Dear Carrie: When I went to college, my father told me he would help me get grants and loans. When I graduated, he said he would pay my debt. I never got a chance to ask him how he paid for it, but he did. He thought this was an incentive for me to get a degree -- it worked.

Now I have done the same for my children, and my daughter just graduated with about $20,000 in debt. It seemed to work as an incentive for her as well. The question is, do I pay it off if I have the cash, or do I just pay out over multiple tax years? -- Ken

Dear Ken: I think you and your father are on to something here. The responsibility of paying for college with grants and loans can really motivate a student to make every moment in school count. The fact that you're now willing to shoulder the debt yourself is a wonderful graduation present and reward for your daughter's academic achievements. But don't let the learning stop there. You may not have had the chance to find out how your father paid off your student loans, but you now have a perfect opportunity to include your daughter in your own payment decision, teaching her some financial lessons.

Before we get into your payment choices, I just want to be clear that, subject to income limitations, up to $2,500 of student loan interest is tax deductible annually for (SET ITAL) the individual who is obligated to make the payments (the qualified student could be either you, your spouse or your dependent) (END ITAL). So, the first question is: Do you or your daughter qualify for the yearly tax deduction? According to IRS Publication 970, the following conditions must be met for deductibility:

-- Your filing status is any, except married filing occurs separately.

-- No one else is claiming an exemption for you on his or her tax return. -- You are legally obligated to pay interest on a qualified student loan. -- You paid interest on a qualified student loan.

Beyond that, the ability to deduct the student loan interest expense phases out when modified-adjusted gross income reaches $60,000 to $75,000 for single filers and $120,000 to $150,000 for married couples filing jointly.

Taxes aside, here are some things to consider -- and discuss with your daughter -- to help you examine your choices and make your decision.

-- What's the interest rate on the loan?

Student loans typically have low interest rates. If the rate on the loan is 5 percent, for instance, and you think you could make more by investing the $20,000, you're probably better off not paying off the loan early. Add up the interest you'd end up paying overtime. Contrast that with the potential return you could make by investing the money during that same time period. Granted, there's no guarantee on investment returns, but it would allow you to discuss risk versus return and the concept of long-term investing. And, of course, the higher the interest rate, the more sense it makes to pay off the loan quickly.

-- What's the repayment plan?

Repayment options vary according to loan source. For example, new federal regulations tie repayment of (SET ITAL) federal (END ITAL) loans to the borrower's income, potentially making the required monthly payment quite low. But if you can easily afford to make higher payments than required, perhaps paying the loan more quickly makes sense. Continued...