Follow This 4 Step Student Loan Payoff Plan
Follow these 4 tips for the best plan to payoff your student loan debt quickly.
I know the struggle y’all. I started my student loan payoff journey with $31,750 (and that’s without interest accumulated). Debt is truly a burden. You constantly think about your finances, worried that one unexpected expense could cause your whole world to crumble. Well girlfriend, I’m here for you. I’m going to give you the best plan to pay off your student loans as quickly as possible.
I currently owe $9,347 on my student loans and I have only been out of my undergrad for 17 months. No, I don’t have a salary of a doctor, lawyer, investment banker, or consultant, but I do know how to stick with a plan on a middle class salary. I should be done paying my student loans by March 2019, so that would be a total of me paying around $33,00 on my student loans (this includes interest accumulated) in 21 months. I’m going to walk you through the steps to pay off your student loans. Make sure you master the current step before going onto the next step.
Understand Compound Interest
Imagine that you have $100. You invest it in the stock market based on the advice from your friend and the stock market is seeing yearly returns at 10%. So, the next year you have $110 and you did absolutely nothing to make that $10. Woohoo! The next year you have $121 ($110 + $110*10%). Yes! You did nothing again for it. The next year you have $133.10 ($121 + $110*10%). High five! You’re so smart. You keep making money by doing nothing. The next year…
Ok, you get the point. Now let’s think about the opposite situation. You have $100 in debt with a 10% annual interest rate. If you leave it unpaid, the next year you will owe $121 and the next year you will owe $131.10. This beautiful thing called compound interest can screw you if you let it but allow you to make money in your sleep if you take advantage of it.
Let’s shift our mindset to being scared about the compound interest on your student loans. This is like a tiger chasing you down in the humid weather with sweat stinging your eyes. This is the real deal. Once you get scared about this, your mindset will change.
The beauty of this mindset is that you now understand how compound interest can help you. Once you pay off your debt, you can invest your money, and you will be benefiting from compound interest like those wealthy banks.
Determine Your Time Table
Now that you understand compound interest, you get that we need to figure out how we are going to get you out of debt so that we can start investing to make money by doing nothing. So, your time table is really up to you, but the best time table is ASAP. Yes, I said it. ASAP. Compound interest is based on time. The more time you have, the richer you will get.
What irks my soul the most is when my friends or random people I meet tell me they are just paying the minimum balance on their student loans when I know that they’re making at the very least a middle class salary. And I want to shake them and be like, would you rather spend $100 on drinks tonight and have your student loans sit and grow in interest or be debt free and not even bat an eye about picking up your tab in literally like a year.
Urgency is everything my friends! Choose a timeline where you feel like you are only 75% in a deep struggle. Don’t do 100% because you will just hate life. And student loans is not worth hating your life.
To figure out your ASAP time table, you’re going to need to take a look at your budget and see the perfect threshold of struggle and joy for your life. However, most people with a middle class salary and an average student loan balance should be able to pay off their student loan debt in about 3 years comfortably.
Write Down Your Budget in Excel
Lol. You all know the feeling of looking at your bank account and thinking, is this it? You’ll have the very same feeling when you’re doing your budget. The easiest place to write down your budget is Excel because it will do all the math for you.
What should your budget include, you ask? Only your bare necessities. I have my housing costs (rent and utilities), insurance, internet, groceries, and transportation. I also have budget allotted for savings, my 401K, and travel, but all of these wonderful things goes towards my student loans now. This is about 45% of my take-home pay after taxes. You need to stretch yourself even if you live in a relatively expensive area like I do (Denver). Figure out what’s right for you and how long you can stand the itch of debt and being technically financially poor.
Once I pay for my student loans in March, I will start funding these other buckets. You definitely should have an emergency fund of around $1,000 if you can. I’m rocking $375 right now though (would not suggest).
Y’all. Here’s the beauty of a budget like this. The $1,470.83 payment I am trying to make every month by March 1st (but let’s be for real, I bought a plane ticket home for Thanksgiving and Christmas so it’s probably going to be March 31st), is making me disciplined. That’s what us in the finance world call the discipline of debt. I am already used to that $1,470.83 not being there, so I can just put that money towards investments in the future and not really notice.
4. Put Your Student Loans on Automatic Payment
In fact, you don’t have to be disciplined. Like people have auto-pay for their rent and utilities, automatically pay your student loans once you get your paycheck. When you look at your student loans like a cost that you have to incur like your housing, water, electric, internet, insurance, and car, you won’t feel as stressed about making payments. You have to make payments. It’s a fact of life. That’s truly the way you have to look at it.
Pay down the unsubsidized loans first and then subsidized. Also, pay down loans with the highest interest rates first. Here’s a summary:
Unsubsidized High Interest Rate
Unsubsidized Low Interest Rate
Subsidized High Interest Rate
Subsidized Low Interest Rate
Some people will say to tackle the smaller loans first so that you can feel the joy of paying off a loan quickly. This definitely makes sense psychologically. But remember you’re on auto-pay so you don’t need to think about your psychology every time because you logically thought it all out from the very beginning. You know the money is coming out and all you need to do every month is allocate it to the loan based on the priority list above.
Guys, I have a confession. I am so guilty of being like YOLO let me go to Nordstrom Rack and spend $100 to make myself feel better about a hard week at work. Or, let me go to Chick-fil-a for the second time this week. That is all fine and dandy and honestly I think you need to do this every once and a while to keep sane, but treat you student loans as a fixed monthly cost. And don’t go into credit card debt for your short, cheap thrills. Remember, always pay of your credit card’s statement balance because the only thing worse than student loan debt is credit card debt.
And then you can watch your student loan balance steadily tick down with no extra effort on your part. If you follow this focused plan, you will not have to pay that much in interest as well. Put a smile on your face and remember that you’re almost done and you’re one step closer to making money from your investments.
What’s your time table for tackling your student loans? Comment below.
This post contains content this is for informational purposes only, and should not be considered legal or financial advice. You should consult with a legal professional and financial professional to determine what may be best for your individual needs. Please read my Disclaimer for more information.
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