Monday, February 20, 2012

Smart ways to handle student debt

Since graduating from pharmacy school last May, Caitlin Killam has been attempting a balancing act familiar to many recent graduates. She is staring down $120,000 in student debt while also gearing up to buy a house and save for retirement. Fortunately, as a pharmacist for a major retail chain, she’s well compensated, with a salary of more than $100,000.

Caitlin knows this income gives her options most of her contemporaries don’t enjoy. But that doesn’t make managing life a breeze. “I just don’t know what to do with my paychecks,” Caitlin says. “Should I pay off all my loans right away? Or invest some of the money that I have?” Aside from student loans, Caitlin has no debt and has $20,000 in the bank. She’d like a new car, and hopes to move to Hawaii, where her mother lives, and buy a house there in five to 10 years.

Those goals require cash. Caitlin’s first step should be to build up her savings and to set aside a rainy-day fund, just in case. Because she has a secure job in a growing field, a six-month emergency fund should be sufficient. Certificates of deposit are her best bet because CDs aren’t easy to spend on a whim.

Caitlin would also do well to buy long-term disability insurance. The cost to guarantee 60 percent of her salary if she were permanently disabled should be in the range of $300 a month – or less, if she can get a discount through her employer. Because Caitlin has other financial goals, her student loans aren’t a priority. She’s currently paying $1,400 a month on a ten-year repayment plan. If she temporarily extends the term of the debt to 25 years, she’ll lower her monthly payment by as much as 50 percent and be able to put aside the difference for other purposes.

At her salary, Caitlin should aim to save as much as 25 percent to 30 percent of her take-home pay, advises Paul Baumbach, of Mallard Advisors, in Newark, Del. In addition, Baumbach says, she should contribute the full $17,000 permitted in 2012 to her 401(k). That will save about $6,300 in state and federal taxes.
If she can afford at some point to return to the 10-year schedule, she should try

By MONEY POWER; Kiplinger's Personal Finance
Published: 02/19/12 9:05 am | Updated: 02/19/12 9:05 am

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