Options abound on cutting debt

Deseret News (Salt Lake City), Dec 16, 2007 by Kimberly Lankford Kiplinger's Personal Finance

Like many newly minted professionals, Lisa Virani started her law career in 2004 with a significant amount of debt (the average law- school grad racks up more than $70,000 in loans).

Virani diligently made all her payments on time, but at the rate she was going she would still have been in debt at age 50.

After two years at that pace, she met with Dan Joss, a financial planner in Reston, Va., who recommended that Virani prioritize her loans based on their interest rates. She's making extra payments on high-rate loans and will pay off one private loan with a 9 percent rate by the end of this year. But she's making minimum payments on the government-sponsored Stafford loans she consolidated at a super- low rate of 2.65 percent.

Meanwhile, Virani, 28, isn't neglecting other financial goals. She has an emergency fund, so she doesn't need to charge unexpected expenses on her credit cards. Plus, she's maxing out contributions to her 401(k) plan and is saving for a down payment on a house.

Recent grads sometimes feel overwhelmed by debt, but they're actually in a better position than they think. Leisa Aiken, a planner with Timothy Financial Counsel in Chicago, usually encourages young professionals to pay a big chunk of money toward student loans before adjusting their lifestyle to their higher, postgraduate income.

"They've just come from being students," says Aiken. "If they can live like students for a few extra years, they can pay off most of their student loans by age 30."

You don't necessarily need a high income to achieve that goal. For example, volunteering for AmeriCorps qualifies you for an education award of $4,725 a year for two years to help pay for student loans, and some colleges match the award. Stefan Reinold, 34, a former AmeriCorps volunteer, received $9,450 in education awards that paid off a big chunk of his $12,000 in undergraduate loans and helped him afford a master's degree in forestry.

What to do

• Pay off loans with the highest interest rate first.

• Don't neglect to save, especially if your employer will match contributions to a retirement account. That's free money.

• Get a job that helps pay off your loans. Working for a school in a low-income area, for example, could qualify you to have your loans forgiven. (For details about loan forgiveness, go to studentaid.ed.gov.)

• Look for discounts. Some lenders cut their interest rates if you make automatic payments from your bank account.

• Take advantage of tax breaks. In 2007 you can deduct up to $2,500 in student-loan interest if you're single and earn less than $55,000, or if you're married and earn less than $110,000. You can take a partial deduction as your income rises.

Kimberly Lankford is a contributing editor to Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com.