Strategies for paying off student loans

Dear Liz: I graduated from college last summer and was lucky enough to get full-time employment. However, I have a great deal of college debt, including private and federal loans. Are there government programs that help pay back college loan debt? Do you have any suggestions? I cringe at the thought of paying double what I owe over the life of the loan because of interest and want to get this debt under control in the next few years instead of 15.

Answer: Your eagerness to pay off your student loan debt is admirable and is particularly appropriate when it comes to your private student loans. Unlike federal student loans, private loans have variable interest rates, limited repayment options, no forgiveness possibilities and fewer consumer protections. Using private student loans to pay for education is a lot like using credit cards, except that credit card debt can be erased in Bankruptcy Court. Private student loans typically can’t be discharged that way.

You needn’t be quite so anxious about paying back your federal student loans. The interest rates on these loans are relatively low and fixed, plus you have a number of repayment and forgiveness options. Often the best approach is to consolidate your federal loans into the longest payback period offered. That will reduce your required payments on the federal loans, freeing up more money to pay down your private loans. Once your private loans are paid off, you can apply the payments you were making on those toward your federal loans and speed your way out of debt.

There are a number of programs that offer stipends to help pay down student loans, and some that offer at least partial forgiveness of federal student loans. Serving in AmeriCorps or the Volunteers in Service to America can generate a $4,725 stipend to pay down your loans. Volunteers in the Peace Corps may apply for deferment of their federal loans and partial cancellation of Perkins Loans (15% for each year of service, up to 70% in total). Those who serve in the Army National Guard may be eligible for up to $10,000 to pay down their student loans. There are also debt forgiveness programs for those who teach or practice medicine in certain communities. You can find a more complete list, including links, at the FinAid website. People with jobs in public service fields (teaching, emergency services, the military and others) can qualify for forgiveness of their remaining federal student loan debt after 10 years of payments, while those in other jobs can erase their debt after 25 years (the time period will be cut to 20 years starting next year).

By the way, you shouldn’t stint your retirement in your enthusiasm to get out of debt. You really can’t make up for lost time when it comes to retirement savings, so try to contribute at least 10% of your income, and preferably 15%, to your workplace retirement program or to an IRA.

Take a long view on retirement accounts

Dear Liz: Why do you keep saying retirement accounts will earn an average annual return of 8%? We haven’t seen returns like that in years, and there’s no chance we will in the future.

Answer: No one knows what the future will bring. But we’ve been through tumultuous times in the stock market many times in the past. Between the mid-1960s and early 1980s, for example, the Dow Jones industrial average benchmark of stock prices pretty much went nowhere, pinging back and forth between about 600 and 1,000. (Just do a Web search for “Dow Jones history” and you’ll turn up charts that show this.) People were pretty disgusted with stock market returns, and many were pessimistic about the future of our economy. Through the rest of the 1980s and ‘90s, though, stock market returns exploded.

In every 30-year period since 1928, stocks have had an average annual return of at least 8%. Those who hung on through bad times were eventually rewarded for ignoring the doom-and-gloomers.

Liz Weston is the author of “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via asklizweston.com. Distributed by No More Red Inc.