Student loan payment strategies can ease some of the debt burden | The Kansas City Star

By now, many of you probably know that student loan debt is $1.1 trillion and counting, making it second only to mortgage loan debt.

The numbers also show about 42 million people have college loans — with the average amount owed hovering around $28,400, according to the latest federal data.

But what do the numbers mean for college graduates who earned their diploma last spring and are starting to pay back their loans now that their six-month grace period has ended? And what do those numbers mean for high school seniors who will be filling out federal financial aid applications come January 2015?

Here’s one thought: Whether you’re a past, present or future borrower, be aware of financing strategies that can ease some of the hand-wringing that naturally occurs when the bills come due.

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The editors of Edvisors.com, a college planning and financial aid website, recently released a report that lists 13 common mistakes to avoid in repaying college loans.

Here are some of their suggestions to help borrowers stay on the straight and narrow path:

▪ Don’t be late on a payment. It only takes a single late payment to mess with your credit and cause problems when applying for a mortgage, car loan or credit card.

Borrowers generally have 10 to 25 years to repay a federal student loan, depending on the repayment plan. That’s a long time to pay like clockwork and keep track of vital loan information.

To get organized, Edvisors has designed a student loan checklist at www.edvisors.com.

▪ Put repayments on autopilot. When you receive your first billing statement, you’ll learn how to sign up for an automatic debit plan, which will transfer the payment directly from your account to the lender. Many loan servicing companies even offer a sign-up incentive — a 0.25 percent or 0.50 percent reduction in the loan’s interest rate.

If you lose your job or run into other financial problems that throw your budget out of whack, you can stop the electronic debit program at any time.

▪ Beware of long repayment plans. To be sure, longer repayment terms mean lower monthly payments. But going long also increases the amount of interest you’ll pay over the life of the loan.

▪ Look out for snowballs. There are no penalties for paying off federal or private student loans early, Edvisors said. So, if you received a year-end bonus or bought a winning lottery ticket, consider making extra payments on your loan to knock it down more quickly.

It’s often best to apply the funds to the loan with the highest interest rate, which should save you the most money and lead to a quicker exit from all your loans. Many borrowers mistakenly believe that paying off the loan with the lowest loan balance is best.

“This approach, called the snowball method, argues that the borrower will pay off that (smaller) loan quicker, yielding a psychological boost,” Edvisors said. “But this does not necessarily save the most money.”

▪ Free is good. If you have several student loans to repay, consolidating them into one payment might be a good option. You can consolidate federal loans for free at studentloans.gov.

Be wary of businesses that offer this service for a fee. According to Edvisors, some of these companies might be identity thieves hoping to pry loose your personal information.