Die, Student Loan, Die

Make fun of the so-called "professional students" all you want. (You know, the ones who, unlike the TAs, remember the original "Dukes of Hazzard" TV show.) But would you be in a huge hurry to check out of the ivory tower and into debtor's prison?

About half of recent graduates trade their sheepskin for student loan debt payments. According to Nellie Mae Corp., the typical grad faces a $20,000 tab for borrowed tuition and makes an average monthly payment of $261.

But what if you had the means to wipe the student loan slate clean? Such was the case with Fred, a recent caller to The Motley Fool Radio Show on NPR. Fred, a 27-year-old recent graduate, had $15,000 sitting in his savings account and a $15,000 IOU notice for his schooling. Should he kill off the loan or keep cash in the bank?

Wipe out that loan ASAP if:

  • You've consolidated your loans, but they are still at a high interest rate. For those who haven't consolidated, Stafford loans are around 4.7% if you're still in school, and 5.3% for those in repayment phase. Parent PLUS loans are at a painful 6.1% -- still low in terms of debt, but high enough to consider shortening the payoff plan. (Shop at a few private lenders -- like Sallie Mae (NYSE:SLM) and Citigroup (NYSE:C) -- to see if you can find lower rates.)
  • The interest you are paying is not tax-deductible.
  • You are flush with cash -- or at least flush enough to pay off your loans and still have money left over to start your emergency savings account.
  • A sweet job with an even sweeter salary awaits.

Sit on your student loan if:

  • You locked in a low, fixed-interest rate before the July 1 deadline.
  • You are able to deduct the interest from your taxes.
  • You've got other higher-interest debt looming, for example, if you paid for your college textbooks with a credit card and are sitting on the balance.
  • If you are unsure of your future income.

When it comes to paying off debt, do a side-by-side interest-rate comparison to see which loan you should kill off first.

More reading to get smart about student loans:

You'll find lots of additional tips on 529 plans and on paying for college in our College Savings Center. Our Paying for College discussion board is a good place to ask questions you may have, and our book, The Motley Fool's Guide to Paying for School by Robert Brokamp, is also a handy resource.

Dayana Yochimowns none of the companies mentioned in this article and is all paid up for her degree from the University of Kansas. Rock Chalk, Jayhawk!

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