As a graduate student, it’s tempting to quit my part-time job and get student loans to live on like my fellow classmates; I would if I wanted to be paying off debt for 30 years. Most students don’t consider the costs of the high priced private loans which seem great at the time, but the costs are realized later on.
In 2012, we added $23 billion dollars in new student loan debt with an increase in 90-day delinquency rate of 11% (White, 2012). This substantial increase in debt shows that while we value education, we aren’t properly assessing our ability to repay these loans.
Being able to pay off my undergraduate loans of $32,000 within 3 years of graduating was a large task that I achieved, but not without effort. Having two jobs, running my own business on the side, and finding every opportunity that I could to achieve my goal was my main focus.
You can achieve these results as well; it just takes a large amount of effort and some thinking outside of the box. Here are my tips that will help you achieve your goals of paying off your loans, or getting them to a manageable size, so they don’t feel like they are overwhelming you.
Find a side job
I hated the sound of it as well. Finding a job on top of your full-time job that requires over 40 hours per week does not sound pleasant. But what if I told you that in a short amount of time, you could be debt free and putting that money toward something else besides old debt?
The early payoff that a second job gives you is huge. For example, if you worked a part-time job at night earning 300 dollars per week, you would take home around 1000 dollars per month. (15% taxes excluded).
Putting that 1000 dollars directly toward your debt gives you a payoff of 12,000 dollars per year. The average student loan debt is 24,000 dollars (White, 2012), which gives you a payoff in just 2 years! Most students will be paying off their debt for 15 years or more, depending on the interest rate.
This may sound a bit quirky, but I still practice this technique. As the economy improves and banks compete for customers, they offer incentives for you to join, mostly through cash bonuses.
For example, my first incentive was through Citibank, and they offered me $100 dollars to open a free checking account, and keep it open for a year. The only requirement is that I left $1000 dollars in the account during that time.
This gave me a 10% return on my investment instantly when interest rates are extremely low. By putting this money toward my student loan debt, I was able to pick up speed on the payoff. After the contract period expires, you can close the account, and move onto the next incentive.
I want to warn you that you need to be vigilant about who you give your money to. Make sure the firm is reputable and large. Be wary of any online banks or brokerages, because there are hidden fees associated with the bonuses.
You don’t have to be internet savvy to sell your old items on EBay. It is a good way to clean out your garage and make some extra money on the side, while minimizing the amount of stuff you keep for no reason.
If you don’t have anything you are willing to sell, you can negotiate with neighbors, friends, and your family about selling their stuff while collecting a commission. This is a great way to earn a few extra dollars and making others money as well.
Create a Budget
The last bit of advice I want to give is probably the most important for not just paying off your debt, but preparing for your future. When you are younger and coming out of college, it is easy to spend money freely, thinking that you have years to save for your first home and retirement.
Putting 5,000 dollars in a Roth IRA at an 8% annual return when you are 20 years old can give you $160,000 dollars by the time you are 65. That’s just a one-time payment, and doesn’t take into account a monthly contribution. The power of compounding interest is huge, and you should take every advantage of it that you can.
Creating a budget allows you to maintain your goals of saving and paying off debt, and also allows you to go on vacations, buy things you have been wanting without going into credit card debt, and living a life without the stress of owing thousands of dollars to strangers. Pay attention to the small everyday costs, and you can accumulate substantial sums of cash in a short amount of time.
4 Steps to paying off Your Student Loan as Fast as Possible
Having obtained and repaid a student loan myself, I know the temptations we often encounter when faced with repayment. It is very easy to disregard the details of the debt and try to get away with only the minimum payment.
If you find yourself drowned in student loan after graduation, there are four easy steps you can take to get on the right path to paying off your student loan.
The first step to making repayments is knowing how much you owe and who you owe money to. In my case, after graduation I made it a priority to understand exactly how much I owed and who I owed.
I knew what my interest rates were and the terms of my loans. Armed with this information I was better able to plan repayment as discussed next.
2. Planning Repayment:
I will say the number one factor that helped me pay off the loan was having a plan and sticking to it. There were months I did rather take some of this payment and use it towards a luxury item but I knew I had made a commitment and I chose to stick to the plan.
Using a financial calculator (templates can be found with most spreadsheet programs); I was able to estimate how much payment I should make to pay off my debt in a year. My debt was less than $10,000 and paying it in a year was doable for me.
Most student loans are automatically calculated over a ten year period. You can ask to extend the pay by consolidation, graduated payment, income based payment or long term payment.
However, remember when you do this that even though your monthly payment is decreased, the total cost of your loan is increased. Moreover, make sure that if you make extra payments, the money goes toward the principal and the loan terms do not include overpayment penalties.
3. Follow Up:
In order to stay motivated, it is important to follow up on your plan. I often evaluated my plan on a monthly basis to see how I was doing.
Seeing your principal balance going down is an encouragement to keep up with the plan. Some months I made minor adjustments to my payment plan.
4. Avoid Late Payments:
One big thing to avoid is late payments. The costs of paying your student loan late are too high. You negatively impact your credit history; risk an interest rate increase and even worse risk capitalized interests. Capitalization is the addition of accrued interest to the principal increasing the total cost of your loan.
When interest is capitalized the total outstanding balance is increased which means your interest payment will go up because of your increased balance. If you fall into a chain of making too many late payments it will be very hard to dig out of that hole.
Taking advantage of early payment also qualifies you for a credit of 1% of your principal for the first three years. Not all lenders offer this so you might want to check with your lender.
Using a direct debit could help you avoid late payments and save you .25% on your interest rate. If you currently pay 6.8%, you could pay 6.55% with direct debit.
I definitely do not regret my decision to pay my student loan early, the financial freedom that comes from having less debt is worth the sacrifice. My student loan served a useful purpose: I am grateful I had them when I did because they helped me fill the gap of getting a good education.