Tackling Private Student Loans

How can I get out from under my $43,000 of student-loan debt? Most articles I see reference the federal student-loan program, but what about private student loans? Are there any little-known methods or laws that will help people like me reduce their monthly payments?

Outside the federal student-loan program, your options are limited. Federal Stafford loans offer more-favorable repayment terms than private loans, plus more opportunities to have loans forgiven.

For example, you may be able to tie your payments to a formula based on your income. Or you may qualify for loan forgiveness if you teach in a low-income school (for details, go to http://studentaid.ed.gov).

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Also, volunteering for the AmeriCorps program qualifies you for an education award of $4,725 a year for two years to help pay for student loans, and some colleges match the award (check with your school).

But those programs aren't available for private loans. In that situation, your best bet is to shop around for the best terms you can find on a private-loan consolidation (compare programs at SimpleTuition.com and FinAid.org). If your credit score has improved significantly since you took out the loans, you may be able to get a better rate.

Consolidating also lets you stretch out the term of the loan, which may lower your monthly payments. You'll pay more interest over time, but the breather could get you over a hump. And you can pay ahead on your loans as your income rises, as long as there are no prepayment penalties.

Some occupations forgive loans as a recruiting tool. And if you meet income requirements, you can deduct up to $2,500 per year in interest on any loans used for higher education.

Once you've arranged the best terms you can, you'll just have to bite the bullet.

Leisa Aiken, a financial adviser in Chicago, recommends that clients with significant student-loan debt go on a crash program to pay off high-rate debt as soon as possible, even if it means continuing to live like a student. Move back home with Mom and Dad, get rid of the car, take a second job, and put the extra cash toward your most expensive loans. Low-interest loans can wait. "Paying $150 a month on a 4% loan isn't all bad," says Aiken. "It's more of a nuisance."

A law recently signed by President Bush will help ease the burden for students who borrow through the federal program. Struggling grads will be able to tie student-loan payments to a more-generous income-based formula. And the government will forgive loan balances after 25 years. But the new law hasn't taken effect yet.

The best way to stay on top of student loans is to limit how much you borrow in the first place. Next week, readers tell how they did it.

Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.