8 Ways to Wipe Out Your Student Debt

Two-thirds of kids receiving an undergraduate degree this spring will leave campus owing money for their education, according to the student-loan giant Sallie Mae. These students will have an average balance of about $20,000, and within six months they'll be required to start making monthly payments of roughly $270.

For most of the kids it will be money well spent, although New York Times columnist Paul Krugman may not think so. Yet a great many will struggle to repay this debt, in large measure because they've never been taught the basics of things like budgeting, late fees, penalties and accrued interest.

In recent months I have interviewed and profiled debt-strapped adults who can trace their financial difficulties back two or three decades -- to their college days and their mishandling of student loans. Their stories are representative of millions of folks who start adult life with a degree, but in hock, and who never manage to get a handle on their finances. Many of these people end up filing for bankruptcy in their 40s or 50s.

It doesn't have to be this way. As one reader wrote to me: $20,000 is a car loan; it should be paid off in three to five years. You make the payments or they take back the car, and so most people find a way to make the payments.

Of course, you can't take back an education and this lack of recourse is why student loans are often the first obligation to be tossed aside when individuals encounter financial trouble. But ignoring student debt only compounds any problems because the vast majority of these loans never go away -- even in bankruptcy -- and the interest expense just keeps adding up.

With that in mind, here are eight ways to help make sure your kids' student debt doesn't swallow them later in life:

• Don't borrow more than you need. This sounds obvious. But a lot of students treat their student loans like an ATM, spending more than they should on clothes, iPods, Blackberries and spring break while borrowing all they can from banks and the government to pay for their tuition, supplies and room and board. This is not free money.
• Pay interest while still in school. If you can, stay current with the interest expense on your student loan from the beginning rather than let this bill be tacked onto your balance each month. Your interest might total as little as $25 to $50 a month. That's not a big commitment and come graduation you'll owe only the amount you borrowed, not the amount you borrowed plus interest. You might cut the repayment period in half and save 30% over the life of the loan, says Sallie Mae.
• Set a Budget. The amount you pay monthly on all your debt plus housing should be no more than 40% of your gross monthly income. If you're paying more, you need to keep up the loan payments and cut somewhere else. Think about finding a roommate or older car.
• Choose the right payment plan. This doesn't mean the cheapest plan. Remember, the more you pay now the less you'll pay overall and the sooner you'll be free of your student debt. New grads have many options, ranging from a standard fixed payment schedule to one based on income to one that starts small and increases each year. Go with the plan where the monthly nut pushes you to the edge of your comfort zone.
• Don't defer payments. New grads typically may defer payments for six months from the last day of school and at other times after that for hardship reasons. This debt is almost never dischargeable in bankruptcy. You will pay it -- and the longer you defer the bigger the interest expense.
• Sign up for automatic debit. Enroll in an automatic debit plan to avoid late fees and possibly qualify for a lower interest rate on your loans.
• Use the right rewards card. Through the Upromise service you earn points with every qualifying purchase on your linked credit card or direct from hundreds of companies. These points can be directed to pay down your student loans.
• Apply for loan forgiveness. By volunteering with AmeriCorps, Peace Corp. or VISTA you may qualify to have some or all of your college debt wiped away. Other options include spending time in the military, teaching, and doing social work. Look here for more information.

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