Debt: Reducing It a Day at a Time

Are you one of the majority of Americans dealing with debt? Understanding the differences in the basic types of debt and loans can help you determine your best debt reduction strategy.

Study Guide

Student loans are sometimes unavoidable with the rising tuition costs. They can be attractive because of a few perks:

  • Low interest rates
  • Grace periods after graduation to begin repayments
  • Tax-deductible up to $2,500 (limited based on income)

Keep in mind that grace periods and payment deferrals sound attractive, but they will increase your cost of tuition in the long-run.

Homeowners’ Manual

Home mortgages and home equity loans are usually the most advantageous type of debt.

  • If you itemize, interest is generally tax-deductible
  • Mortgages are limited to $1 million in principal
  • Home equity lines are limited to $100,000
  • Rates are generally lower

Be sure to consider the costs of origination fees along with your annual percentage rate when comparing different loans.

Consumer Debt Applications

Consumer debts, such as auto loans and credit card debt, are typically the worst type for several reasons:

  • Interest is not deductible
  • Generally high interest rates
  • Some have annual fees
  • Making only minimum payments substantially increase your total price

Try saving for upcoming purchases and developing emergency funds rather than resorting to consumer debt.

Make Your Plan

  • Consider all of the loan attributes, not just interest rate
  • Start paying down the worst debt first
  • Current low rates provide a good opportunity to consolidate
  • Consult with an adviser if you’re uncertain

As your debt decreases, you’ll be able to increase your disposable income without ever having to beg your boss for a raise.