This week an anonymous reader asked about how to best pay off her student loan debt. My response is useful for anyone looking to knock out debt quickly. If you have student loans, this is a must listen.
Student Loans Resources Mentioned
Eric Rosenberg: Ladies and gentlemen, boys and girls, children of all ages, welcome back to Personal Profitability Podcast. I’m so excited to have you back today. It means a lot to me that each of you downloads and listens to the show, you know, we’re not normally getting money from the podcast at this point really. I’m just trying to help you out and do the best I can to answer your questions and bring useful interviews.
And today I have a question that came in by email because it has some specific financial information that was requested to stand on in this, so I’m going to do that. This reader had an email and asked about student loans and how the best pay those off. Now I’ve paid off student loans myself. I had a degree that costs about $90,000; that was the estimated cost for my private school education at University of Denver for my MBA. And I ended up for about $40,000 in student loans there. So this is the topic very near and dear to my heart. I was able to pay those student loans off in two years and six days I believe, five or six days, after the anniversary of our graduation, it was just about two years after graduated. I was student loan free and it was a lot of work to do that. I worked full time well in school to help pay for things. It was not easy, I did what I could, but I did it. So I want to try to pass on what I learned as I did that to this reader and answer the questions.
So to lay out the lay of the land for what happened here, so this person’s question, had about between fifty and sixty thousand dollars of student loan debts. That’s quite a bit chunk of change and those are spread out. The biggest loan balance is just about $22,000, the smallest is about $500, and the interest rates on those range from 2.33% which is really low on the bottom end, those are Federal Perkins Loans; those are government back loans. The highest are 8%, which are also a government Perkins Loans. But there’s different types of government loans so that’s not uncommon for there to be different rates depending on when were taken out and whatnot. There’s also two loans that are private loans from Discover Loans, those each have a balance of about $10,000 and one’s at 3.2%, one’s at 3.25%, so it can fall in the middle of the range there. Good news is none of the interest rates are really that high. The highest one there is 8% and has a $400 monthly payment, and the balance on that is just about $5500. That’s the worst of the interest rates. The highest balance loan is actually the second highest interest rates. That’s not the best of news, it’s about 7.75% on the $2200. So it’s spread all along over quite a bit.
Debt Snowball Plan
So what I would do is I would use what is, I’d create a debt snowball that fits for my needs. What a debt snowball is, if you’re not familiar, was made popular by Dave Ramsey, it’s a way to order your loans from highest interest rate to lowest interest rate because that’s the financial best order to pay it off. And what you do is you put as much money as you possibly can in to the highest interest rate loan, until that’s paid off, and you roll that payment forward, when that’s paid off into the next highest interest rate. That’s why it’s called the snow ball because the payment you make gets bigger and bigger as you go forward into the different loans because you have to pay the minimum obviously on each loan. So the minimums here range from, I’m looking at the spread sheet that I was sent, from about the one’s that under $500 is an $8 a month payment, the highest one, the 8% interest rate’s a $400 month payment so it’s obviously paid down quite a bit, if that has the highest payment.
So what I would do if it were me, I would first target that 8% loan with the $5000 left and just knock that one out as quick as you can and just put that one to rest. Next I’d probably go for that $500 loan. Its only 2.3, 3% but that’s a big victory feeling to pay off a loan, so I’d probably knock that one out next. And then I just order them by interest rate from highest to lowest. I know it’ll be tough to feel like you’re making a lot of big progress after you pay off that first $5000 loan. The next one with the 7.75% interest rate is that $2200 balance – that’s the big behemoth. But as you pay that off and you see that balance fall away you’ll know that what you have after that is all going to be easier, it’s all downhill from there.
So that’s what I would do, I would target the highest interest rate one first then that tiny little one just see if feel like you won and that’s two loans gone. And then just work from highest to smallest interest rate, and as you can role that payment forward, keep making it bigger and bigger.
Cut Recurring Costs
Think about ways that you might be able to cut your spending to help pay off the loan quicker, so I mean you have a somewhat of an emergency fund to fall back on. Once you’ve saved up a little bit, you want to think what expenses do you have that are recurring, or really big expenses like those big wins if you can cut those out. Things like, you know for me I’ve talked about this before, a cable TV, is I really, it adds up, is an expensive thing. I need my internet, I use that for making money from my online business that’s how we watch our TV now, I realized that I don’t really need cable TV anymore. I was paying about $70 a month for it and now at the same package it’s just probably a $120 a month. And if you think about it, let’s say it’s a $100 a month for your TV billings, make the numbers easy, and if you cut that, that’s $1200 every year. That’s almost enough to pay off another one of those smaller loans or make a huge chunk in one of the bigger ones.
So think about the big wins. There’s a thing I’ve actually been, I’m talking with my family and my family plans that makes our cell phone bill cheaper. And we’ve talk about switching from Verizon to a cheaper option, something like Republic Wireless where your handset options and the phones you used are a little less robust. I couldn’t get my fancy Samsung Galaxy S5 or the newest iPhone 6 if that’s what you’re into. You have few different options, there are all android options. But your monthly bills may be half of what you‘re paying now. It’s a lot less when you have something like Republic Wireless so that’s something to look into. Anywhere you can cut recurring costs that come up again and again and again, you’re maybe looking at can you get a cheaper car insurance, can you get cheaper, any kind of bill you have that you have control over, take a look those. And if you can chop off ten, twenty, thirty dollars a month add that to the loan. Every dollar counts. You think every $10 you saved a month, a $120 towards the loan. So that’s a big way to make a big push in there.
Making Big Payments
Another thing that I always did is any time you get any tax refund back, if you’re lucky enough to get a return from the government in April, or if you get any bonus from work, those are two good times to put money in the your loans as well. I’ve always not gotten in arrear because industries of chain go through sessions and whatnot but I’ve been in the career path where bonuses are the norms so when I did get those big bonuses early on in my career, I put that whole thing right into the student loan. If it was a $1000 or $8000, boom right into this loan balance, paid off as much as I could. The same thing if I got a $1000 back or $5000 back it packs on right into the loan, paid that off. So any time you get any big cash infusions, birthday presents, what not, just put right to the loan, knock that out and you will have all the financial freedom later on.
So it’s no fun to pay off debt obviously if you’re seeing all the money go away but on the flip side of that, every dollar that you pay off is saving you headache and pay off and money later on. So you know, pay that off, save that interest, coz the interest is the real expense, the principle you have to pay off soon or later, might as well pay it off now. So that’s what I would do for this question and I’ll email the reader, so you know this is for you.
Anybody else if you have any questions you can email it to me at firstname.lastname@example.org. You can go to personalprofitability.com/AskEric and you can drop an audio question and I will answer right here on the podcast. Or respond to a comment, reply to the emails of you’re on the newsletter. If you’re not please sign up, it’s really easy to join. Just go to personalprofitability.com and type in your email and you’re on the list. You get a free eBook delivered, you can join our private Facebook group where you can ask me and other personal profitability minded folks questions and get some good answers to help you on you path to making it big. So thanks everyone for listening and joining in, I appreciate you spending your little time with me this morning, afternoon, evening, wherever it is and whenever it is when you were listening. And until next time, stay profitable.
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