How to Pay Off Student Loans
Citing higher levels of student loans and other debt among college grads, one book title proclaims that "now is a terrible time to be young."
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As someone who is older and, I hope, wiser, let me say that it's never a terrible time to be young. Today's twentysomethings have unprecedented opportunities -- and, in many cases, parents who are willing to help support them while they figure out what to do with their lives.
That's not to minimize the challenge of repaying student loans. But there are practical ways to ease the pain, starting with choosing an affordable education and borrowing at the lowest rates (government-sponsored Stafford loans for students and PLUS loans for parents).
Let's assume that you graduate owing $19,000 in student loans (the average student-loan debt among graduating seniors) at 6.8%, the current rate on Stafford loans, and you want to repay the loans in ten years. That would require a monthly payment of about $220. Limiting debt repayment to 10% of your gross income would require an annual salary of about $26,400.
That's manageable -- and can be even easier if you take advantage of breaks for Stafford-loan borrowers:
Postpone repayment. You're entitled to a deferment if you go back to grad school, can't find a full-time job or experience economic hardship.
Lower your payments. Struggling on an entry-level salary? You can lower payments by stretching out the loan term. You'll pay more interest over the long run, but this move could get you over a hump. And you can bump up payments later or switch to a shorter term.
Borrow smart if you go back to grad school. Graduate and professional students can also use low-cost Stafford loans. Need more money? You can borrow up to the full cost of attendance with PLUS loans, now available to grad students at a low rate of 8.5%.
Consider consolidating your loans. You won't necessarily get a lower rate, but you'll get the convenience of a single payment plus other perks (for more on consolidating loans, go to www.finaid.com).
Get someone else to pay. Join AmeriCorps or Teach for America and you're eligible for grants to help you pay off your loans. Teaching in a low-income school may also qualify you for loan forgiveness. Some occupations forgive loans as a recruiting tool.
And don't forget: If you meet income requirements, you can deduct up to $2,500 per year in interest on any loans used for higher education.
Once you've worked out the best terms you can, put your payment on autopilot. Use any spare cash to pay off higher-rate debt, or to start an emergency fund or a retirement stash. It's nice to have money in the bank. (Learn more about whether you should save or pay down debt first.)
See Janet's college-financing series: