This is a guest post by Miranda Marquit, who writes about personal finances for Yielding Wealth and edits information on debt consolidation for DestroyDebt.
One of the trends that we see a lot of these days is Leaving College With Debt. I was one of those statistics. When I finished my undergraduate degree six years ago, I had credit card debt on top of student loan debt. Even though I had a scholarship and a part-time job, I was seduced by the “easy money” promised by student loans and credit cards. Why scrimp to get by when I could live large?
Of course, when I got married at the end of my four-year stint, and both my husband and I started grad school, the student loans only got bigger. By then, though, I had been working toward getting rid of my credit card debt. Now with my grad school done, and my husband almost done, credit card debt isn’t a problem. We are already paying on my student loans. But when I look at what the combined total of my loans plus my husband’s student loans will be, I feel almost overwhelmed by the crushing weight of the student loan debt.
So I’m applying the principles of aggressive debt reduction that served me so well with the credit card debt to my student loans. And I’m starting now.
Tackling the Private Student Loans First
Federal student loans are offering less and less, so private lenders are stepping in to take up the slack. This is especially true for graduate school. My husband and I both have private student loans for our advanced degrees. These loans usually come in smaller amounts than federal loans, and they almost always have higher interest rates. So that’s what we’ll get rid of first. We’re working on my husband’s private student loans, even though we don’t have to yet, because we really don’t want the interest capitalized (meaning the interest accrued is added to the principal and then more interest is paid on the interest).
We looked over our monthly budget and found that we actually have about $500 that we could put toward debt reduction each month. This money is recovered “waste” — things we don’t need, but that we buy anyway. (Experts say that, on average, each household spends 10-15 percent of its income on waste each month.) It means we’ve had to prioritize our spending and cut out some of the things we used to buy.
We’re applying that debt reduction amount to the smallest student loan that we have, my husband’s $3,000 private loan for living expenses for one year during his Master’s program. Every month we pay $500 on top of the $35 minimum payment required by the lender. Meanwhile, we are paying the minimum on my private student loan and my federal student loans. When that first private student loan is paid off, we’ll take the entire $535 amount and put it toward aggressively reducing my private student loan.
Federal Student Loans
I consolidated my federal student loans to a fixed rate loan back when interest rates were low — around 2.75 percent. By signing up for an automatic withdrawal program, I got another 0.25 knocked off. After 36 on-time payments (which should come sometime around October), the interest rate will drop another percentage point, making my interest rate 1.50 percent. We’re not terribly concerned about my federal student loans. And my husband’s federal loans are all subsidized, so we don’t have to worry about them accruing interest until he actually finishes school.
Even now, with special programs and incentives, it is still possible to consolidate to one, lower interest rate on federal student loans. You won’t get 1.50 percent, but you can still do fairly well. This is a good way to go, since it will simplify your payments, and with special programs offered by some lenders, allow you to lower your interest rate — reducing what you pay in interest charges. When I start paying down my federal student loans, we will be applying $660 (the $535 + $115 from my private student loan) on top of the minimum payment. You can see that things will really start to snowball then.
And when my husband is done (and gets a job), we can put even more toward reducing debt. Although, with the inevitably higher rates on his federal loans we will probably switch over and concentrate on paying his loans down when his grace period ends. In the meantime, we’re still contributing to our retirement accounts and setting some money aside.
There is a light at the end of the tunnel. We figure it will take us about six more years to pay off all the student loans. It may seem like a while, but it’s a darn sight better than the 25 years mine are financed for.
Miranda Marquit writes about personal finances for Yielding Wealth and edits information on debt consolidation for DestroyDebt.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.