NEW YORK (MainStreet) Although you may be eager to pay down your student loans and become debt free as soon as possible, some payment strategies can destroy your long-term financial future. Experts weigh in on five extreme student loan payment strategies that are far worse than having debt:
1. Paying too much, too soon
In the first few months after graduation, you shouldn't set up an overly aggressive payment plan, says Reyna Gobel, author of CliffsNotes Graduation Debt, 2nd Edition.
"You really don't know what your income is going to be or how far it's going to go," she says. "Graduates have a grace period of six months before they have to start paying. Use that time to figure out your strategy."
Many grads get excited with the prospect of spending $20 a week on groceries and $800 a month paying down their loans, but that's not realistic, Gobel says. The worst thing you can do is get locked into a payment plan you can't sustain.
"A lot of grads think they can continue living off ramen noodles for the next five or 10 years, but then they start looking at their new expenses like rent, electricity, the gas to get to and from work, and they realize that the real world is more expensive than they thought."
For the first six months after graduation, don't sign up for a payment plan, but do deposit the amount you think you'd like to pay into a savings account and see how you manage, Gobel suggests.
"Act as if you're making those payments and see how it works for you. You may find that you can't pay as much as you thought, or you may find you can pay more. In either case, after a few months you'll have a job and you'll know what's going to fit with your life."
2. Getting on a payment plan without looking up all your loans first
"I ended up with a default because I missed a loan I didn't know I had. You might not know you've lost one unless you look everything up in the National Student Loan Data System," Gobel says.
Sometimes loans can get lost in the consolidation process, or if you move after graduation, notification on one of your loans can get lost in the mail. It happens more than you might think, she says.
"There is still a 15% default rate on student loans within the first three years, and a lot of those are due to a lack of awareness. It takes two seconds to look at the NSLDS website and see what the status of each loan is."
Some graduates may have consolidated their loans several times and may have both subsidized loans and non-subsidized loans, which will always be listed separately. Although it is possible to recover from a default Gobel did it's not something you want to go through if you can avoid it, she says.
"A lot of people get scared when talking about student loans and just want to hide under the couch. Don't hide. Double-checking what you know about your loans is electronic and it's easy. You don't want a default on your credit report."
3. Paying off undergraduate loans while borrowing more for graduate school
You may feel good about paying down your undergraduate student loans while you're getting your master's degree or doctorate, but grad school loans carry a higher interest rate. It's actually better to get a deferment on your undergraduate loans and put money toward your graduate tuition instead, Gobel says.
"Be thoughtful with grad school," she says. "Put your money toward your graduate degree or better yet, look into getting a graduate assistantship to get your tuition reduced."
If you're working full time while pursuing a graduate degree, Gobel recommends asking your HR department for any tuition reimbursement programs they may offer.
"You may be surprised what they offer. If your degree is going to improve your knowledge or job performance, they may offer a tuition stipend or reimbursement. Just check for any stipulations you may have to sign a contract that you will work there for several years once you get your degree."
4. Cashing in your 401(k)
"You have a right to do it, but you're going to suffer for it," says Adam Levin, chairman and co-founder of Credit.com. "You pay taxes on the withdrawal, and you're penalized if you withdraw before the appropriate age."
Even if you say you'll put the money back later, you're missing out on the growth that would occur between the time you withdraw and the time you replace the funds, Levin says.
"Inevitably things happen that prevent you from replacing the money right away, and then you can't afford to replace the money at the value it would be, so it's a double hit."
Cashing out your 401(k) is the last thing you want to do to pay off student loan debt, says Bill Demaree, owner and founder of Demaree Retirement Services.
"Individuals and couples should do everything they can to protect the assets that have taken them a lifetime to accumulate," Demaree says. "By taking money from your 401(k) before retirement, you risk not being able to re-accumulate those assets in order to meet your retirement goals and live the lifestyle you want to in your golden years."
5. Having a fire sale selling everything you own
Some people try to pay down their debt by selling off everything they own for extra cash. Unfortunately, this is a cycle that's bound to repeat itself, Levin says.
"At first blush, if you own some things you can make money off of, it's not a bad idea, but when you are walking into an empty apartment after you sold things you use every day, you're going to be miserable and you're just going to end up having to buy those things back."
Even if you sold everything you owned, you still wouldn't have enough to pay off your student loans completely, so you end up in a situation where you haven't resolved the real issue and you're not living in a sustainable way, Levin explains.
Also, when you do decide to replace the items you sold, there's a chance you'll use credit cards to make the purchases, which only puts you further into debt.
"You're never going to come out ahead by selling and rebuying," he says.
By Kathryn Tuggle