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Dear Carrie: The Best Way To Pay Off Student Loans?

Dear Carrie: I just graduated from nursing school and am carrying several student loans — both federal and private. I don't have to start repaying them for a few months, but I haven't landed a job yet. I'm starting to worry how I'll manage given my other expenses.

I've heard about consolidating loans as a way to lower my monthly payments. Is that a good idea? Are there other options? — A Reader

Dear Reader: First, congratulations on your graduation. Nursing is a challenging and important field, and it demands a special dedication. But as you pursue your professional goals, you'll also have to dedicate some energy to paying off your loans — and that's often a challenge in itself. As you seem to understand, it's extremely important to be consistent and on time with your payments. So, you're smart to create a plan now.

GETTING STARTED

First, gather all your loan documents and make a chart that includes the following for each loan: amount owed, interest rate, whether that rate is fixed or variable, term of the loan, minimum monthly payment, and the date you need to start repaying. This may seem like a lot of work, but it's really important to see the big picture.

Clearly, you want to pay off higher interest loans first, but make sure to pay at least the minimum every month on every loan. That's because defaulting on a student loan has serious consequences. Not only will you pay hefty penalties and fees, but a default could damage your credit rating for many years.

Start by adding up your monthly minimums. Where does that put you? If the figure is out of reach, don't despair. There are options, including consolidation. For federal loans, the government offers a Direct Consolidation Loan as well as several repayment alternatives designed to lower your payment and possibly even get your debt forgiven. Many private banks offer their own consolidation or alternate repayment programs. The details are beyond the scope of this column, but I can give you some things to consider as you look into your choices.

THE PROS AND CONS OF CONSOLIDATION

Looking at the positives, consolidating can make your life a lot simpler. Private and federal loans must be kept separate, but consolidating each group of loans would give you just two payments, making it easier to manage your debt. Even more significant, you may be able to lower your payment by extending the life of your loans. Plus, if you have several variable interest loans, consolidating into a fixed interest loan may reduce your overall interest rate.

That all sounds great, but there are a couple of minuses to consider. First and foremost, if you extend the loan term, while your monthly payments may go down, the amount of interest you pay in the long run will go up — just like for a mortgage or a car loan. So you have to decide how much you're willing to pay over the long term. For instance, if you increase a 10-year loan to 25 years, your monthly payment could go down about 40 percent, but you could end up paying almost twice as much interest over the life of the loan.

Also, if some of your loans still have a grace period before repayment is due, you'll lose that grace period when you consolidate.

OTHER REPAYMENT OPTIONS FOR FEDERAL LOANS

You might also want to look into various repayment options available for federal loans, including:

— Graduated Repayment: Payments start low and gradually increase every two years. The term of the loan can be up to 30 years, depending on how much you've borrowed.

— Income-Based Repayment (IBR): Monthly payments are based on a percentage of discretionary income , not the amount owed. Discretionary income is your adjusted gross income (AGI) minus 150 percent of the poverty guideline for your family and state of residence. If you make less than 150 percent of the poverty line, your payment is $0. Otherwise, it's capped at 15 percent of your discretionary income. Any remaining debt and interest is forgiven after 25 years of repayment.

— Public Service Loan Forgiveness: This program forgives any remaining debt after 10 years of full-time employment in a public service job (and 120 payments), such as police, fire, government, public health and education and certain nonprofit organizations. This might be of particular interest to you depending on the nursing job you get.

NEXT STEPS

Recent legislation has changed the way certain student loans are handled, so I suggest digging a little deeper before making a decision. Two good resources are the Department of Education (www.ed.gov) and Finaid.org. Also, talk to the financial aid department at your college or university.

With a little research, I'm sure you can find a plan that will help you stay on top of your payments while you use your education to follow your dreams. Best of luck!

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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