loan options before looking into private loans. Avoid charging tuition on a credit card. According to an article written in a January2008 issue of The Spokesman-Review titled "Loan options concern schools," 'Last year, private loans accounted for nearly a quarter of all college loans.' The story also mentioned that private loans carry high interest rates and charge astronomical fees before the loan is even sent to you.

Whether or not you are facing financial difficulties, one of the most important things to remember is that it's just money – don't let if define your life. But, said Stensland, "Don't use credit cards as a way to 'bridge gaps' in paying for living expenses." That will only create more trouble. Live within your means and, if necessary, take a step back, look at your situation and consider budgeting as the key to eventual financial success.

Many of us are tempted to live beyond our means. "Credit card debt remains a problem because people seek instant gratification," Long said. But in most cases, funding education is a different story. It's like buying an expensive car; a good education should cost money.

Debt can be a burden after you've graduated because you are likely to want to buy a home and start saving for the future. Unfortunately with student loan and credit card bills, you have no choice. "It's hard because student loans are a big expense, especially when I could be making a house payment or saving it instead," Gilliam said. Although Gilliam didn't have a good model to follow, he is constantly reminded of the effects debt has had on his life and is taking small steps that are allowing him to achieve financial success.