Getting started.

It's not easy to step off the debt treadmill

August 22, 2004|By Carolyn Bigda.

Many running enthusiasts I know don't particularly like treadmills. They argue that for all the energy you expend, you never get anywhere.

I was reminded of them when Dean Miner of Utah State University's cooperative extension program talked about the people he helps who are facing debt.

"They often feel that nothing they do will make any difference," Miner said.

That sentiment can start early too.

In 2002, the average student loan debt was $18,900, and students slinging credit cards typically carried $1,600 in balances, according to Nellie Mae, a college lender based in Braintree, Mass.

But with a little strategy, Miner said, we might not be fated to the treadmill. In fact, we just might start running Forrest Gump-style into a brighter financial future.

The first step is to list everything you owe, along with the current interest rates. With this information at hand, you can calculate how long it will take to erase these loans making the minimum payments, and at what cost.

Calculators on Web sites such as will help you do this.

Financially, it makes the most sense to shuttle extra money to credit cards and other high-interest debt, even if the balances are comparatively low.

For instance, a $1,600 credit card balance with a 20 percent rate may end up costing you around $2,000 in interest if you only pay the monthly minimum, assuming you don't charge anything more.

Of course, there are exceptions. If you're feeling paralyzed by the debt load, eliminate a few of the smallest balances first.

"It gives you the encouragement to take on the marathon," said Gary Foreman, former financial planner and now editor of the Dollar Stretcher (, an online newsletter about budgeting.

Another priority is 401(k) loans. When you leave your job, employers generally require you to pay back the entire loan within a few months. That's a significant bill, especially if you were laid off and aren't working yet.

But once these debt land mines are cleared, you can shift those former payments to other bills and also start paying yourself.

"This is the easiest time [when you're young] to save money that you'll have for your life," Foreman said. "You're coming from a lower standard of living, and any dollar you save will be multiplied many times over."

It may seem counterintuitive to save while a few loans remain, but you have to think of your debt as an investment, said Barbara O'Neill, a professor of family and consumer sciences at Rutgers University. Especially when it comes to prepaying the principal on a student loan or mortgage, which have interest rates hovering near all-time lows.

"Ask yourself, `What would I do if I didn't prepay the principal?'" O'Neill said. "How much would that money be worth in the future at an average 8 or 9 percent rate?"

At the very least, save some cash in a rainy-day fund for emergencies and put the rest toward loan principals, helping cut down on your overall interest expense.

But be sure you understand how your lender accepts prepayments. Some mortgage companies have been known to apply the extra money to your next monthly payment, not the principal.

Overall, try not to take on more debt.

After graduating from school and landing the first job, you may feel inclined to reward yourself.

But hold off. Instead of buying a new car, get something that's 3 years old. It's still better than your college junker but will save you from hefty car payments.

Another idea Dollar Stretcher's Foreman offers: If you're married and making two incomes, try to live off just one salary and put the other toward debts or a down payment on a home.

It may not be luxury living for a while, but your chances of escaping the treadmill get a whole lot better.


E-mail Carolyn Bigda at Bigda