The process of eliminating substantial student debt is not rooted in fortune or chance. It is not based solely on luck (winning the lottery) or an exceptionally high-paying job on your very first day. Rather, it utilizes an efficient, strategic approach as well as consistent, diligent organization until the borrower is no longer liable for their debt.
Eliminating over $175,000 in two years or so sounds unobtainable, but it can happen when there is a proven system in place.
The Exciting Solution:
As discussed in previous articles, most people attack their debt with emotion initially. Emotion/feeling works for a while, but as soon as that feeling fades, payments tend to also slow down.
The two most common methods of repayment are:
Snowball: Paying off the smallest loan balances first allowing for quicker payoffs, success and an increase in confidence.
Avalanche: Focusing on the highest interest rate loan first, based purely on a mathematical formula that provides the highest probability of success.
The graph below depicts a combination of the two, snowballing the smaller loans initially, and once you have gained some momentum, switch over to attacking the larger loans based upon their interest rate.
As previously suggested, in some way, the financial future of your family and the quality of life for your children depend upon eliminating your debt quickly.
The Most Difficult Task in Debt Repayment: Being Organized
Get organized by completing the following steps prior to paying off your debt.
** Step 1: List all of the student loans that you currently have so that you know where to make payments.**
Write down (by hand) the following for each loan:
- Total balance
- Percent interest
- Lender
Having the loan information written out, right in front of you, feels different than looking at it on a computer screen.
Log into each loan account and verify that your email and address are correct. You will receive a 1098-E tax form from your loan provider during tax season that will show you how much interest you paid on the loans. The amount of interest you paid is generally tax-deductible, which can save you hundreds of dollars.
Details count, especially with loans.
Also, check your credit report. Occasionally, older loans will still appear on your credit report. If you forget about your old loans, you will want to find them sooner rather than later.
Also, if your parents took out a Parent PLUS Loan to help you pay for college, include that loan in your plan, even if it does not show up on your credit report. If you plan to repay that loan, it should be a part of your repayment plan.
Refinance or Consolidate… Understand the difference between refinancing and consolidating your loans.
If you are refinancing, you are replacing an old loan with a new loan. A better loan, with a lower interest rate, is what you want.
Consolidating your loans is when you take multiple loans and combine them into one.
What’s the point?
Interest rate = cost of borrowing money! So if you’re paying interest on a loan at 6% or 7% or more, you could save thousands of dollars on your debt by doing a refinance.
Don’t forget the fine print! If you consolidate federal student loans/refinance to a private loan, you may lose some benefits. Will the savings be worth it? Review all of the options before deciding on a refinance.
Lower the interest rate, lower monthly payments and pay off quicker. That’s the goal.
Be aggressive! There are two ways to increase the speed of paying off debt:
1) Increase your income
2) Decrease your expenses
Or, if you really want it badly, do both.
Find ways to increase your income: extra shifts at work (if you can), freelance work, driving for Uber or Amazon Flex, selling items from around your house, asking for a raise, changing jobs.
Develop a budget that divides your spending into fixed and variable. Before the beginning of each month, determine where your money will go.
First, analyze your variable expenses:
- Eating out
- Entertainment
- Subscriptions
- Impulse buys
Then, analyze your fixed expenses:
- Housing
- Car Payments
- Insurance
For instance, would living in a smaller apartment for one year help you to become debt-free faster? Would driving a lower-cost car allow you to pay off your debt more quickly?
These aren’t permanent choices; they’re short-term sacrifices for long-term liberation from debt.
Momentum Is Mental
This is why the debt snowball method works so well initially. The satisfaction of eliminating a $5,000 loan is rewarding; removing it from the “to do” list creates motivation.
Eliminating smaller debts improves your cash flow as you no longer have those minimum monthly payments. Therefore, you’ll able to use that extra cash for your next targeted debt.
With each successive payment, momentum creates even more momentum.
When you get to the point that only the larger debt remains, switch to avalanche mode and attack the debt with the highest interest payment first.
Now focus on both the psychology (emotion) and the mathematics to create synergy.
Create a Timeline
To determine the amount of time it’d take to pay off all of your debts, take your total debt balance and divide it by the monthly amount you can realistically pay.
Be honest with yourself.
This will provide you an approximate timeframe to make the payments, i.e., 50 months thereafter, 36 months etc.
You’ll now have a structured plan instead of feeling like you are on an endless journey toward eliminating your debt because you can see how long it’s going to take you. You may be surprised at how much sooner you will actually finish than you previously believed; as a result of your increased intensity.
Be careful not to forget about taxes you will have to pay on any freelance/side business income you generate.
Make sure to save a part of the extra money you earn to prevent any unexpected bills that may arrive. Unforeseen tax bills can wreck any progress you have made to pay off your debts.
Being prepared is vital!
A new way of thinking
Paying off student loans is not only about numbers; it’s about who you are. You go from a person who has debt to someone who is working to eliminate their debt, which will change how you make decisions every day.
All of the sudden, the extra income you receive can be spent towards something with purpose, budgeting becomes a way to reach your goal, rather than feeling like restrictions, and making sacrifices becomes much easier knowing that they are temporary.
You are not poor; you are focused.
If you want to stop giving money to lenders each month and wondering when you will be done, you are not the only person in this position. Many people look at their student loan debt as being forever.
However, it is not forever.
With good organization, refinancing when necessary, aggressive earning strategies, disciplined spending, and the proper payment method, you will eliminate six figures of student loan debt much quicker than you would think.
Wouldn’t it have been nice to know all of this before graduation? Of course!
It’s the knowledge now that is important. You could have paid off all of your debt by focusing on it and continually putting pressure on it, until you finally were able to pay it off.
When your last payment processes, there is quietness, there are no more due dates, there is no more interest, there is just freedom.
