STARTING OUT
Time to Repay Student Loans
by Erin Burt

Attention recent college grads: If you took out federal loans to help pay for your degree, it's time to start paying the piper.

The six-month grace period that allowed May graduates to put off repayment of their federal student loans ends this month. But don't sweat it. You may be able to put off that first payment a bit longer, or minimize the squeeze these payments will put on your entry-level salary. And if you're already making payments, you may still be able to trim your loan bill.

Postponing repayment

Although the job outlook for college graduates looked more promising this spring and summer than in years past, many of you may simply not be able to repay your loans. And, the good news is, you may not have to -- at least not right away.

If you decided to attend graduate school, haven't found a job yet or you simply don't earn enough to make ends meet, you might qualify for deferment or forbearance.

But weigh the decision to postpone repayment carefully. Your interest will continue to accrue, and in the long run you'll owe more. Although the government will pick up the interest tab on your subsidized loans if you're in a qualified deferment period, that's not the case in forbearance.

See if you qualify and download the application forms.

Choose a payment plan

If you're ready to start paying the loans off, find out how much you can afford each month. Use Kiplinger.com's budget worksheet to track your spending versus your income and identify areas to cut back if necessary.

Then set your strategy. There are four options available, so no matter how tight your finances you can craft a repayment plan that fits your budget and your goals. And you can switch options any time.

• Standard. You pay a fixed amount each month -- a minimum of $50 -- and you have up to ten years to repay the loan. For example, if you have $50,000 in Stafford loans, you'll owe about $491 a month (at today's interest rate of 3.37%). This option costs the least in the long run because your interest is paid over a shorter loan period.



• Extended. Similar to the standard repayment plan with one big exception: you have up to 30 years to repay the loan. Stretching a $50,000 debt over 20 years shaves more than $200 off the standard plan's monthly payment. But you'll shell out nearly $10,000 more in interest.



• Graduated. Your payments start out low and they increase in stages, generally every two years over 12 to 30 years. If you expect your income to grow over time, this might work well for you. Each month you'll either pay the interest accrued or half of what your payment would be under the standard plan.



• Income-contingent. Your monthly payment is recalculated each year based on your income, family size and debt, and you typically have from 12 to 25 years to pay off the loan. If you're single and you make $35,000 a year with $50,000 in loans, you'd start out paying $386 a month. Get a $1,500 raise next year, and your payments would increase by $9 a month.

More money in your pocket

Interest rates are at rock-bottom levels right now, but there are ways to trim thousands of dollars more from your debt:

• Consolidate your loans to lock in today's favorable rates. Interest rates on student loans are adjusted every year, though Stafford loans can never exceed 8.25%. Currently the rate is 3.37%. If your six-month grace period hasn't ended yet, you can secure an even lower rate of 2.77% if you consolidate before entering repayment. Use this consolidation loan calculator to figure your monthly payments for each of the plans above.



• Trim your interest rate. If you pay electronically, you can net a 0.25% rate reduction. Most lenders also reward consistency -- make on-time payments for two years, for example, and you might get an extra 1% knocked off your rate.



• Write-off interest on your taxes. You can deduct up to $2,500 in student-loan interest if your adjusted gross income is less than $50,000 (single filers) or $100,000 (married filing jointly).

With interest rates as low as they are, it doesn't make much sense to pay off your student loans early. Consider saving or investing extra cash instead. This is especially true if you're eligible for a 401(k) plan at work. You'd be much better off to use your extra money to boost your retirement contributions, especially if your employer offers a match, than to try to pay off your loans early. As long as your investments return more than you're paying in interest, you come out ahead. The free money from your employer's match is icing on the cake.