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The student loan scramble
Believe it or not, you can pay off those student loans while saving for retirement - here's how.
July 25, 2005: 10:58 AM EDT
By David Ellis, CNN/Money staff writer

NEW YORK (CNN/Money) - Three months ago you were gearing up for your last set of finals and now you've secured the job you always wanted and a salary you're happy with.

While the money may be good, you're a little worried about how you will pay off your loans and start saving for retirement at the same time.

But it can be done.

Will paying off early pay off?

According to the 2003-2004 National Postsecondary Student Aid Study, at least two thirds of all undergraduates and graduate students will complete their education with some debt. In some instances, as much as $125,000.

What's important is to take care of your short-term obligations first, said Glenda Kemple, a certified financial planner and certified public accountant in Dallas, Texas.

Recent grads should try and pay down credit card debt or create a three-month cash reserve in the event of an emergency or a layoff.

"Someone in their first or second job can be the victim of downsizing -- they would be the first to go," she said. "They need some reserves to put their fingers on."

When staring at the chilling reality of loan numbers, many graduates contemplate paying off their student loans early.

On the one hand, it makes sense -- theres no early repayment penalties and if you attack it early, you can trim the amount of interest you have to pay out on the loan.

But that takes away from money you could pour into your 401(k) or IRA for retirement, which are important to open early in your career in order to take advantage of growth over time.

Many financial planners recommend paying the minimum balance on your student loan and trying to save as much as you can for retirement.

The basis for this strategy, said Kemple, is that student loan is "good debt", or debt that was a worthwhile investment and can be smartly managed.

Student loan debt is "good" for two reasons.

First, some of your student loans, especially ones subsidized by the government, carry low interest rates. As a result, you are not significantly adding to the debt principal by paying it off over the term of the loan.

Second, you might qualify for a tax deduction for the interest on your student loan.

If you are single and your adjusted gross income is no greater than $65,000 as a single individual or $130,000 as a married couple filing jointly, you can deduct up to $2,5000 a year on your taxes.

Improving that interest rate

Whatever approach you take, reduce the interest rate you are paying on your loans.

One common strategy is to consolidate if you have more than one loan. The new rate on your outstanding debt will typically equal the weighted average on all of your loans but will not exceed 8.25 percent.

Individuals are typically only allowed to consolidate a group of loans once during the life of the loan and by consolidating you extend the length of the loan term which could increase the total interest paid. Borrowers can consolidate more than once as long as the new loan contains an unconsolidated loan.

Mark Kantrowitz, the publisher or, an online guide to financial aid for students, said keep in mind that there are a variety of options available. You can easily consolidate with another student lender, your local bank, or if you are a homeowner you can borrow against the equity in your home to cover loan costs, which may offer you the best rates if you are a home owner.

But finding that better rate, said Kantrowitz, is not always easy, nor is factoring in fees from different lenders. offers a rate comparison calculator that can tell you when one lender's rate is better than the other.

Also important is to take a close look at the interest rate you are paying and if it is fixed or variable. In times of rising interest rates, a fixed rate might be your best option while in times of falling interest rates, a variable rate might be the better choice. Some private lenders will allow you to switch between the two but it is important to remember that additional fees may be involved with a fixed rate loan.

Many lenders are willing to deduct a quarter percentage point off of your interest rate if you have your monthly payment automatically deducted from your account and if your payments are on time for 48 months, most private lenders will knock two percentage points off your interest rate.


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