In a recent column, you said that there's no rush to pay off student loans because interest rates are so low. But if I have $20,000 in student-loan debt, will it count against me if I apply for a mortgage?

Not necessarily. When lenders evaluate you, they look at the entire picture -- how much you owe on loans, credit cards and any other kind of debt. They also look at your income and, in the case of a mortgage, the cost of the house you want to buy.

If student loans are your only debt, you may have no problem getting a mortgage. On the other hand, if you also have significant credit card debt, or have made some late payments, your chances of getting a loan aren't as good.

If you're thinking of applying for a mortgage, start by getting a copy of your credit score. For $12.95 you can get your FICO score, the industry standard, plus a report from one of the three major credit bureaus at www.myfico.com. The information will tell you why your score is high or low, and what you can do to improve it, if necessary.

The median FICO score is 725, says Craig Watts of Fair Isaac, the company that compiles the scores. "Any score from the mid 700s on up is a sure thing when you apply for credit," says Watts. "Score below that, and lenders will take a second look."

There's no secret about how to improve your score: Pay all your bills on time, keep balances on revolving accounts (such as credit cards) to below 50% of your credit limit, and don't have too many accounts.

If you need to reduce your debt, tackle the most expensive debt first. That usually means credit cards. If your only debt is student loans, your first strategy should be to consolidate them at the current low interest rates. After that, you have the option of paying ahead on the loans with any spare cash.

Deduct Student Loan Interest

In your column on student loans, you neglected to mention another reason they're not as onerous as some other kinds of debt: Not only is the interest rate low, but also the interest is tax-deductible.

That's correct. You can deduct up to $2,500 a year in student-loan interest, a deduction that's phased out when your adjusted gross income is between $50,000 and $65,000 (or $100,000 and $130,000 if you're married and filing jointly).

EMAIL ARTICLE | PRINT | REPRINT ARTICLE | SUBSCRIBE TO KIPLINGER MAGAZINE |

FIND THIS ARTICLE HELPFUL?

SIGN UP FOR DELIVERY OF COLUMNS AND SITE UPDATES