Do you ever notice that there’s a lot of after-the-fact advice revolving around the topic of student loan debt? Whether it’s on television or in articles, I’ve lost track of the amount of times someone has asked for advice on paying off college, only to be told:
“You shouldn’t have taken on so much student loan debt in the first place!”
Well. That’s not very helpful. Arguing whether any amount of student loan debt is justified or not is a moot point for those in the midst of a repayment plan. New students? Yes, the conversation of how much student loan debt is reasonable should definitely be had – and early. But for people already in repayment mode, it’s time to switch the topic to how they can pay that debt off for good.
If this sounds like you, then grab a notepad and get ready. We’re sharing real world advice for you to finally pay off that debt – judgement-free. No matter the amount you have to repay, the time to act is now. You CAN take back your life from student loan debt!
Pick a Repayment Plan that Makes Sense – For Now and Later
I’ll never forget the day I went to my financial aid office to finalize my student loan repayment plan. The aid officer explained to me that there were multiple repayment plans that I could choose from, one of which was called the “graduated repayment plan”. That plan, she told me, would allow me to pay a small amount each month for the first five years of my plan, then go up incrementally in the next five years, and then again for the last ten. The idea of it was to give new graduates time to grow their careers – thus being able to earn more money and make the higher payments when the time came.
How great! I thought. Of course I’ll be earning more five years from now, so it totally makes sense to take on this particular plan. How nice of them to give this option to new graduates who don’t yet have a job lined up….
Cut to two years later. I always paid my loans over the phone and ignored the remaining balance. Quite frankly, I didn’t want to know. I knew how long my plan was and therefore when I’d be debt-free; and I didn’t want to be reminded of that crazy huge number hanging over my head…until one day I decided to open a statement. And guess what? In two years, my principal balance hadn’t changed at all.
Two years of making payments. 24 months of continuously losing hundreds of hard-earned dollars out of my bank account. Only to have the exact same balance? How could this be??
It turns out, there was one very important detail about the graduated payment plan that I didn’t know about – why the first five years of payments were lower. Or rather, what the lenders did to make that option available. The answer? Interest-only payments.
So because I was only paying interest, it made sense that my balance hadn’t changed. And that’s why knowing the details about each plan before you take one on is so important. There are a lot of student loan repayment plans, but if your focus is paying your debt off faster, focus on the standard repayment plan. That’s the one that prioritizes paying your debt off faster, while the others focus on lowering your student loan payments (good for your budget, bad for your total debt payoff time and amount of interest you’ll pay.)
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Optimize Your Repayment
Let’s go back to that day I found out my balance hadn’t budged in two years. What do you think I did after that? I’d like to say I took immediate action and start paying more. That didn’t happen. Instead, I threw my head back down in the sand and kept on with my slow-going repayment plan.
Unbelievably, it took me another few years (and a job at ReadyForZero) to make me get serious about paying off my loans before the end of my plan. It certainly helped to see how much extra I’d pay over time if I stuck to the graduated payment plan! (In total, it would cost me nearly $15k in interest – on top of my original balance!) So what did I do?
I started making biweekly payments. By simply splitting my monthly payment in half and paying that amount every other week, I cut down the overall interest spent by several thousand dollars. That’s not bad for a simple budget rejig!
What about you? How can you optimize your plan? Besides biweekly payments, there are plenty of things you can do to optimize your plan. Here are a few to think about:
Student loan consolidation
Student loan consolidation is a way consolidate all of your loans into one. If you can find a lower interest rate through federal consolidation plans or private consolidation lenders, then this could be a great way to pay your debt off faster. Keep in mind, however, that federal loans consolidated through private lenders forfeit assistance such as deferral, forbearance, and the Income Based Repayment Plan.
Student loan refinancing
Student loan refinancing is similar to consolidation, except that a new lender buys your loans from your current lender or lenders (or servicers). Again, a useful tool if the new interest rate is lower than what you’re currently paying. And, again, federal loans refinanced to private lenders will forfeit assistance such as deferral, forbearance, and the Income Based Repayment Plan.
Take Advantage of Interest Rate Discounts
If you have federal loans, your servicer very likely offers a discount on your interest rate if you set up automatic payments on their website. This typically lowers your interest rate .25% lower than what it is without making these payments. It’s an easy way to pay less – and to make sure you don’t miss a payment!
Earn extra income
One thing that I didn’t think about when repaying my student loans was trying to earn more money to pay them off faster. Rather, I considered myself stuck financially and just trudged along as is. Now I realize that those years were the ones in which I had the most time on my hands and could have made the most impact on my repayment plan. It may not be fun to work more than one job, but doing so while you’re fresh out of college could save you years of repayment later.
Keep Your Future Self in Mind No Matter Where Life Goes
One of the most exciting things about the first few years after college graduation is the amount of changes and opportunities that come along. Most 20-something college graduates are relatively unencumbered, which means this the best time to take (calculated) risks and explore many different avenues.
However, while you’re out there exploring all that life has to offer, don’t let your student loans slide. But also remember to make room to build a retirement fund! Whether you move to a new city, change jobs, or travel the world, stay on track with your repayment plan and retirement building – even if your budget gets tight. That way you won’t miss out but you also won’t have a painful moment years later when you wonder why you didn’t focus more on your future finances. Remember – the sooner you start building financial freedom, the sooner you can spend your hard-earned money your way!
Image Credit: Chris Ford