You've graduated: Now pay back your debts

Welcome to WalletPop's series "You've graduated. Now what?" Our bloggers have a wealth of suggestions to help you find you way through that time of amazing transformation, from student to working stiff.

student loan debtWhen I graduated from college, my bank account totaled exactly $0 and my first student loan payment on $10,000 was due in less than 30 days because I had used up my grace period on a semester internship in New York. I didn't have a job lined up and was simply heading home with my parents after the ceremony to see what turned up.

I still had my diploma in one hand when my father handed me a bill totaling up all that I owed the family for my four years of higher education. He's the sarcastic type, so I thought he was joking, but he was actually serious. I was taking on some of the debt burden, but my parents had taken out loans as well and he figured they were my responsibility. My mom had to talk him down and let him give me a little time to get on my feet -- interest free -- before I started making payments.

They also ended up co-signing my first rental lease and fronting the broker's fee and first month's rent when I moved to New York for an internship that paid $5 an hour (just to give a sign of the declining times: A few years later, that internship paid nothing at all, and the company went out of business last year). So it wasn't just Sallie Mae that I owed.

The average college student now graduates with over $20,000 in loans and a couple of thousand more in credit card debt. Given the weak economy, recent grads are likely to get into even more trouble before climbing out of the hole. What's a young person to do to stay out of economic trouble when there's little money coming in?

1. Pay off low-interest loans steadily but slowly. Student loans typically come with low interest rates, so when I financed mine, I picked the longest term that offered the smallest possible payment and had it taken out of my checking account automatically. Even when I started making more money, I kept the same small payments. It took me until I was 30 to finish off my loans, but I never defaulted and had money for other purposes along the way. My husband was more active about his school loans, paying off extra each month and finishing early, which freed up money later on when he needed it more.

2. Work out a deal with your folks. That yogurt in the fridge comes with a cost, and don't you forget it. If your parents are helping you out, the last thing you want to do is take them for granted. Sit down with them and work out a plan for what expenses they are willing to foot and for how long. Food and shelter will likely be on the table, but $20 to go to a movie is probably not. Find out how much debt they are covering from the college tab and if they want you to tackle any of it. Then get onto the business of furthering your career and making them proud. I answered my dad's bill with a nicely worded thank you note. It brought my parents to tears and we all lived happily ever after.

3. Live within your means. Even if you are lucky enough to be employed immediately after graduation, your starting salary will likely not be enough to cover all the things you want. It might be a struggle just to afford rent and food. Now is the time to live within your means and not rack up any additional debt, especially for luxury items. Learn how to drink and entertain yourself for free. Learn how to cook. Update your wardrobe with hand-me-downs. I survived my first year in Manhattan on peanut butter sandwiches, first-date drinks and office hot chocolate. I never took cabs, invited people over to watch TV instead of going to the movies and went to any event that offered free food (I suggest getting religion -- any religion -- as a cost-cutting measure).

4. Don't forget about the future. Times might be tight now, but if you start saving now when your potential is high, you'll be happy with yourself even if your paychecks are slightly smaller right now. I contributed the maximum to my 401(k) at my first job -- in which I lasted less than a year -- and the matching funds alone were enough for a down payment on an apartment ten years later (and that was even after a disastrous merger tanked the company stock). I sold that place two years ago, and was able to sock away enough in 529 plans for my own children that they should be left with very little college debt no matter what our financial situation is 16 years from now.

I am now, by the way, back in student loan debt from my husband's master's degree. He consolidated three loans to get the lowest possible interest rate and picked an aggressive payment schedule, since we have no other debt. He pays less than $200 a month, and should be done in a couple of years, with little damage to our monthly budget.
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