Tackling student loans: How to keep “good debt” from becoming a burden

Woman saving money to pay off her student loans

Staying on top of your student loan debt can improve your credit score and leave you with more money to save for retirement, your kids' college educations, and other life expenses.

"Money borrowed for your education is called 'good' debt because it's an investment in your future," says Mark Kantrowitz, publisher of FinAid.org, a guide to student financial aid. "But too much of even 'good' debt is bad."

Managing student loans

There are ways to make managing your student loans easier. You can:

  • Consolidate your student loan debt. If possible, streamline your payments into one monthly bill if doing so gets you a lower interest rate. Federal loans tend to have lower interest rates than private student loans.
  • Repay student loans automatically through your bank account. You won't have to worry about late payments or missing checks.
  • Make additional payments to your principal amount. While this will reduce the interest you pay on your loans, it's a good idea only if you don't have other debts that charge higher interest.

Going back to school?

Many adults are taking classes in pursuit of a second career or to improve their chances of finding a job after being downsized.

If you're considering a return to school and need financial aid, keep these tips in mind:

  • Start with a smart financial aid package. If you're over age 24, you may qualify for a Pell Grant as an "independent" student. This lets you omit your family's income and assets in your aid application.
  • Consider a financial aid appeal. If you're quitting your job to attend college full-time, ask for a special financial aid review. "Because your income will drop while you're in school, you could get a substantial increase in aid," says Kantrowitz.
  • Take advantage of tax breaks. Depending on your income, you may qualify for up to $2,500 in tax credits for tuition, fees, and course material.
  • Don't retire with debt. Be careful about taking on more debt than you can repay before you retire. "Make a careful analysis of how much [school is] going to cost you, versus how much you'll earn before you retire," says Kantrowitz.

Is college still a good bet?

Rising tuition costs may leave you wondering whether college is still a worthy investment, whether for yourself or your child.

Consider this: The unemployment rate among college graduates is about 3% lower than for those with only a high-school diploma, according to the Bureau of Labor Statistics.1 And the annual pre-tax income of households headed by a college graduate is double that of less-educated households.

So while a college education is more expensive than it used to be, it's still likely a terrific investment in your (or your child’s) future.

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