Those two words are the modern day equivalent of a witch hex. So many terrible connotations and bad feelings come intertwined with those two words.
The truth of the matter is, everyone has student loans now, so don’t take it as a personal attack or a weight that you have to bear on your own, just make a plan. When I graduated school, I owed north of $50,000. It seemed almost insurmountable. Every time I authorized my payments it wasn’t without a week’s worth of depression and thoughts of a million ways that money would have been better spent. It wasn’t until I started to look at this as a true challenge that I really started to make any headway with these cursed loans.
I started to read multiple online blogs that talked about strategies to pay off loans. There were a lot of overwhelming words in there that I had to do secondary research on and I would get all panicky and think I had no idea what I was doing and I was somehow getting duped into paying everything I was making into these loans. Totally irrational. So, let me bottom line it for you so you don’t get stuck in the same endless cycle that I did.
Every time you request a loan, it was most likely at a different interest rate. So, in my case, I would request a federal loan (which means it came through the government) and a private loan (which means it came through a credit agency) every semester. So after I graduated, I had 16 different child loans of the two larger parent loans I got with all different interest rates. Within these child loans you either have a fixed interest rate (which means you agreed on the interest rate based on the market when you requested the loan and it won’t change) or a variable interest rate (which means you agreed on the interest rate based on the market when you requested the loan but as the market fluctuates, so will your interest rate. Could go up, could go down)
In general follow the below guidelines when paying off loans:
- If you have both private and federal loans, try to pay the private loans off first. Usually the private loans have higher interest rates than the federal ones but the federal loans also have a bit more wiggle room if you find you are not able to make your payments, there are programs you can lean on.
- Pay off the variable interest rate loans first. Even though the variable rates are usually a bit lower than the fixed, the potential for them to sky rocket is pretty high. Yes, technically they can go down but if you’re not willing to hedge that bet (which the odds are stacked against you) then maybe just pay them off first and save yourself the constant panic.
- If you have two loans with the same interest rate but different principal (the amount you borrowed originally), pay off the higher principal first. This is just based off percents. If the principal is higher, the actual money you are paying in interest will be higher.
That’s it, plain and simple. Once you wade through all the fancy financial gymnastics and deliberate word play, that is the simple strategy that got me to pay off my loans in less than two and a half years.
Now, that is the financial side of it, but there is more to it. This is the part that makes all of us cringe: there will have to be sacrifices made. In order to pay off your loans without falling captive to the interest, you WILL have to pay more into your loans on a monthly basis than your monthly payment.
- Write down all your monthly expenses. Start with your fixed costs (the stuff you have to pay every month) rent, phone bill, utilities, car, insurance, etc. Then compare that to your monthly income. From there, work backwards what your extra spend should be. For example, Suzanne’s fixed costs are $2200 a month, she makes $3200 a month. Suzanne wants to put an extra $300 toward her loans on top of her fixed payment so she can spend $3200-$2200-$300=$700 on whatever she pleases.
- Concentrate these extra payments into one specific “child loan” following the priorities discussed above.
I moved to a different state for a year and was able to pay a good amount down but then I moved back in with my parents and funneled almost 60% of my paycheck into my loans. Now, not everyone has that luxury but whenever you find opportunities like that, you have to bite the bullet for a few months so you can set yourself up for a great future.
What really helped me was writing down my loans on a monthly basis. It’s like weight loss, it happens gradually and you won’t notice it unless you take progress pictures. Think of these monthly checkins as your progress pictures of your loans. It motivated me to really get at them. Any money I came into went right to my loans, bonuses, tax returns, Christmas gifts, etc.
It truly is worth it once you pay them off and realize the financial independence you have but you also set yourself into very good financial habits that you will continue to reap the benefits of well after you pay off those irritating loans!