Ashley is a new graduate of Public University. While at Public University, Ashley majored in graphic design and lived off campus for all 4 years. In order for her to afford college, Ashley took out student loans at various interest rates. As a result, she has accumulated around $35,000 in student debt. After graduation, Ashley accepts a position as an entry level graphic designer at a local graphic design firm. Her yearly salary is $35,000 with a $3,000 signing bonus. Ashley is determined to pay down her student debt as fast as possible but doesn’t know the best way to go about it. What are your recommendations?
Paying back student loans is one of the biggest issues facing people today. With the average student debt for graduating seniors in 2016 equaling just over $37,000 (up 6% from last year), student debt has become a sizable financial burden in many people’s lives. What steps can we take to combat this debt and get the monkey off our back? Here are a few techniques that if implemented can help you pay back your student loans faster than you ever thought possible:
You know the initial bonus Ashley got from her employer? That bonus is generally designated for any relocation and other expenses associated with moving to a work location. What if Ashley recruits her friends to help her move and eliminates the need to hire movers? What if she decides to sign a lease at an affordable apartment that doesn’t require a security deposit? In both of these scenarios, Ashley would save a sizable amount of that signing bonus. The remainder of the bonus can then be deployed to pay down the student debt. Watching your debt balance go down for the first time will get you excited about increasing your efforts to pay it back sooner.
Contributing a little extra every month
If Ashley owes $35,000 at 6.5% and her debt repayment time frame is 15 years, she can expect to pay $304.89 per month (http://www.bankrate.com/calculators/college-planning/loan-calculator.aspx). What if Ashley was able to find an extra $50 per month to put towards paying down her debt? If you really look at your budget and what you spend in a month, I guarantee that you can find at least $50 to save. Remember that latte you get every morning ($50)? How about the over the top cable package that you have ($30)? What about that subscription to a magazine you hardly read ($10)?
There are many different ways you can save a few extra dollars each month to put directly towards your payments. If Ashley were to increase her payments by just $50 per month she would be able to reduce the time it takes to pay back her loan by over 3 years. Wouldn’t that be nice?
This is a technique that I learned about while reading real estate books. It turns out that by making payments bi-weekly you actually end up making one extra payment at the end of the year. The chart below illustrates this phenomenon:
|Payment Frequency||# of Payments||Payment Amount||Total Payment 1st Year||Time to pay off your loans|
|Monthly Payments||12||$304.89||3658.68||15 years|
|Bi-Weekly Payments||26||$152.45||3963.57||13 years 2 months|
Imagine being able to pay off your student loans almost 2 years faster without increasing your monthly payment?! That seems like a pretty awesome deal to me.
Raises and Bonuses
As you start to learn and perform better in your job, you will begin to receive bonuses and raises to your salary. Regardless of how much more money you receive per pay period, I highly recommend you allocate the extra funds to paying down your student debt. People tend to spend up to their salary so by receiving more money per year, your expenses will inevitably go up. You’ve already become accustomed to living with your old salary so it shouldn’t be too much of a burden. Once you begin allocating your extra funds to paying down your student debt, you’ll be better able to capitalize on the next pay down method.
Yes the good old tax refund can be a great tool to take a chunk out of your student loans. Every year, many Americans receive money from the government in the form of a tax refund. Probably one of the only benefits to paying back your student loans is that you can claim the interest paid on your student loans as a tax credit. As part of the “American Opportunity Tax Credit” taxpayers making less than $80000 gross per year can claim up to $2500 in credit for interest paid on student loan debt (https://www.irs.gov/uac/american-opportunity-tax-credit). Considering the average salary in the United States is $44,500, most professionals with student debt can claim this credit. If Ashley was able to put a $2000 refund toward her student loans every year, she would cut her loan payback time by almost 7 years!!
Bringing it all together
When Ashely incorporated these strategies into her debt pay down plan she was able to significantly reduce the time it took to pay back her loans. Below I displayed her results:
|Pay Back Strategy||Ttl Cost of Loan||Interest Savings||Pay off Date||Debt pay-down time|
|Status Quo||$ 54,879.76||$ –||July 19, 2031||15 years|
|New Strategy||$ 42,753.21||$ 12,126.55||Jan 19, 2023||6 years and 6 months|
|Pay Down Method||Money Set Aside|
|Signing Bonus:||$ 1,500.00|
|Refund (yearly):||$ 2,000.00|
|Monthly Increase in Payment:||$ 50.00|
|Raises and Bonuses:||Not included|
|TOTAL TIME SAVED:||8 years and 6 months|
|TOTAL INTEREST SAVED:||$ 12,126.55|
Even without including raises and bonuses into the equation, Ashley is able to pay down her loan 8 ½ years sooner (If we include raises and bonuses, we are looking at closer to 10 years sooner). Imagine the peace of mind you will have once the big bad student loan is finally off your back. Look at the money she was able to save on interest. What would you do with an extra $12,000 in your pocket? Would you buy a new car? Buy a new house? Take a 2 month trip around the world? Since Ashley took the steps to make this plan a reality, she is able to reap the rewards.
Student loans may currently be an issue for you but you shouldn’t let them control your life. Follow Ashley’s example and take charge of paying back your student loans. The piece of mind and cash savings you will receive from paying back your loans are definitely worth it. Do you guys have any other techniques you feel may be valuable? I would love to hear your feedback.
Having trouble focusing on paying back your loan? Read “The One Thing” by Jay Papasan and Gary Keller (https://www.amazon.com/ONE-Thing-Surprisingly-Extraordinary-Results/dp/1885167776/ref=sr_1_1?ie=UTF8&qid=1469065919&sr=8-1&keywords=the+one+thing). This book guides you through the process of narrowing down your focus and developing strategies to achieve extraordinary results.