Kat Tretina contributed to this article
College is expensive. And it probably won’t surprise you to learn that the average graduate leaves school with more than $39,000 in student loan debt.
It’s a difficult situation to be in. Most students take at least 10 years to pay off these loans. Even former President Obama didn’t pay off his student loans until he reached age 43.
This long time frame is a problem; the longer it takes you to pay off that debt, the longer it will be before you start building your own financial foundation.
If you want to retire your student loans pronto, here’s a five-step plan that will help do just that.
1. Take An Oath
I know you are reading this because you are fired up about getting out of debt and that’s great. But believe me, when all your friends are packing up the car to go to Vegas for the weekend or making plans to go skiing next month, that fire in your belly just might fizzle out.
You can pay off your debt fast; I guarantee it. But in order to do so, you and everyone in your household will have to be committed to the process. Some people are able to pay off their loans without making any big changes to their lifestyle. But most people find they need to do things a little differently if they want a very different (and positive) outcome.
That’s why the first step is to promise yourself that paying off your student debt is a priority and you are going to get it done in three years or less. Unless you are 100 percent on board with this plan, it’s going to be hard to keep going when things get a little uncomfortable.
Are you willing to sign on? Great. Let’s go on to the next step.
2. Refinance Your Debt
The next thing we want to do is cut back the interest you currently pay for the debt you already have. That way, more of your payments will go toward the principal, rather than interest charges.
If you have good credit, you can qualify for a lower interest rate by refinancing your student loans. When you refinance, you work with a private lender to take out a new loan for some or all of your current student loans. The new loan will have completely different repayment terms than your old one, including interest rate, minimum monthly payment, and length of repayment.
Although you can refinance both federal and private loans, there are some downsides to refinancing federal loans. You’ll lose out on certain protections and benefits, such as access to income-driven repayment plans. However, if you’re focused on getting out of debt as quickly as possible, refinancing can be a smart way to achieve your goal.
If you decide that it’s for you, compare offers from multiple refinancing lenders to get the lowest rate.
3. Pay Off the Most Expensive Debts First
Now that you’ve done all you can to cut down the interest rates on your loans, it’s time to use some fancy footwork to get out of debt faster. The idea is to use as much money as you can to pay down the principal rather than wasting it on interest that only makes your creditors rich.
You did some of that already in the step above by refinancing to the lowest rate possible. Now, we’re going to take this idea to the next level by using the debt avalanche method to pay off your loans.
With this approach, you tackle the debt with the highest interest rates first. To get started, list all of your loans and their interest rates. Continue making the minimum payments on all of them, but put any extra money you have toward the loan with the highest rate. For example, let’s say you have the following loans:
- $10,000 federal student loan at 4.45% interest
- $5,000 private student loan at 9% interest
At 9% interest, the private student loan is the most expensive form of debt you have, so it makes sense to try to pay that one off more aggressively. Paying it off ahead of schedule will help you save more money in the long run.
4. Do the Math
At this point, you haven’t made higher payments, so it hasn’t cost you anything. You’ve just rearranged your debts and debt payments to optimize the power of your dollars. And you’ve also organized your financial life in a big way.
These are big wins and you’ve accomplished a great deal. Still, taking these steps probably won’t be enough to shave seven or more years off your debt schedule.
To do that, we have to gather a little more information. The first step is to calculate how much money you’ll need in order to pay off your debt in three years.
Let’s keep things simple and assume you owe $30,000 and your blended average interest rate is 6%. If you pay $333 a month, you’ll be done in 10 years. But you can do better than that.
Doing the math is the easy part, but coming up with that extra cash is tough. That’s where our next step comes in.
5. Earn the Money
You can earn money for debt repayment by either spending less, earning more, or doing a bit of each. This step is harder than the preceding four, but not impossible.
Go through your bank and credit card statements for the last three months. Circle each item you can live without for the next three years. If it’s an ongoing expense that you really don’t need, cancel it right away. If you see a pattern of spending, like dining out or expensive vacations, make immediate adjustments.
If you have already cut back to the bone, think about ways to earn more money. One of the best ways is to launch a side hustle, where you can make extra cash on your own schedule. Working just a few hours a week can bring in hundreds each month, which you can apply to your debt repayment. That extra income can help you pay off your loans years ahead of schedule and save money on interest charges.
The most important thing is to stay focused. Celebrate your progress even if you can’t get this done in three years. You’ll be amazed at how good it feels to see those debt balances melt away. Once you get a little success under your belt, it will be easier to find more ways to apply more money towards your debts.
Photo credit: TaxCredits.net
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