Managing Debt: Three Things to Consider Before Paying Off Student Loans

It's often said that a home mortgage is likely the largest debt you'll ever take on, but for some college alumni, the burden of student loan debt can be crushing. Student loans issued and insured by the US Department f Education allow a grace period of six months after graduation before you must begin repayment. Consolidation is typically done during the grace period before your first payments on your student loans become due. How you manage your student loans can impact your overall financial well being. Consolidating student loans can streamline your finances, save money, and help you establish good credit during repayment.

Managing Debt: Consolidating Student Loans Provides Benefits

You may receive a federal student loan each academic year, and when you graduate, you may have student loans from several different sources. They can have different interest rates and different terms. Consolidating your student loans can help you avoid multiple student loan payments while trying to get your post-grad life in gear. You can apply for a federal consolidation loan that "rolls" all of your loans into one loan with one monthly payment. Additional benefits of consolidating your student loans can include:

• Flexible payment options: Eligibility for financial hardship deferral: If you have documented financial hardship, you may qualify for deferral of your payments under the same eligibility criteria used for federal student loan programs.
• Retain Federal Subsidized Status (if applicable): Your consolidation loan may carry over any federal subsidy status awarded with your original student loans.
• Your consolidation rate may be lower than rates for some of your individual student loans: Your monthly payments can be significantly lower but remember that if you opt for a long repayment period, you may pay more over time.

Pay Off Your Credit Cards First

If you finish college with credit card debt, it's a good idea to review the annual percentage rate (APR) for each of your credit cards and compare these to the APRs on your student loans. You'll probably find that credit card interest rates are higher. Pay off higher interest rate debt first, while making minimum required payments on your consolidated student loans. As you pay off each credit card, apply more to the next credit card balance. Once you've paid off your credit cards, consider paying an additional amount toward your consolidation loan each month.

Understanding the Difference between Good and Bad Debt

Financial advisor Suze Orman defines consumer debt (with the exception of a home mortgage) as bad debt, as it is often unnecessary and can eat away your assets with high finance charges. In her February 2007 US Senate testimony, Ms. Orman characterizes student loan debt (and subsequently, your consolidation loan) as good debt. Good debt represents an investment in your future; while bad debt can jeopardize your financial security. Paying off consumer debt can help you tackle student loan debt sooner rather than later.

Sources:

• Suze Orman: February 2007 Senate Testimony

About the Author:
Karen Lawson started writing stories about birds and surfing at an early age. For more than ten years, she enjoyed a productive corporate career in mortgage banking before moving to Reno, Nevada in 1997. Karen earned BA and MA degrees in English (specializing in writing) at the University of Nevada. Significant areas of research and writing include truth and ethics in creative nonfiction, medical humanities, and the symbolism and lore of birds in American literature and culture. Karen has taught English at a community college, is writing a collection of poetry, and enjoys birdwatching and walking her basset hounds.