Taming Your Student Loan

Graduating was the easy part. Now, here's how to tackle one of your biggest debts.

Peter’s now earning $35,000 managing the food service at Fitchburg State College in Massachusetts, while Tamara kicks in $25,000 from bookkeeping. For now, though, their aim is to hack away at their $6,000 in credit card debt. From whatever they manage to salt away each month, Peter says they direct $100-$200 a month extra to their loan.

There are exceptions to consider, but only if you can manage to pay the amount due each month on your student debt. If your employer promises to match the amount you put in your 401(k), jump at it. “Otherwise,” says Dee Lee, author of The Complete Idiot’s Guide to 401(k) Plans (Macmillan, $17.95), “you’re leaving money on the table.” That’s because the matching amount your boss contributes is like getting an automatic 100% return on your investment. Your contribution is also deducted from your gross salary, lowering your taxes.

While we’re on the subject, Lee says it’s good to think about a first home as well. Remember, though, that mortgage lenders are likely to turn you down if the amount you’re paying on debt each year is above 36% of your annual salary. If what you owe is blocking you, consider a concerted effort to pay off your student loan. Another option: check into programs from the Federal Home Lending Association (Freddie Mac, as it’s sometimes called), which require new home buyers to foot a down payment of only 3% of the home’s price.

A MATTER OF PRINCIPAL
Before considering payment options, it’s good to dissect some of the mathematics behind your loan. You owe the loan’s principal–the amount you borrowed-in addition to any interest that accrues over time. The bigger the principal, the more interest you pay. The longer you pay your loan, the more interest you pay. Finally, interest that isn’t paid off is lumped into the amount you owe.

That’s the obvious part. What isn’t readily visible, however, is just how much less you pay back over time by chopping down the principal you owe. On a loan at 8% interest, paying an extra $50 a month–$600 over the course of the first year–ultimately amounts to a savings of $1,300 in principal and interest over the nine years you’re making payments. “I try to add whatever extra amount I can,” says Hilliard. “That’s because the savings over time are far greater than the payment itself.”

Also bear in mind that lenders like steady payments. Sallie Mae, one of the largest loan consolidators around, will, in fact, cut 2% off your interest if you make your loan payments on time for 48 consecutive months. Set up automatic payments from your checking account, and Sallie Mae will take 0.25% off your interest rate.

RELIEF . . . AT A PRICE
If paying back your loan turns out to be stifling, don’t panic. There are ways to adjust the amount you owe each month. Keep in mind, though, that any change often comes at a price, namely more interest paid over the life of a loan. Currently, federal loan programs, as well as

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