Taming your student loan.

Graduating was the easy part. Now, here's how to tackle one of your biggest debts.

It was only a stack of paper in a rainbow of pastel shades. Two inches thick, it couldn't have weighed more than a couple of pounds, the size of the Yellow Pages in a city like Memphis. But the minute Virgil Hilliard started reviewing his student loan documents five years ago, he could have sworn someone had dropped a slab of lead in his hands.

There were promissory notes, schedules and agreements to wade through. And, there was that grand total of $70,000 to ponder, the amount he'd taken out during four years of medical school at the University of Southern California to cover everything from tuition to $300 textbooks. It was little wonder that just days before he'd pick up his diploma in anesthesiology, Hilliard was in a panic. "The day of my exit interview with a financial aid counselor, it seemed I'd spent every week going through those papers and fretting over just how my life was going to change."

Five years later, Hilliard is still alive--in fact, thriving quite well, thank you. And that's after five lean years of residency, putting in 20-plus-hour workdays in surgery and on call at State University of New York Hospital in Brooklyn, while earning just $36,000 a year. He and wife Angie, 32, who then was marketing pharmaceuticals for Bristol-Myers Squibb, have worked together to pay off about half of Hilliard's original student loan balance. After a few more months at the Mayo Clinic in Jacksonville, Florida, Hilliard plans to move the family, which includes his 20-month-old daughter, Lena, downstate to Port St. Lucie. There, Virgil can look forward to being in practice with a friend and earning $100,000 or more a year. The couple plans to hit the market for a house soon, and Hilliard's outlook is fixed on the future, despite the $700 a month he's paying on his loans. "I'm lucky Angie and I kept at it," says Hilliard, 33, "but I'll tell you it's certainly had an effect on a lot of the decisions I've made."

Hilliard has plenty of company these days. No matter where you went to school, whether you went to work after earning a B.A. or continued on for a graduate or professional degree, the story is the same. The minute you tuck away your diploma, get ready for a crash course in bill payment. According to figures compiled by the Education Resources Institute in Boston and the Institute for Higher Education Policy in Washington, D.C., undergraduates today leave campus with an average $7,594 debt from public four-year campuses, $10,000 if they opt for private schools. That figure is increasing rapidly since tuition rises on average about 7% annually. Graduate students have it worse, particularly those who enrolled in professional programs. On average, law students graduate owing over $40,000--a monthly bill close to $500, assuming a 10-year payback period and an 8% interest rate. Doctors and dentists, meanwhile, finish school owing an average $64,100 and $67,800, respectively, in debt. That makes for monthly payments of $777 and $822.

As gruesome as it looks, the student loan monster can be tamed. We won't sugarcoat things, though. Financial planners say it's best to meet the burden head-on and pay it off as soon as possible. Yes, there are ways to stretch out payments or alter the amount due each month, but be forewarned: more often than not, changes to your loan schedule or set payment can double or even triple the total sum you pay back to lenders. Default or bankruptcy on your mind? Don't even think about it. These days, when you let your loans lapse into default, you'll find the lenders have more bite than ever before. "After they assess fines and collection fees, don't be surprised if the amount you owe increases 43%," says Robin Leonard of Berkeley, California, co-author of Take Control of Your Student Loans (Nolo Press, $19.95). That's not to mention the damage to the credit you'll need as a cushion in case things are rough those first few years." In medicine, after school's over, there are interviews to fly to, hotels to pay for," says Hilliard, who knows of one classmate who has already defaulted and is on the verge of bankruptcy long before he'll earn the big bucks. "He can't get a credit card, and I simply don't know how he's going to make it," Hilliard laments.

Take heart. Government and private lenders are aware of the amount you and other graduates owe. And creditors appear to be increasingly willing to work out terms to make paving back as easy as possible. "Everyone's making greater efforts to be accommodating," says Tess Van Duvall, assistant director of debt management at Emory University in Atlanta. And in one bit of good news, starting in 1998 you'll be able to deduct interest paid on student loans up to $1,000 for five years, provided your salary is under 560,000. That amount is due to increase $500 a year until reaching $2,500 in the year 2001.

THE BIG PAYBACK

Talk about a catch-22. You take out loans for a degree that will help you live the good life, right? Shortly after graduation, though you're scraping to meet rent, car and credit card payments as well as student loans. To top it all off, there are additional worries like saving for retirement or a new home. "My friends all know I'm swamped," quips Rishal Dinkins-Stanciel, a '93 graduate with an M.B A. from Northwestern, who still has $30,000 to service on the $60,000 she borrowed. And payments aren't any easier now that she and her husband, Kenneth, are raising their two-year-old daughter, Kennedy. "Whenever they ask how much I owe, I just say, enough to pay for the two invisible Jeeps sitting in my driveway."

But where do you start? The best place is your paperwork. Before you mull over how much of a financial hurt you're in for, you need to know who holds your loans, when the payments start and what the terms are. It sounds easy, but often by the time you begin paying back, your lender has long sold off your loan on the secondary market to a consolidation company like Student Loan Marketing Association (better known as Sallie Mae, 800-524-9100), USA Group (800-382-4506) or Citibank (800-967-2400). That way, your original lender can free up money to funnel back into the lucrative student loan business.

If you've set aside every document on your loans, we applaud you. If you've lost track of who has what, first track down your creditors by phoning your school's financial aid office or the Federal Aid Information Center at 800-433-3243. Be prepared to supply as much info as you can, including Social Security card number, dates of attendance and graduation, and a list of original lenders.

That helps to square away where the monthly loan check is going. Now, it's time to figure out how you're going to pay. Standard terms call for you to pay student debt back in 120 installments over 10 years. And to maintain the kind of good credit you'll need to secure a mortgage, there's no getting around paying back the debt. As far as setting priorities and deciding which burdens deserve more of your hard-earned money, financial planners tell you to follow the interest rates. Interest on credit cards accrues at an average rate of 16% yearly, while student loans are hit with an 8% rate. Meet both monthly payments, but aim to whittle down your credit card debt first.

Next, determine how much you can afford to pay on the loans themselves. According to USA Group, a loan consolidator in Indianapolis, most people can foot 8% of their annual salary in student loan payments comfortably. Translated into raw numbers, if you make $24,000 a year, $1,920 annually or $160 a month should be affordable with a minimum of financial pain.

Above that threshold, you may have to consider sacrifices, including working somewhere other than the job you envisioned. "Angie is bent on moving back to Pasadena, where she's from," says Hilliard. "The fact is, L.A. is a market where the competition is stiff and there's less money to be made." Dinkins-Stanciel says many of her business school classmates had to compromise, too. "We day-dreamed about great sports marketing jobs or nonprofits," she recalls. "Once we found out about student loan payments, most of us steered directly into corporate jobs or to the big consulting firms that pay six-figure salaries straight off."

PRIORITIES, PRIORITIES

Meanwhile, you might be thinking about big-ticket items like a home or retirement. Financial planners say the matter is cut and dried: debt (including student loans) comes first, investing second. That's how Peter and Tamara Salmon of Ayres, Massachusetts, both 27, see it. On the one hand, their son Luther is barely eight months old, and they have their sights fixed on a first home. The couple is lucky: when they both finished Johnson & Wales, a small private school in Providence, Rhode Island, their combined student loan burden was $30,000, just under $400 a month. Peter's now earning $35,000 managing the food service at Fitchburg State College in Massachusetts, while Tamara kicks in $25,000 from bookkeeping. For now, though, their aim is to hack away at their $6,000 in credit card debt. From whatever they manage to salt away each month, Peter says they direct $100-$200 a month extra to their loan.

There are exceptions to consider, but only if you can manage to pay the amount due each month on your student debt. If your employer promises to march the amount you put in your 401 (k), jump at in "Otherwise," says Dee Lee, author of The Complete Idiots Guide to 401(k) Plans (Macmillan, $17.95), "you're leaving money on the table." That's because the matching amount your boss contributes is like getting an automatic 100% return on your investment. Your contribution is also deducted from your gross salary, lowering your taxes.

While we're on the subject, Lee says it's good to think about a first home as well. Remember, though, that mortgage lenders are likely to turn you down if the amount you're paying on debt each year is above 36% of your annual salary. If what you owe is blocking you, consider a concerted effort to pay off your student loan. Another option: check into programs from the Federal Home Lending Association (Freddie Mac, as it's sometimes called), which require new home buyers to foot a down payment of only 3% of the home's price.

A MATTER OF PRINCIPAL

Before considering payment options, it's good to dissect some of the mathematics behind your loan. You owe the loan's principal--the amount you borrowed--in addition to any interest that accrues over time. The bigger the principal, the more interest you pay. The longer you pay your loan, the more interest you pay. Finally, interest that isn't paid off is lumped into the amount you owe.

That's the obvious part. What isn't readily visible, however, is just how much less you pay back over time by chopping down the principal you owe. On a loan at 8% interest, paying an extra $50 a month--$600 over the course of the first year--ultimately amounts to a savings of $1,300 in principal and interest over the nine years you're making payments. "I try to add whatever extra amount I can," says Hilliard. "That's because the savings over time are far greater than the payment itself."

Also bear in mind that lenders like steady payments Sallie Mae, one of the largest loan consolidators around, will, in fact, cut 2% off your interest if you make your loan payments on time for 48 consecutive months. Set up automatic payments from your checking account, and Sallie Mae will take 0.25% off your interest rate.

RELIEF . . . AT A PRICE

If paying beck your loan turns out to be stifling, don't panic. There are ways to adjust the amount you owe each month Keep in mind, though, that any change often comes at a price, namely more interest paid over the life of a loan. Currently, federal loan programs, as well as many private lenders, let you choose from several repayment options in addition to the standard 10-year fixed payment schedule. To apply or get a list of terms, check with your creditor. Here are chose options:

Income-contingent plans calculate how much you can pay monthly based on your salary, and can stretch out payments as long as 25 years. Whatever balance remains afterward, although forgiven, is taxed as income.

In graduated payment plans, the amount you pay back each month increases steadily over time, with the assumption that after a few years on the job market, your salary will begin to increase.

Finally, extended payment plans lower your monthly payment by stretching your repayment over a period as long as 30 years.

To get a better idea of how tinkering with terms can alter how much you pay and when you finish with your loan, consider the following example. Say you took out $40,000 at 8%--a student debt typically granted a six-month grace period before payments start, and due in 10 years. As is, you'd pay $505 a month. All told, you'd pay the bank $60,567, including $20,567 in total interest. Opt for a graduated payment schedule and stretch the payment period out to 15 years. The first two years, you pay $277 a month, $354 a month years three through five, and $455 a month years six through 15. At the same time, though, you'll repay $71,559 on the $40,000 you borrowed, including $31,559 interest.

Another way to go is consolidation. Consolidation amounts to taking out a new loan to pay off old ones. In that way you combine payment of several loans into one, usually extending your payback period and cutting down on the amount you pay each month. Your lender can fill you in on consolidation terms and conditions. Van Duvall of Emory University, however, says consolidation is a last resort in her book. The reason: graduates often get better terms but at the price of paying two to three times more interest over the life of the loan. Let's return to our $40,000 loan at 8%. If you managed to refinance at 7% and stretch payments out 15 years, you'd owe $372 monthly, less than the $505 under normal terms. No matter how much easier, though, you'd end up paying $66,981 back on the $40,000 you borrowed, for a total of $26,981 in interest, compared to $20,567 under the original terms.

For more on the ups and downs of consolidation, contact the Federal Direct Consolidation Loan Information Center (800-557-7392) or the three main private consolidators mentioned above: Sallie Mae, USA Group and Citibank.

If things are really rough, you have a choice between forbearance and deferment. For specifics, check with your lender. Under a forbearance, you're allowed to postpone or reduce loan payments for a set amount of time, or you're allowed to extend the time you pay a loan back. Interest, though, keeps accruing during your forbearance. Remember, also, that a forbearance is granted at the discretion of the holder of your loan.

Deferment is a temporary postponement of your loan payments. In some cases the federal government will cover your interest. Under other circumstances the interest keeps piling on. The most common deferment is for students who continue their education. A word of caution: if you owed $40,000 at 8% interest, then in a period of 24 months. you'd accrue $6,400 in interest.

PREGRADUATE PLANNING

If you haven't already graduated to the strains of paying back student loans, there's one thing you can do to lighten the burden once you're out in the real world. Van Duvall says first take out the minimum needed. "You can always come back again and again during the semester if you run out of funds." A second trick is to pay whatever you can on the interest that accrues on some of your loans. "I'd say $20 a month is doable, and it'll make a big difference in the amount you owe when you graduate," she adds.

Calculations can be tricky. Fortunately for you, a couple of the large loan consolidators offer helpful Web sites that will let you plug in figures and calculate repayment strategies USA Group (www.usa group.com) and Sallie Mae (www.sallie mae.com) will walk you through all the basics. explain options for your loans and guide you through decisions, whether you're an undergraduate or have been out of school for years.

COPING WITH THE FISCAL PAIN

Think there's no end in sight? Dinkins-Stanciel was in the same boat not long ago. In 1992, up to her neck in student loans to cover expenses at Northwestern, she was shocked to find out that Hurricane Andrew had passed through her native Miami and ravaged her parents' home. Suddenly, she couldn't rely on help from her folks. "I had to max out my credit card, and it was almost too much to make payments." Even when she finished school, Dinkins-Stanciel felt overwhelmed by one life change after another. There was her $15,000 wedding. Then her parents' home was hit by a hurricane. "It seemed like one burden after another. I've had to look over my finances again and again to really consider what was crucial and what wasn't," she recalls. "But if I could handle it and come out OK, I think anyone can."

RELATED ARTICLE: The Big Payback

Altering the schedules and monthly payments can buy you breathing room, but a price

Loan balance: $15,000/Interest rate: 8.25%(*)/Annual salary:25,000

                       Monthly
Repayment Option       Payment   Term

Level                  $183.98   120 months

Graduated               103.13    24 months
                        150.27    18 months
                        199.08    18 months
                        247.81    60 months

Income-Sensitive(**)    103.12    60 months
                        182.98   120 months

                           Total Repayment         Total
                       (Principal and Interest)   Interest
Repayment Option

Level                        $22,077.60           $7,077.60

Graduated                     23,632.02            8,632.02

Income-Sensitive(**)          28,265.10           13,265.10

(*) Interest rate is assumed to hold constant for the life of the loan.

(**) Borrower's income is assumed to increase 5% annually. During the first five years of repayment, monthly payments must be enough to at least cover the acquiring interest. Income-sensitive loans must be paid back within 15 years.

Source: USA Group, Indianapolis (www.usagroup.com)