Learning How to Pay Off Debt

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Learning How to Pay Off Debt

Stephanie Benedetti works for a nonprofit in Washington, D.C., and while she's a savvy saver now, she wasn't always so budget-conscious. Here's how she managed to pay down thousands of dollars in student loans in just three years.

After completing undergraduate and master programs, Benedetti found herself with quite a bit of debt. "When I was in school, I had over $90,000 in student loan debt accumulated," she says. "[I was] just kind of living my life, having fun, going to happy hours [and] not really keeping track of how much I was paying off and how much I was saving."

Two years later, Benedetti met her husband, Rob, which changed everything. "He was totally planning for his financial future," she remarks. Rob motivated her to save and work toward paying off her student loans, while he continued to put money away for a house.

With the help of her husband, Benedetti was able to cut costs of living by consolidating bills like rent and utilities. She also cut her gym membership and other expenses that had free alternatives. "I went line by line through everything I was spending and monitored literally every dollar that was coming in and every dollar that was coming out," she explains.

Benedetti also thought it would be wise to look for an additional source of income, but she needed a job with flexible hours. She realized she could babysit to earn extra money, and parents were willing to pay a premium for her because of her masters degree.

With less debt and more cash in the bank, Benedetti is more financially stable than ever. She adds, "Now I'm well set up for the future, and I think my whole life has changed because I really set that financial goal and reached it."

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Learning How to Pay Off Debt

One solution is to take advantage of some of the loan forgiveness opportunities that are already out there. The military, the federal government, and state governments offer dozens of programs that will wipe away at least part of your debt, in return for a few years of service. Most are tied to specific, in-demand professions in areas such as health care, law enforcement, and education. but others -- like the military, the Peace Corps, and AmeriCorps -- are open to people from a variety of majors and disciplines.

American Student Assistance, a nonprofit group that helps people manage their student loan debt, has produced a free list of occupation-based loan forgiveness programs. It's worth a peek -- even if you don't plan to become a firefighter, policeman, speech therapist or social worker.

Photo: Brett Holt, flickr.com

Several programs will allow you to structure your repayment of federal student loan debt based on your income. For example, if your loan payments are more than 15 percent of your discretionary income, you may qualify for income-based repayment, under which your monthly payment calculated based primarily on what you earn, and after 25 years of payments, any remaining money owed gets forgiven. Other programs, including income-contingent repayment and pay-as-you-earn forgiveness, are pegged to different income levels.
Nobody wants to die, go through bankruptcy, or suffer a total and permanent disability. However, if you experiences one of these life events, your federal student loans will be discharged. The banks behind private loans, however, may still go after your cosigners in an attempt to recoup their losses.

Assuming you're not a too-big-to-fail bank, the idea of going deeper into debt in order to make more money may sound counterintuitive. However, in many fields, a graduate degree can vastly increase earning power. "What's It Worth," a publication of Georgetown University's Center on Education and the Workforce, ranks graduate programs by their return on investment. Not surprisingly, degrees in medicine, the social sciences and hard sciences top the list.

Photo: Serge Melki, Flickr.com

Ultimately, student loans are like any other debt: Getting out from under them requires that you understand your situation and keep your focus on repayment. In this regard, the best advice is also the most obvious. First, be aware of how much money you owe and what the interest rates are on each of your loans. Work on paying off the highest-interest loans first, while making minimum payments on the rest of your loans. As you pay off each loan, take the money that you were spending on it and roll it over onto your highest interest loan.

But, while discipline is good, it's also important to reward yourself. Paying off loans is a big deal: give yourself a nice present every time you put one to bed!

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