College is expensive — you don’t need me to tell you that. And it probably won’t surprise you to learn that the average student graduates with more than $30,000 in student loans. That’s a lot of tamales, friend.
It’s a difficult and expensive situation to be in. Most students take at least 10 years to pay off these loans. 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 agree and 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 (and somebody else) 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. There are a few ways to do this and you should look into each alternative before choosing one.
First, contact your loan servicers. Tell them you are going to refinance your debt with a lower cost provider and give them the opportunity to provide the lowest rate possible. You may not get too far with this option, but all it takes is a few minutes of your time and you might be surprised with the results. Rates are low now and new programs come online constantly. Either way, it doesn’t hurt to try.
Your next option is to ask your family and friends to refinance your debt. Interest rates are low. If you have a rich Aunt Jenny (or the equivalent thereof), she’ll likely be more than open to the idea of paying off your debt in exchange for a promissory note from you at let’s say 4%.
This is a lot more than she can earn at the bank. On top of that higher rate, she gets to help someone she cares about: you. If you do plan on approaching the people closest to you, make sure you have an iron-clad payback plan you can show them to prove how serious you are about making your monthly payments.
If neither of these options work, consider getting a loan using a peer-to-peer service. These companies match people who need to borrow money with people like Aunt Jenny who have money and want to earn more than the bank is willing to pay. This could work great if you have good credit and are paying more than 7% to 8% on any of your debts. But if your interest on the debt you currently carry is less than 7%, this avenue may not be worthwhile.
While we’re on the topic of reducing interest costs, make sure you have the highest possible credit score. Why? Because creditors determine the rate they charge you based on your credit history and score. If you have a few blemishes, get them repaired.
Once you spruce up your credit, you should go back to your lenders and ask them to reduce your rate based on this new, improved credit rating.
3. Pay Off the Most Expensive Debts First
Now that you’ve done all you can to cut the cost of debt to the rock-bottom level, 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 applying as much money as you can towards your highest existing cost debt and make minimum payments towards all your other debts.
This is known as the debt snowball, which gets you out of debt faster because you reduce your interest costs as quickly as possible. This in turn allows you to put more money towards the actual amount you owe. Sweet.
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.
In order 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.
Where is that $580 going to come from each month?
5. Create the Money
You can create money 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 – even just a little more each week will help.
Add up all the money you are going to save but cutting your spending and earning some extra side money. Then contact your creditors to increase your monthly payments and put it on autopay. This way, you force yourself to come up with that extra cash each month. This step is a critical success factor. Please take advantage of it.
You may not be able to create the entire amount you need to be debt free in the time frame you want, but you can accelerate the process if you take each of the steps I’ve outlined above.
Go slowly at first. 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
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Rates (APR)||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!|
|2.54% - 7.38%||Undergrad & Graduate||Visit SoFi|
|2.57% - 6.32%||Undergrad & Graduate||Visit Earnest|
|2.80% - 7.02%||Undergrad & Graduate||Visit Laurel Road|
|2.56% - 8.12%||Undergrad & Graduate||Visit Lendkey|
|2.72% - 6.49%||Undergrad & Graduate||Visit CommonBond|
|2.88% - 8.34%||Undergrad & Graduate||Visit Citizens|