Card consolidate credit loan student

Get a break on your payments so you can manage your other debt, too.

It's payback time for students who graduated from college last spring owing money on federal student loans. Your six-month-long grace period is about to end, and the money you owe--an average of $16,600 for undergraduates 18 to 25, according to Nellie Mae, a major student-loan provider--is looming large. The burden is still heavier when you add on credit card debt, which Nellie Mae says averages $2,000 for the same group of students, and maybe even payments you're making on a new car. What's the best way to balance the load?

Rebecca Carter has a plan. Carter, 31, is a veteran of student loans, having repaid about $7,500 from her first stab at college a decade ago. Two years ago she returned to school to complete her degree in business administration at Eastern Nazarene College, in Quincy, Mass.; she graduated in August with $23,000 in outstanding loans.

Carter is wiser, if not richer, the second time around. Before she begins repayment next March, Carter plans to consolidate loans from three lenders (with interest averaging about 7.5%) into a new loan from a single lender, and to extend the payment term from the standard ten years to 20 years. Carter estimates that loan consolidation will reduce her monthly payments 40%, so that she'll pay between $200 and $250 a month. That will give her breathing room to make payments on her more-expensive car loan at 11%.

Once the car is paid off, she hopes to put the extra money toward the student loans and still repay them in ten years. "I understand debt a lot better this time around because I've lived it," says Carter, who is also a manager of loan origination at Nellie Mae.

A WINNING STRATEGY. Carter's plan to knock off her more-expensive loan first and then concentrate her resources on her remaining debt is a winner, says Amy Cole, an educator at the Consumer Credit Counseling Service of Southern New England. A credit card charging 18% interest is a heavier burden than a student loan: The highest rate on student loans currently outstanding is 8.25%. If student loans are your only liability, focus first on those with the highest rate. Even if your budget is tight, don't rule out investing some of your resources if you can earn a higher return than the interest rate you're paying on your loan.

The standard repayment plan for student loans calls for equal monthly payments and a ten-year payback period. If that's more than you can afford, call your lender before the grace period ends to ask about other repayment options. For example, Carter is a prime candidate for loan consolidation because she owes money to three different lenders at different rates. With the consolidated loan, the interest rate will be a weighted average of all the loans, rounded up by one-fourth of a percentage point. Variable rates for government-sponsored Stafford loans are unusually low now, so consolidating locks in an attractive rate. Once you're locked in, however, you're stuck if the Stafford rate happens to drop in the future.

When consolidating loans, start with your current lender, advises Robin Leonard, author of Take Control of Your Student Loan Debt (Nolo.com, $19.95; 800-992-6656), and shop elsewhere if you don't like the terms. The U.S. Department of Education, for example, is offering an interest-rate reduction of 0.6 percentage point for borrowers who consolidate before starting repayment. Most lenders will also reduce the interest rate if you pay electronically, with a further reduction of two percentage points once you make 48 consecutive on-time payments.

OTHER TACTICS. If a loan consolidation doesn't suit your needs, consider a graduated repayment plan, which starts out with monthly payments that are about 50% of those under a standard plan. Payments will gradually increase until you're paying more each month than you would under a standard plan: While the higher payments may be manageable if you expect your salary to keep pace, there's a chance you'll have difficulty qualifying for another loan, such as a mortgage, later on. And you do end up paying more in interest, especially if you take more than ten years to repay. "Once you lower the payment or increase the term, a $25,000 loan can end up costing $40,000," says Diane Saunders of Nellie Mae.

If your finances are too shaky to manage either a standard or a graduated plan, some lenders will extend your repayment period up to 30 years, with monthly payments as low as $50. You can also choose an extended repayment plan that fluctuates with your income; monthly payments are calculated each year based on annual income for the previous year or on current monthly pay stubs.

Beware of letting payments drop too low, or you may find yourself paying interest only and never tackling the principal, warns Patricia Scherschel of the USA Group, which services student loans. But because you are entitled to switch plans at least once a year, a repayment option that increases the cost of your loan needn't be permanent. "As soon as you get promoted or earn more, you should send in more money or switch to a standard plan," advises Michael Kidwell of Debt Counselors of America.

If you return to school, you can request a deferment, which lets you suspend payment until you complete your studies. If you are unemployed or are temporarily disabled, you can defer for up to three years; the government will continue to pay the interest on your subsidized loans.

If you can prove financial hardship for some other reason, you can apply for forbearance. That has the same grace period as deferment, although interest continues to accrue even on subsidized loans. Forbearance should be a last resort, because when you finally pay back the loan, "you're going to be making a payment that is even higher than the one you were uncomfortable making the year before," says Scherschel.

Reporter: Kathy Jones