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June 22, 2009

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Nice article! I would add that students should look into the new Income Based Repayment that will go into effect in July. If you qualify, your monthly payments will be limited to 15% of your income that is over 150% of the federal poverty line. Also, your debt is forgiven after 25 years of repayment (or 10 years if you have a public service career). This new program will really be helpful to those with large amounts of debt!

Would you say that we should make repaying my wife's student loans (around $45k) a higher priority than putting more money down on our next car? Our payments on her loan is about $400 a month and we can afford that but it will take awhile to save up the cash to pay off her loan

I just can't bring myself to pay off my student loans quickly. I have no trouble servicing the debt, and it's accruing at just 2.83%. The low rate, coupled with the deduction on income taxes, convinced me to stretch out repayment for 25 years. It would be nice to see the $50,000 debt go away, but I have auto-payment set up and can earn more on CDs than I save by making payments.
Anyone out there to challenge my thinking?

@brent: it depends what the interest rate is on the loan vs. what you would get for a car loan. depending on your credit it might be a wash as to which one to pay off first.

I started off with $56,000 in student loans in September, and I have $21,000 left right now. I will be 100% debt-free in about six months. If you have the discipline to knock out debt in a short amount of time, in addition to living extremely below your means, I say do it. I'm going to apply this same philosophy to funding my savings and retirement accounts when my debt is paid off. I guess I got lucky because savings rates are crap and stocks are volatile right now. I probably am getting better returns by paying off my student loans right now and saving big next year.

One other thing...student loans are the only debt you can't bankrupt yourself out of in the future. Health issues, legal issues, marital issues, etc. can take your savings and leave you with nothing. It's best to get rid of any kind of debt as quickly as possible, but make sure you have an emergency fund in place before you start.

Brent --

If it was me, I'd pay of the higher one first.

Matt --

Financially, that makes sense. Then again, some people like the freedom and extra security of having no debt (me included.)

@Matt: by paying off the loan, you reduce your monthly expenses and can live on a lower income. As FMF mentioned, this can buy you freedom (such as in your job and career choices).

I think it depends on the other types of debt you have. I only have mortgage debt (w/a HELOC) and my student loans. I think the home loan in this instance would take priority of the student loans. Mostly because students loans are fixed at 2.55, 4% and 4.5% and offer flexible payment terms as well as deferments for hardships and low income. What other debt gives you that flexibility?

Another few things to think about:
1) Consolidate your loans when the interest rate is low. I was able to lock mine in a few years ago when it dropped to 3.35%.
2) If you are paid bi-weekly, send a half payment every two weeks. Not only will the interest not accumulate as much, but you will make an extra payment per year.
3) Pay a little extra when you can.

Using these three techniques, I paid my loans off two years early.

Simple tips that work. When I had student loans, I made sure that I had my money directly taken out of my account, like they stated above. It worked like a charm, and helped my budget tremendously.

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