Managing your student loan debt: with the right approach, paying for college can be less of a burden. (Personal Finance).

IT'S NO SECRET THAT HIGHER EDUCATION COSTS ARE ON THE rise. Over the last two decades, the price of attending two- and four-year public and private colleges has grown more rapidly than inflation and family income. In fact, last year the average tuition and fees for four-year public colleges rose nearly three times faster than the national inflation rate.

Consequently, students of all economic levels are borrowing money to help finance their education. According to a report issued by the National Center for Public Policy and Higher Education, only 17% of the highest-income families borrowed for college in 1990, but that figure increased to 45% by 2000. In addition, the U.S. Department of Education reported the average amount of debt incurred by a public college graduate totaled $16,243 in 2000; those who attended private colleges incurred $17,613 in debt. For those who pursue graduate degrees, "Upwards of $100,000 [of debt] is very common, which is very scary," says Erica Sandberg, chief financial writer and media relations manager for Consumer Credit Counseling Service in San Francisco.

As grim as such figures are, there is some good news for student borrowers. Statistics show that more education still leads to higher salaries, and the College Board estimates that over a lifetime, those with a B.A. or higher earn over $1 million more than those with a high-school diploma.

Now is a good time to get a handle on your debt since interest rates for Federal Stafford Loans have hit an all-time low. So don't approach your loans begrudgingly. The debt you incur while studying can be an important investment in yourself.

Fern Williams White, 31, a 1999 graduate of Clark Atlanta University with an M.B.A. in finance, can attest to the benefits of investing in higher education. "I definitely don't have any regrets about pursuing the degree; my salary has pretty much doubled," White says. She is currently an account associate for a financial services firm in Atlanta and earns $60,000 per year.

White received her B.A. in economics from Earlham College in Richmond, Indiana, in 1994 and financed the degree with mostly scholarships and work-study, graduating with only $6,000 in student loan debt. After working for a nonprofit housing agency in Philadelphia for three years, she enrolled at Clark Atlanta in 1997 and relied heavily on loans to pay living expenses. Although she earned her M.B.A., she also racked up around $50,000 in student loan debt. "I was aware of what I was getting into," she says. "I was thinking that within five years of [graduating], I would go back and get my M.B.A. [because] I wanted to work in the corporate world."

White got a handle on her student loan bills soon after graduating by consolidating all of her Federal Stafford Loans. By consolidating the five payments she was making to separate lenders, White now makes a monthly payment of $391, saving her about $150 a month. "I just wanted to simplify my loans and get more favorable interest rates," she says.

White's consolidated Stafford Loans account for about $280 of her monthly bill and have a fixed interest rate of 7.375% over a 20-year term. A private CitiAssist Loan with a variable interest rate makes up the remaining total. Today, White's postgraduate balance is down to $46,500 and she doesn't view her student loan debt in a negative light. "It's just a part of me getting from point A to point B," she says. "I've been able to manage it and it's not deterring me from pursuing the lifestyle that I want."

GETTING A GRASP ON YOUR DEBT

Consolidation--taking out a new loan to pay off old ones--can be a good option for anyone looking to reduce large student loan bills. Those with at least $7,500 in federal loans are eligible to consolidate, and recent graduates should seriously consider the option. It's important to consider the long-term impact of student loans on your ability to establish an upscale lifestyle, buy a brand new car, or purchase a home. Financial planners advise that those considering large purchases such as buying a home get a grip on their debt first.

White's advisor, Atlanta-based financial planner Sterling Laylock, says loan consolidation helped improve her credit profile as she and husband, Garrick, 31, shopped for the home they purchased in September 2000. "Consolidation can help people with their debt-to-income ratio if they need to go under the scrutiny of any kind of lending institution," he says. "If their student loan payments are too high, it can exclude them from purchasing a home." In most cases, mortgage lenders are still apt to turn you down if the amount of your total annual debt is 38% above your annual income, although some programs may allow a higher debt-to-income ratio.

When you consolidate your loans, you convert them from a variable rate to a fixed rate loan. That's why it's so attractive right now. Interest rates are low and you can lock in these rates over the life of the loan. Federal law mandates that your new loan feature the combined balance of the previous loans, as well as a weighted average of the interest rates of all your loans adjusted up to the nearest one-eighth percent. The rate cannot exceed 8.25%.

TAKE ADVANTAGE OF LOW INTEREST RATES

If you're holding Federal Stafford Loans, now is a great time to consider consolidation. For students in repayment status, interest rates for Stafford Loans issued on or after July 1, 1998, are at 4.06%, down from 5.99%, and for those issued prior to July 1, 1998, the rates have also dropped significantly ranging from 4.26% to 4.86%. "This is the first time that these rates have dropped below the fixed interest rate of 5% on Perkins Loans, which institutions give to the neediest students," says Martha Holler, a spokesperson for Sallie Mae in Reston, Virginia, one of the nation's largest student loan lenders. The new rates will be in effect until June 30, 2003, as the government resets them every July 1.

For those who have not consolidated, the good news is you already owe less money this year because of falling interest rates, and consolidating can protect you from future rate increases. For example, a borrower repaying on Stafford Loans issued on or after July 1, 1998, will automatically have a weighted average rate of 4.125% after consolidating.

You need to remain aware, however, that while consolidation can ease your monthly debt load, you'll end up paying more in interest if you only make minimum payments. If you can afford to pay off your debt before the end of your term, do so, as there is no prepayment penalty associated with student loan consolidation. For more information, contact the Federal Direct Consolidation Loans Information Center (http://loanconsolidation.ed.gov); Collegiate Funding Services (www .cfsloans.com); or private lenders Sallie Mae (www.salliemae.com) and Citibank (www.studentloan.com).

LOAN MANAGEMENT IN SCHOOL

Even though most loans go into deferment while students are in school, there are ways to lower the debt burden before graduation. Daniel Brown, 23, a first-year student at Washington University Law School in St. Louis is already concerned about finding the best way to pay back the debt he expects to incur.

Last year, Brown (who is a former BLACK ENTERPRISES intern) graduated debt-free from Washington University with a B.A. in English thanks to an all-inclusive merit scholarship. For law school, however, he only received $10,000 in scholarship money and expects to finance the rest of the $28,460 tuition with $15,000 in student loans and a contribution from his parents. A portion ($8,000) of the loans are subsidized, meaning the government pays the interest during deferment periods, but the remaining amount is unsubsidized and Brown will have to pay on the interest while in school or defer and accumulate the interest until repayment.

Some of the loan money will go toward his living expenses such as car insurance, and Brown plans to live at home to save money. "I expect to have around $45,000 in debt after graduation, but I don't know how much I will have to borrow over the next two years," he says. Brown is currently paying the interest on his student loan (approximately $20 per semester), and he hopes to land well-paying summer internships to allow him to borrow less.

"It's smart for students to pay the interest while they're in school," Laylock advises. "This way, the amount doesn't accrue and $15,000 doesn't become $16,900. If you were to get a small windfall of say, $2,500, consider paying $200-$300 on student loans."

FACING THE BIG PAYBACK

Sandberg, of Consumer Credit Counseling, says that Brown is in really good shape if he only expects to incur $45,000 of debt. She knows of cases where law school students have graduated with $200,000 in loans. Sandberg advises that graduate students such as Brown first "look at what you need to survive, put yourself on a budget, and constantly reassess it."

Another debt-management strategy that current students should be aware of is consolidating loans during the six-month grace period after graduation. If you consolidate during this time, you can lock in your in-school interest rate, which is .06% lower than the repayment rate. This year the in-school interest rate for Stafford Loans is 3.46%, but once you take out a consolidated loan, you must start making payments immediately. So it may be smart to have your consolidation take place at the end of your grace period or by June 30, whichever comes first.

In addition, most lenders also offer extended payment, income-sensitive, and graduated payment plans. If you opt for extended payment, you can lower your monthly balance by lengthening your payback time up to 30 years. Income-sensitive plans base your payments on gross monthly income and you must reapply each year. Under a graduated income plan, the amount you pay each month steadily increases on the assumption that your salary will rise after a few years in the job market.

Sandberg says graduated and income-sensitive plans can be a good fit for students who aren't sure what salary they'll be making after graduation. If you still can't afford student loan payments after your six-month grace period, you can apply for additional deferment or forbearance. In some cases the government will cover your interest while the loan is in deferment, but not forbearance, which is granted at the discretion of your lender. Whatever you do, avoid defaulting on your loans, which happens if you make no payments over a 270-day period. Defaulting can ruin your credit rating and allow your wages to be garnished.

"Lenders are very loose as long as you're making payments," says Sandberg. "So be proactive, talk to your lender, and see what you can come up with [together]."

Steps to Consolidating Student Loan Debt

There are many ways to consolidate or refinance your college student loan debt. Sterling Laylock, an Atlanta-based financial advisor, says that consolidating will lower your monthly payments, "but if you stretch the payback period, you may actually pay more over the long run." Of course, the amount you pay back over time will depend on the interest rate you receive on the consolidated loan.

To start the process, make sure the loans are eligible for consolidation. Federal Perkins Loans, Guaranteed Student Loans, Federal Stafford Loans, Federal Supplemental Loans for Students, and National Direct Student Loans are among the many types of loans that apply. Private loans are not eligible for consolidation under the federal government's new lowered interest rates.

Next, you'll need to find a consolidator to discuss your loan situation. Your school may have a list of approved lenders, but the federal government, banks, credit unions, and consumer finance companies all have loan consolidation programs. If all of your loans are with one lender, you must use that lender to consolidate. If you have more than one lender, you can consolidate with any one of them. It is important to choose a consolidator that you trust will give you the most favorable rate and terms of repayment.

Once you've agreed to your new consolidation terms, make your payments religiously!