Graduates who can spare a few hundred bucks a month would be wise to apply the surplus to their consumer debt rather than student loan balances since the interest on academic obligations is among the lowest offered and tax-deductible for many, said Jeff Harwood, a certified financial planner in Santa Monica. "Pay off the credit cards first, start paying off unsecured debt and go with the highest interest rates first. Pay those down as quickly as possible," Harwood said.

        Student loan debt can be misleading because of its typically bigger numbers - public college and university undergraduates borrowed $15,375 on average and typically repaid $179 monthly in the 1999-2000 school year, according to USA funds, which guarantees about a quarter of all federal loans issued. Even so, credit card debt of a lesser amount can be costlier to finances because it compounds at double-digit interest rates.

Taking advantage of tax benefits

        Unlike with credit-card debt, student loan borrowers can cash in on tax benefits, Harwood said. The student loan interest deduction can reduce the amount of taxable income by up to $2,500. "Student loans have a tax advantage, which makes their true cost even less than the stated interest rate," he said. "It's pretty hard to find an unsecured debt where you're going to get the tax deduction."  Congress has become more generous toward education investments in the last few years, Harwood said.

        For tax year 2002, single people begin losing the ability to deduct interest when they earn $50,000 a year and face complete phase-out at $65,000, up from a range of $40,000 to $55,000 last year, Harwood said. Married joint filers start losing eligibility at $100,000 of combined income and surrender it totally by $130,000, up from a $60,000 to $75,000 cut-off last year. Also new this year is the ability to deduct interest for the life of the loan instead of for the first five years only, Harwood said.
 

Best rates since 1966

        Rates on Stafford loans, the largest component of the federal program, are so attractive that many people can afford to put them off in favor of costlier financial burdens, USA funds spokesman Bob Murray said. "Obviously, it makes sense to get rid of the other sources of debt and deal with the one that has the most flexibility and...the lowest interest rates currently."

        Stafford loan borrowers now in repayment whose loan was issued since July 1, 1998, have an interest rate of 4.06 percent - the lowest since the federal lending program began 36 years ago, Murray said.  Stafford borrowers who are in school, in deferment or in the six-month grace period after graduation have a rate that's six-tenths of a percent lower - 3.46 percent, he said. Those who've held their Stafford loans before July 1998 have an interest rate slightly higher but generally less than 5 percent.

        Stafford loans adjust every year on July 1 according to the 91-day Treasury bill, Murray said. But rates on new Staffords can't exceed 8.25 percent. Their repayment rate hit the 8.25 percent cap for three consecutive academic years from 1995-96 to 1997-1998, he said.

        Borrowers who consolidate their loans incur a rate that's typically slightly higher since it's weighted to the rate of their individual loans. But in exchange they're able to lock in an interest rate, which many more have done in the last two years, according to USA Funds and Sallie Mae.
 

Flexible repayment options

        Another reason to delay repaying student loans to put others to rest: More forgiving options should life circumstances change, Murray said. "There are some extremely liberal terms under student loans that many other sources of debt don't offer."  Those who are unemployed may be eligible for three years of deferment. Even if deferment isn't granted, borrowers can apply to the lender for a forbearance to reduce or delay payments, he said.

        Still, those with enough discretionary cash to repay their student loans in full shouldn't hesitate to do so if that's their only source of debt, Murray said. "They need to know that is available if they so choose and it's available without penalty. In other kinds of consumer debt, you also pay a penalty if you do that."