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How To Handle Student Loans


Tips for repaying debt quickly, building a good credit history and saving money.

Student debt is like a cold: Eventually, you shake it.

Steps you take immediately after graduation can help you repay your student debt more quickly, build a good credit history - and save money.

In general, you have a six-month grace period after graduation when you don't have to make payments on your loan. But sitting tight is a mistake. Here's why:

If you have a subsidized loan, immediate payments will be applied directly to the principal, reducing the total amount of interest you'll pay in the future. This allows you to sharply reduce your debt because no interest accrues during the grace period.

If you have an unsubsidized Minyanville's Tips for June Grads loan, interest will accrue during the grace period, but making payments right after graduation will reduce the total interest added to the principal and cut what you owe.

But overall, Stuart Ritter, a certified financial planner for T. Rowe Price, who also teaches a class in personal finance at Johns Hopkins University, says it doesn't make sense to take money away from savings or other investments to pay off your student loans as quickly as possible. He says most student loans have a low interest rate and it therefore makes more sense to increase the contribution to your retirement fund, pay off credit card debt or boost your savings rather than pay off the student loan.

Consolidating your loans can reduce your monthly payments and make bookkeeping simpler because you write only one check. Contact your lenders to see if you can consolidate. In general, federal loans that can be consolidated are subsidized and unsubsidized Stafford, Federal Plus Loans taken out by your parents, Direct Plus Loans, Federal Supplemental Loans for Students, Perkins Loans, Health Professions Student Loans, Health Education Assistance Loans, Federal Nursing Loans and Federal Insured Student Loans.

Remember: If you don't repay your undergraduate loan as agreed, you almost certainly won't be able to secure a future loan for graduate or professional study and may get hit with higher interest rates on future commercial loans.

In addition, collection costs of nearly 20% could be added to the balance due. The default will appear on your credit report, 15% of your paycheck may be garnished to repay the loan and income tax refunds could be withheld and applied toward the balance. For starters, you don't want your employer to think you're a scofflaw. Defaulting on your student loan will destroy your credit rating and make it more difficult to secure a mortgage in the future.

In short, a student loan is a legal contract and how you handle it says a lot about you and will affect your credit. That becomes important when you get married or want to buy a house.

Vitamin C may be the world's best placebo when fighting a cold, but regular payments are the best cure for student debt. Payments on your student loan during the grace period will cut the principal and regular payments will help build a solid credit history.

Consider this: Instead of using extra money to repay the student loan as quickly as possible, take Ritter's advice and pay yourself first - use extra money to boost your contribution to a 401(k) retirement fund and build your savings.

The Web sites of major brokerage houses and banks offer solid financial tips to grads, including T. Rowe Price (TROW), Merrill Lynch (MER), JP Morgan Chase (JPM), Wells Fargo Bank (WFC) and Wachovia (WB).
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