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6 Strategies for Slaying the Student Loan Dragon

by Student Loan Daddy

For recent college graduates, facing debt from student loans can feel like squaring off against a fire-breathing dragon of ancient myth, armed only with a metal trash can lid for a shield and a toothpick for a lance. In fact, the Class of 2011 is the most indebted ever, with average loan balances close to $27,000, a harsh reality for graduates who are trying to find jobs that earn them enough so they can stay current on student loan payments. But all is not lost. Here are six strategies to help you slay the student loan dragon.

1. New tools can help you understand your repayment options

The first thing you should do is check out a new website called PaybackSmarter.com, which will help you see your student loan options in graphic detail. For example, you can consolidate your loans to get longer terms with a higher total repayment but smaller monthly minimums, or you can pay more each month to pay off your loans earlier and lower your total repayment but increase your monthly minimums.

2. Look into federal student loan repayment programs

If you can afford your monthly payments, stand pat. But if you can’t because you don’t have a job or the job you have doesn’t pay enough, then you should consider enrolling in the federal Income Based Repayment program, which will allow you pay an affordable percentage of your monthly income over a certain number of years, after which any remaining student loan balance is forgiven — and if your income is zero because you’re unemployed, then you pay nothing.

You should also consider federal loan forgiveness programs and state loan forgiveness programs that help pay off your student loan in exchange for working in a particular field in a certain part of the country for a few years.

3. Manage your private student loans

If you have private student loans, you may be able to refinance them at lower interest rates through a local credit union or through a bank or private lender’s private student consolidation loan. Your parents will probably have to co-sign for a refinance, but since they probably had to co-sign your private student loans in the first place, that shouldn’t be a problem.

4. Don’t rush to consolidate

Even though we just suggested you look into private student loan consolidation, don’t rush blindly into the fray. In many cases, consolidation won’t actually save you any money — and may end up costing you even more — so investigate your consolidation options carefully, do your homework, and ask lots of questions.

Avoid mixing in your low-interest student loans with your high-interest loans, because you’ll lose your low interest rate. Instead, aim to consolidate your high-interest loans into lower-interest loans and leave your low-interest loans alone. And watch out for low-interest consolidation loans with variable interest rates. Once interest rates rise, your variable-rate consolidation loan could end up costing you more than your original fixed-rate loan that was 4 or 5 percent higher.

5. Seek help from your family

You can always ask mom, dad, and the grandparents to help if things are looking bleak. If you and your family is good with money and you’re good at paying your bills on time, try to work out a deal for an intra-family loan to help pay off your debt. With interest rates on CDs and savings accounts abysmally low, your parents and grandparents stand to make out even if they loan you money at half the interest rate of your student loan, Just make sure everyone is happy with the terms and signs a contract.

Alternatively, instead of getting financially involved with family — which can be tricky thing to pull off for many people — you can ask that birthday and holiday gifts be given as cash so you can use them to pay off your student loans.

6. Keep careful records

Keep copies of everything. Student loans and the rights to service them get bundled and sold, often more than once, and a lot of chefs can end up in the kitchen. Consolidations can get improperly recorded, siblings can get each other’s bills, and things can get generally out of whack. It’s up to you to keep accurate records, and to get everything in writing, so that you have official documentation when you have to dispute something or argue with the billing department or — and this happens more often than you can imagine — you have to provide some loan servicer with documentation that they should already have.

The student loan dragon is big, menacing, and has an insatiable appetite, even if you can’t afford to feed it. Thankfully, these six strategies for paying off your student loans will help you sooth the savage beast and get out of debt as safely as possible.

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