Two-thirds of U.S. college students borrow money to pay for college, and the average student debt at graduation is about $20,000. That's a lot of debt, but even financial planners--who usually despise consumer debt--think student loans are a very good thing. "Debt can be beneficial when it's used to buy something that increases in value, especially if the money can be borrowed at low fixed rates and with a tax advantage," says Ken Robinson, a certified financial planner from Cleveland, Ohio. Education loans, he says, are "classic examples of beneficial debt."

But student loans--loans included in your financial aid package and guaranteed by the federal government at a low interest rate--are one thing; loans for, well, just about anything else are a completely different matter. When you're in college, borrowing money to pay for items that depreciate in value--food, beer, dorm-room furniture--is a bad idea. And even if you borrow very little, using a credit card--which offers high rates and no tax advantage--is an even worse idea unless you are disciplined enough to pay it off every month.

So despite the relative poverty of the typical American college student, Brent Neiser, director of collaborative programs at the National Endowment for Financial Education in Greenwood Village, Colorado, says that the only good answer is to pay as you go. It isn't always easy, but students who build up consumer debt are likely to find themselves suffering the fallout for years to come, Neiser says.

Staying in the black

The financial challenges of college student life can be daunting, but money management for students is--or should be--a simple business: Just make sure that the amount of money leaving your bank account every month is smaller than or equal to the amount going out to pay your bills. The idea couldn't be simpler, but dealing with financial pressure is hard. College students lead stressful lives, and the temptation to buy stuff--such as junk food--can be great. Even buying small things can be dangerous.

It's a good idea to embrace an ethic of delayed gratification. It's important to have your basic needs met, but "you don't have to have the latest of whatever," Neiser says. Cultivate your Spartan side, and put your money into what you really need and value. "A lot of supplies that you may need or want for a dorm room actually go on a fire sale at the end of spring semester," Neiser says. A budget can be a handy tool. "Part of [having] a budget is to be thrifty and look for bargains. If you can save in one category, you have more to spend in another."

Credit-card virtue--and vice

Credit cards can be good things. They are convenient--and essential for renting a car, buying a plane ticket, and reserving a hotel room (a debit card might work, too, but debit cards carry their own set of risks), all of which you may have to do when you attend a scientific conference, for example.

But there's a right way to use credit cards; unfortunately, credit-card companies make their money by getting people to use their cards the wrong way. Companies often target the 18- to 24-year-old crowd by sponsoring events on college campuses and offering free items to those who sign up for a card and perks for those who use them often. But be wary, Neiser says. "The wrong way to use a credit card is for [airline] mileage points, to get free T-shirts and other freebies," Neiser says.

That's because the advantages a credit card offers are offset by considerable risks. "If you use it to order pizza and other things, the cost of all that is going to escalate if you don't pay it off," says Neiser. "Clothes, food, and entertainment should all be paid for in cash," adds Robinson, who encourages his clients to pay cash even--or especially--for computers. "The only thing that I know of that depreciates faster" than a computer, Robinson says, "is food, especially when you're dining out. Once you stick your fork in it, it has no resale value--not even online." If you aren't careful, you'll end up paying high interest rates, long-term, for things of fleeting value. What's worse, "credit-card companies can change the card terms more or less at will," Robinson says, so you may end up paying more interest than you were counting on. And if you are late with a payment, the company can charge as much as it wants to in late fees.

With a little self-discipline, however, you can exploit credit cards' advantages without falling prey to temptation. "There is one crucial rule with consumer debt in general, and credit cards in particular," Robinson says. "Pay them off every month. Never carry a balance. The cost of borrowing with a credit card is huge, and every time you use a card, what you're doing is borrowing money. If you simply establish the habit of paying off the credit cards every month, it won't seem like a burden to do so." And "Knowing that you'll have to pay it off, you'll likely be more cautious about what you choose to buy and how much you choose to spend."

The wages of financial sin

Credit cards make it easy to make serious mistakes, and it can be hard to know how much trouble you're in until it's too late. Late payments can damage your credit rating, which can limit your access, long term, to some of the things you are working hard for in college. In the short term, a bad credit rating increases the finance charge on credit cards and can make it hard to rent an apartment. In the longer term, it can limit your ability to get a mortgage to buy a house.

Excess consumer debt may even force you to take an outside job, which for many students isn't a good idea; an outside job may distract you from your studies and disrupt your financial-aid package. In the worst case, you could be forced to drop out of college to take a job to pay your debt, or to take a job right after graduation instead of going to graduate school--both of which are likely to be bad financial decisions in the long run.

Then again, there is no guarantee that you'll even be able to find a job if you have bad credit or carry a lot of debt. "Potential employers may check credit records, and they don't want to see a lot of consumer debt," Neiser explains. "They want to hire people who have acted intelligently with their money." And if a company does hire you despite a bad credit rating or a heavy debt load, you may not be able to take full advantage of some of the job's financial perks, such as a 401K retirement plan. Because employers often match the money you contribute to these plans, not participating means "you're basically giving away free money because you've splurged on things you can probably hardly remember you bought," Neiser says. Another advantage of these plans is that the interest you earn accumulates tax-free, so if you can't contribute because you're too busy servicing credit-card debt, you'll be missing out on a major employment perk.

About credit reports and scores

Credit scores range from 300 to 850, and a higher score is better. Credit scores are determined mainly by how much you owe, how consistently you pay your bills on time, and how long you've been borrowing. "Scores in the 700s and up are usually considered favorable," says Robinson. "Somewhere between 700 and 800, the borrower reaches a point where their credit [score] is considered 'great,' and it's quite difficult, and not that helpful, to do any better." A credit score below about 650 means you qualify only for "subprime" lending--and that means higher interest rates.

A 2003 law gave every consumer the right to review his or her credit report--although not to know the actual score--free once every 12 months. "You can get copies of your credit reports from the three major credit reporting agencies--Equifax, Experian, and TransUnion--once a year at no cost," Robinson says. "To get the reports over the Internet, go to www.annualcreditreport.com. If you prefer to order them by telephone, call 877-322-8228."

"If you want to know your credit score, you'll need to pay a small fee," says Robinson. But "if you're borrowing money, applying for a credit card, or getting a new cell phone plan, you might be able to find out your credit score free," Robinson says. "Just ask the lender or merchant. They'll often say, 'Well, I'm not supposed to tell you, but ...' "

Credit-card alternatives

Not everyone has the self-discipline to pay off credit cards every month. One alternative is the "classic" card from American Express, which allows credit-card convenience but must be paid in full every month. This lack of flexibility comes at a cost--the American Express classic has a $95 annual fee--but if you tend to carry balances on credit cards, and to pay those high interest rates, the fee might work out cheaper than your annual interest payments, and it certainly carries less long-term risk.

Another option is a secured credit card in which, as Robinson explains, "the applicant is required to leave money on deposit with the bank issuing the card. The deposit is in the same amount as the credit limit of the card." Secured cards let you make purchases online, reserve rental cars, and buy plane tickets, but they don't allow you to go into debt. Still, whichever approach you take, failing to make your payments on time can hurt your credit record. "If someone lacks the self-discipline to pay off the card every month, a secured card won't change that," says Robinson. "It's a behavioral issue, not a financial one."

Financial planning after college

Like everything else in life, the decisions you make today have implications for your future. Staying in college--and, if it's right for you, going on to graduate school--are probably the most important financial decisions you will make in the next few years.

But it isn't too soon, Neiser says, for undergraduates to start thinking about their financial plans after college. Most science students can earn a living while in graduate school, but not an abundant one, so it's crucial to keep your consumer debt under control and, as you enter the working world, to build up an emergency fund and some savings. Even at low rates of return, money you put away now will grow a lot over the 40-or-so years between now and retirement--especially if you add to it consistently over all those years. "Time is money," Neiser says, and in more ways than one. "Saving early and compounding often will put them in a great financial position in the future. The earlier you start, the better." For now, however, the best thing you can do to assure your financial future is finish your degree.

Jim Austin contributed to the reporting for this article.

Comments, suggestions? Please send your feedback to our editor.

Robin Arnette is editor of MiSciNet and may be reached at rarnette@aaas.org