(MONEY Magazine) – WHEN DANIELLE ARCARO ENTERED George Washington Medical School in Washington, D.C. in 1989, she anticipated a long and lucrative career. Now, with 18 months to go as a hospital resident, the would-be ophthalmologist is struggling to make ends meet and unable to envision a prosperous future. The Arcaros live in fear of June 1997, when their combined student loan payments reach an unthinkable $2,486 every month. "We'll be paying back these loans until we're ready to retire," says Danielle.

For generations, college grads have willingly paid extra dues to earn M.D.s, J.D.s, M.B.A.s or certain Ph.D.s because of the payday guaranteed them in the end. But that historic trade-off is increasingly proving to be a bad bargain. Fresh-minted pros like the Arcaros are getting socked by a one-two punch--the fast-rising cost of graduate school, which translates into greater debt, followed by slow-growing income. "These graduates aren't looking to drive a Mercedes and earn half a million anymore," says Julie Disa, director of financial aid services at Johns Hopkins Medical School in Baltimore. "Instead, they're wondering, 'Can I afford to pay back my loans, have a family and buy a home one day?'" Adds Kevin Boyer, executive director of the National Association of Graduate-Professional Students: "What's happening is that many graduate students are mortgaging their futures. We're ending up with a new debtor generation."

As if the current situation weren't tough enough, Congress is considering measures that would make it more difficult. Budget-cutting Republicans are looking to eliminate some of the breaks offered by federal student loan programs--moves that could cost the borrower who has both undergraduate and graduate debts a couple of thousand dollars more over the life of the loans.

So it's getting harder to become a lawyer or a doctor. Big deal, you say. The elite are getting their lumps. So what?

So this: Diminished prospects for young pros hurt not only them but society as well. The deep hole being dug by America's best and brightest has grave implications for us all. If there are fewer incentives for young people to enter highly skilled professions, it will affect how well the country will be served now and in generations to come. "More and more students who went into law school thinking they'd take a public interest job are finding they can't afford to because of their colossal debts," says Phyllis Jaudes, a 1993 graduate of the select Public Interest Law Scholars Program at Georgetown University's Law Center, who took a job in a law firm to pay down nearly $75,000 in student loans.

Meanwhile, boomer parents are borrowing against their homes and pensions to shoulder at least part of the financial burden. But exhausting their resources is likely to mean slim pockets when they retire. As this article will make clear, however, there are a number of steps young debtors can take themselves to make the heavy load more manageable.

As for the problem, numbers tell most of the story. An American Council on Education (ACE) study last year found that borrowing under federal loan programs for graduate and professional students at 347 institutions rose an astounding 47% between 1992 and 1994, increasing from an average $1.6 million to $2.4 million. For many students, this graduate school debt comes on top of hefty undergraduate loans of $10,000 or more. With tuitions at grad schools rising twice as fast as inflation, and total costs at private professional schools running $70,000 for a two-year M.B.A., $100,000 for a three-year J.D. and $150,000 for a four-year M.D., it's no wonder students go into hock.

Plus, borrowing is easier than ever. In 1992, Congress raised the ceiling on the maximum graduate students could borrow in federal loans from $11,500 to $18,500, a 61% jump. Of that amount, $8,500 is now available as subsidized Stafford Loans (on which the government pays interest while the student is in school). An additional $10,000 may be borrowed as an unsubsidized Stafford, on which interest starts to accrue immediately. Borrowers obtain these loans through private lenders or directly from the federal government. Simultaneously, private lenders also aggressively market their own loan programs to grad students (with, for example, variable rates pegged to the 91-day Treasury bill plus 2.4 to 3.25 percentage points while you're in school and rising to 2.85 to 3.5 points after you graduate, generally without a cap).

One of the recent congressional initiatives would add to the debt burden by eliminating the six-month interest break new graduates get on subsidized federal loans. This move could tack on $2,000 over 10 years for a student who borrows $34,125 for four years of undergraduate and two years of graduate school, according to ACE. But Republicans argue that dropping this interest subsidy would save $3.5 billion over seven years and eliminating direct lending by the federal government would save $1.2 billion. "We think these are the least onerous ways to cut," says California Rep. Howard P. ("Buck") McKeon, chairman of the Subcommittee on Postsecondary Education, Training and Life-Long Learning.

While debt loads have been rising, incomes for doctors, lawyers and M.B.A.s haven't been increasing nearly as fast. In 1994, the median starting salary for lawyers was $37,000, while doctors and M.B.A.s averaged $29,600 and $38,800 respectively. Those salaries had risen only 2.8%, 8.9% and 8.6% between 1992 and 1994--the same period in which grad student debt rose 47% on average. And during that time, the median net incomes of established doctors in private practice declined by 3%, according to the Medical Economics Continuing Survey, an annual poll of more than 10,000 physicians.

Many new pros find the job market grim. Nearly one in every four law school grads can't find work in the legal profession. And a new report by William F. Massy at Stanford University and Charles A. Goldman at Rand Corp. reports a dramatic oversupply of science, engineering and math doctorates.

To find ways for recent grads to overcome the burden, MONEY canvassed more than two dozen school financial aid officers, lenders and counselors. The following is based on their advice. For more about smart ways to handle debt, see also the story on page 57 and "Five Shortcuts to Your Top Financial Goals" on page 92:

Check into refinancing. If you're a doctor with a federal Health Education Assistance Loan (HEAL; current rate, 8.25%), get in touch with Household Bank (800-777-1136) and PNC Bank (800-756-5430), two lenders that recently offered attractive 8% refinancing rates for HEALs. Consider refinancing high-rate student loans with a home-equity line of credit, assuming you own a house. Using a home-equity line (HEL) with, say, a 10% rate to pay off a 10-year, $50,000 student loan that also has a 10% rate will ultimately save you $8,200 if you're in the 28% tax bracket. Reason: A HEL lets you deduct the interest from your taxes.

Pay off private loans first. Private loans generally have higher interest rates than federal loans do. Also, unlike federal loans, they usually do not have a cap on rate increases (both federal and private student loans tend to have variable rates). You'll save by wiping out private loans fast. One strategy: Reduce your monthly federal loan payments by stretching the repayment period to, say, 15 years instead of 10. Then use the extra cash to pay off private loans. (Be sure to pay off more expensive credit-card debt or auto loans first.)

Take advantage of deferred-repayment options. A deferment is a stretch of time during which a borrower gets a break from repaying a federal loan, apart from the six-month grace period after graduation. You may qualify for federal-loan deferments on several grounds, including further schooling or unemployment. Since Congress seems to change deferment rules every few years, your eligibility may depend on when you took out your first federal loan. Ask your lender for details. Depending on your type of loan, interest may or may not accrue during the time-out. If you're eligible, use the deferment period to prepay any more expensive private loans.

See if your lender will cut you some slack. You may also get time out from paying back a loan by requesting something known as forbearance. A forbearance is granted at the lender's discretion, while deferments are based on stringent federal guidelines. Also, interest always accrues during forbearance periods.

Consolidate your loans. Combining several loans into one monthly payment can help lower your nut. There are two programs that allow you to consolidate federal loans. First, check whether you're eligible for the Federal Direct Consolidation Loan program (800-848-0982), which is run by the government. If you qualify, you can choose among four options: Standard repayment stretches the term of your consolidated loan to 10 years; extended repayment pushes the payback period to 12 or 30 years; income-contingent repayment calculates your monthly payment based on a percentage of your income; and graduated repayment permits lower payments now and higher payments later. To qualify, you either need at least one direct student loan or must be dissatisfied with the consolidation options offered by your private lender.

The interest rate on a consolidation loan adjusts annually and is equal to the 91-day Treasury bill plus 3.1 percentage points. Currently, that totals 8.39%, but the most you'll ever pay is 8.25%, the program's cap. One caution: On income-contingent loans, make sure your monthly payment is at least large enough to cover your interest charges if your income is very low. Otherwise, you might face negative amortization, which means the unpaid portion of interest is added to the principal and is subject to further interest.

An alternative is the Federal Family Education Loan (FFEL) consolidation program, which is administered by private lenders and offers loans with repayment options similar to the Federal Direct Consolidation Loan Program. Depending on the rates on your various student loans, you could pay slightly more interest, however, when you consolidate under FFEL rather than under the direct-loan consolidation program. That's because the rate on your FFEL loan is a weighted average of the rates on all of your loans, rounded up to the nearest whole number.

Some other disadvantages: First, under FFEL consolidation, there is no limit to how high your interest rate can be set (although currently, most new borrowers pay no more than 9%). And if you consolidate subsidized Stafford Loans with unsubsidized Staffords under FFEL and then return to school, you lose the interest subsidy. This isn't the case with the direct-loan consolidation.

But FFEL's program has some attractions. The interest rate you pay on a Federal Family consolidated loan is fixed--no worry about interest rates rising. And some lenders have added incentives. For example, the Student Loan Marketing Association (Sallie Mae), a company that services about a third of all student loans, offers a FFEL-consolidation program that will reduce the interest rate by one percentage point for the remaining term if you make your first 48 payments on time.

Before opting for consolidation of any kind, however, understand that stretching out your payments will result in your paying more interest over the life of the loan.

Search for scholarships and stipends. If you work up to four years in an underserved U.S. area as a dentist or a primary-care doctor, the National Health Service Corps will pay back as much as $120,000 of your educational loans. Plus, 51 law schools and five states--Arizona, Florida, Maryland, Minnesota and North Carolina--offer repayment assistance for lawyers who take certain jobs, usually low paying and in the public sector. Ask your school financial aid officer for details.

Don't blow the bonus. Some health maintenance organizations, law offices and consulting firms now offer signing bonuses to attract top talent, and a rare handful will pay off your loans. If you get a bonus, use it to pay down your loans. "Paying off a student loan with a 10% interest rate gets you the equivalent of a guaranteed 10% rate of return," says financial planner William Speciale at David L. Babson & Co. in Cambridge, Mass. "That may be the best investment in your future."