This is a guest post by Miranda Marquit, who writes about personal finances for Yielding Wealth.
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.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Hi, Good article. I'm working on repaying my school loans this year. I hate the idea of long term debt and just want to get it over with, to free up resources for other, more enjoyable purchases and also to accumulating wealth for retirement. I'm making $1,000 payments and my outstanding balance is $22,000. My plan is to dip into savings at the end of this year and be done in the next 10 months or so. Wish me luck.
Both my wife and I have large student loan balances. I am trying to pay my loan, but my wife struggles to pay hers. She makes about $21K per year and if she paid her monthly loan it would take 80% of her take home paycheck. I started http://www.studentloanstress.com in order to vent our student loan stress.
lilyslist.com is a student loan gift registry to help pay down student loans. Save by turning regular gifts into student loan payments. The burden that students have today is overwhelming and my heart goes out to them. With three other like-minded moms I created www.lilyslist.com. Please chack it out to see if it can help you.
It's obvious we need to do a better job teaching people about money. I've done some work with Junior Achievement. They have a lot of programs in this area. Here's their site, for anyone who is interested www.ja.org.
I've gotten into the habit of making two payments every month, immediately after getting paid. This way you're paying down faster but you don't really feel like you have less money.
I wouldn't pay off the student loans ahead of time at the expense of having a savings account or investing in 401k.
Private loans have higher rates than federal loans: 6-7% compared to 2-4%. In such cases, paying the high-interest loan is better than investing elsewhere.
I agree with Dave's comments, but personally, I do NOT want debt hanging over my head .. it's like I can't start my life until it's been cleared. that's the way I feel.
Besides, we get charged at 8% interest on some student loans, and the market over a long term brings 10%, but in the short term, (for me) it's better to clear my student debt... psychologically and financially.
I still save for retirement but not as much as I could've if I didn't make my debt a priority.
I don't quite understand the rationale of paying off a student loan as quickly as possible. Student loan debt more than likely comes at far lower interest rates than say a mortgage or credit card debt. I think it should be obvious to most people that we should always pay off the hight interest debt first and then focus on the lower interest debt. However with student loan debt where most of us have consolidated we have interest in the realm of 2%-4%. Would we not be better off investing any extra money? In addition the interest payments in these student loans is tax deductible so the true interest rate could be in the 1-3% range. The question you would need to ask yourself is if you can achieve greater than 4% on money invested as opposed to paying down school loans. With rates as low as they are this is no longer possible using a savings account or CD. Over the term of your school loan however 4% should be very easy to achieve, the S&P averages 11% or there abouts so a simple monthly investment in spiders (SYMBOL SPY) could in fact be better than putting more than the minimum payment into paying down school debt.
On the morbid side federal student loan debt is cancelled upon death so if you have kids or a family they would be better served with you having put extra money into savings rather than paying down your federal school loans.
Personally I don't have a mortgage but pay off all of my credit card debt in full almost immediately, if you have bill pay on your bank account it is so convenient to pay your credit cards even before they are due, there is no reason to pay any interest at all on a credit card. I try to invest all of my discretionary income in my brokerage account. I have about 70,000 in student loan debt that I pay the minimum on every month.
I agree that you should keep paying as much when you consolidate. The lower rate will help your payments go further. And I agree that it is scary that student loan debt is like having another mortgage. *shudder* That's why we're trying to pay it off like it's a 10 year mortgage.
Thanks for reading my guest post here!
This is excellent, simple advice; and is pretty much exactly what my husband and I are doing. It's frightening how much debt is now "normal" coming out of school; more so when you realize that the lenders expect you to be paying on that debt as long as you would for a mortgage.
Good tip. Consolidate your student loans to get a lower rate, BUT at the very least, continue to make the same payments as you did before the consolidation, and more if ever possible.