This is the guide I needed when I was a quarter million in student loan debt. If you're feeling hopeless and facing six-figures in student loans, this is for you. I'm going to you understand your debt, get motivated to attack it, and create a 5-year pay off plan.
First, I want you to know that you are not alone. Currently 3.2 million borrowers owe six figures in student loans. AND, nearly 1 million borrowers owe more than $200,000! (see official US Student Loan Portfolio for latest stats)
There are very few occupations that pay enough to even cover the interest on loans of this size. And thanks to income based repayment plans, it's possible for these loans to grow rapidly even as borrowers make timely payments.
Why Am I Writing About Student Loans?
I'd like to start by telling you a story.
I was 25 and just finished law school. Gone were my dreams of being a high-powered international lawyer with a six figure income. I was in survival mode and didn't want to think about my student loans. The double dip legal recession made it impossible to find a decent paying law job, so I was making just over minimum wage driving a shuttle bus.
I was totally stuck, and I had no idea how I'd pay them down. The market for lawyers was horrible. An average first year attorney could make about $50,000 per year in my area, and I knew that wouldn't even be enough to cover the monthly loan interest.
After graduation, I deferred my loans for six months. When the six month deferment period was up, I put them into forbearance. Each time I filed paperwork and viewed the balance, it felt like a punch in the stomach. I couldn't think of any way I'd ever pay the debt off. I was barely making minimum wage and my loans were growing by $1,000 every month. I was desperate and wanted to devise a plan, but I didn't know where to turn for help.
I reached out to a career coach and paid him a few hundred dollars over the course of several sessions. He gave me some solid career advice but had no practical advice for how I'd tackle the loan problem. Within a few years, I'd managed to turn my career around and had a path to a lucrative career in tech, but I'd neglected my student loans. For years I'd been paying the minimum required under income based repayment. After years of intentionally avoiding them, I decided it was time to take action. I had paid $500 per month for a few years and just sort of forgot about them. When I logged in to Navient in early 2015, I was shocked to see they'd ballooned to nearly $220,000.
It was time to hire a pro, so I looked for a reasonably priced financial advisor and set up a meeting. His jaw dropped when he saw my student loan balance. I showed him some spreadsheets, forgiveness options, and payoff strategies. He was speechless. He couldn't offer any practical advice for getting out of my situation. It was at this point that I realized I was totally on my own. There was no tax loophole, hack, or expert who could clean up this mess. I would have to find a way out myself.
Over the next few years, I learned everything I possibly could about student loans, income, interest, and strategies for staying motivated and paying down debt. Today I've wiped out $250,000 in student loan debt and the decision to pay off my debt put me on the path to 10x'ing my income.
Let me be clear, I'm not writing this guide for people that have financial support. There's certainly nothing wrong with that, but there's a big difference in paying off your loans without any family help and no financial support to fallback on. I'm so tired of seeing news articles like couple pays off their $200,000 debt by living with a relative and flipping condos that parents gifted them. It's hard not to be cynical if you're totally on your own and you read stories like this. I want you to know it's possible to pay off six-figure student loans even if you're totally on your own financially. I've done it.
I lived paycheck to paycheck for years. My spouse didn't have a high paying job. There was no family money. I had no lucky financial windfall, lottery winnings, or inheritance. I didn't even have a financially stable parent who could cosign on a refinance to get my federal loans down from 8%. I had literally zero assets to my name after law school and when I couldn't find a job, I drove a shuttle bus for minimum wage to make ends meet. During this time I maxed out my credit cards and entered into an IRS installment plan when I couldn't afford to pay thousands of dollars in taxes. If the bulk of my debt had been a house instead of student loans, I'm sure I could've enjoyed the sweet relief of bankruptcy.
Why should you listen to me?
I hit just about every obstacle on my journey and I still found a way to eliminate my debt. My journey was far from perfect. I made mistakes with my repayment plan, took bad advice on consolidation, and put my head in the sand for years as my loans continued to grow. I want to help you avoid those mistakes and motivate you to get your head out of the sand if you've been ignoring your loans.
On my way to paying off a quarter million in student loan debt, I made every mistake you can think of along the way, which caused my debt to grow far more than it would've been otherwise. I paid it all off by creating a plan, increasing my income, and setting clear goals about the financial future I wanted.
This book contains everything you need to pick a strategy, get motivated, and crush your student loans. In the following chapters, I'll walk you through your options and help you create a framework for paying them off.
This book is divided into three (3) main parts.
In part one, I look at common misconceptions around student loan forgiveness and explain why it's a better idea to pay them off as soon as possible. I'll also discuss motivation and help you get started if you've had trouble facing your loans.
The second section focuses on taking an inventory of your debt fighting tools, as well as what adjustments to make to help you pay off your loans as quickly as possible. There's also a discussion on the various income based repayment options and I include recommendations around when it might be a good idea to use them and when you should avoid them.
The final sections are geared towards helping you to create a student loan attack plan. I'll discuss strategies like refinancing, loan consolidation, and I'll offer other tips and tricks for eliminating your debt.
Should I Pay Off My Student Loans?
Over the years, I've heard people refer to loans as "good debt" or as an "investment in the future." If you're reading this, I'm sure you're sick of hearing pithy platitudes about student debt.
Don't let anyone convince you that your loan balance represents good debt or a good investment. Debt is debt, and we shouldn't tolerate any trivializing when it comes to the impact it can have on your life.
Think about this. If in 2009 you had put $150,000 into the S&P 500 instead of into your education, you'd have $450,000 by now. Student loans on the other hand, would have gained you negative dollars during that time. If you elected an income based repayment plan, it's possible your loans have gained six figures in additional interest. This is the opposite of an investment. Your student loan "investment" made you half a million dollars worse off than an actual investment would have.
This book isn't meant to focus on all the negatives surrounding student loans. Rather, I want to motivate you to tackle your debt instead of avoiding it. Think about what you've already given up due to student loans. Have you missed out on fun with friends, vacations, buying a house, or delayed starting a family? Have you suffered emotionally and laid awake at night wondering how you'll ever pay off your loans?
If your answer to those two questions is yes, then now is the time to get angry with your student loans and start thinking about what you can do to turn your situation around.
But what about political candidate 'x' forgiving them?
Let's talk about broad student loan forgiveness. Many candidates have promised this over the years, but so far, nothing has materialized. If you're holding out hope for this, you're setting yourself up for disappointment. Think about all that would need to happen for this to wipe out your student loan balance.
1. The right political candidate needs to be elected president.
2. The right party needs to have control of Congress.
3. The forgiveness legislation would need to apply to the exact makeup of your student debt.
4. If a portion of your loans are private, the law would need to extend to those too. If not, only a portion of your student loans would be covered.
5. If you have a high income, you better cross your fingers that the law won't exclude certain people based on income.
Consider Elizabeth Warren's recent forgiveness proposal. If you were sitting back with $200,000 in debt eagerly waiting for forgiveness legislation, you might be disappointed to learn that the maximum forgiveness was $50,000. Also, you wouldn't even be eligible for the full $50,000 if you were in a certain income bracket.
It's a bad idea to sit back and wait on the government to bail you out. Odds are high that no one is coming to your rescue and you're going to have to bail yourself out if you don't want Sallie Mae following you around for the next 25 years.
What about Public Service Loan Forgiveness?
This actually isn't a bad option if you actually like the job you're doing and you're paid a reasonable salary. When you agree to Public Service Loan Forgiveness, you are choosing to limit what you'll be able to do, how much money you'll be able to make, and where you'll be able to live for the next 10 years.
After law school, I hunted like hell for a federal job. At the time, it was the only way I could think of getting rid of my student loans. I remember looking at jobs in faraway places that I had no interest in living and the jobs weren't even things I wanted to do. I was just so desperate to find a way to get out of debt, I was looking at management analyst positions out in Montana. I'm lucky they didn't hire me.
Don't get me wrong. There are exciting, fulfilling positions that qualify for Public Service Loan Forgiveness (PSLF). Just make sure you're not picking something out of desperation or because you feel like you have no other option. Before going all in on PSLF, think about the following.
Are you prepared to restrict what you can do and where you can work for the next 10 years? If you're working a job that you truly love and don't ever see yourself going anywhere else, then make sure you're 100% on top of your loans and payments and this can be a great deal.
PSLF Warning #1
So far, very few people have had loans forgiven through this program – something like 99% of people applying for PLSF have been denied. Be very diligent and file every piece of paperwork needed to make sure you qualify for this plan. You don't want to miss anything at all during your repayment period, you lose out on the opportunity.
PLSF Warning #2
I'm not trying to scare anyone, but it's worth pointing out that there's no guarantee the forgiveness legislation won't be repealed. While you would probably be grandfathered in under the old legislation, there is still a risk when you're relying on Congress and the political climate 20 years from now.
What about income based repayment forgiveness?
Depending on your repayment plan, it's going to take 20 or 25 years of consecutive payments to qualify for this type of forgiveness. These plans tend to be horrible repayment strategies for the following reasons.
These plans almost always end up in negative amortization. That’s because these plans often require paying less than the monthly interest. As a result, your loan balance can grow to 3x your original loan amount. If you have a starting debt of $200,000 and you let it negatively amortize for 25 years, you could be looking at over half a million in outstanding debt by that time (depending on your interest rate).
There are many borrowers who just say, "Screw it. I'll pay the minimum amount for the next two decades and wait for forgiveness." In theory this sounds pretty good, particularly if your monthly income based payments are low, but there's one very important detail that many students don't consider. The amount forgiven will be treated as income. In the situation above, this pretty much guarantees you'll have a tax bill of roughly $200,000.
Think about how frustrating that would be. All those years of payments and your loans are finally forgiven, but now you owe the IRS a giant tax bill equivalent to your original loan amount!
What about investing to offset student loan interest?
During law school, my friends and I would often joke that we should've just gone to Vegas and put our loan balance on black. There are many borrowers who make a similar gamble and try to offset their student loan interest by trading stocks. While this may sound like a "safer gamble" than the roulette example, you're still taking a pretty big risk based on the theory that the market will always perform as it has in recent history.
I say recent market history, because it's only been about 100 years since the market has been such a reliable means of wealth generation. It's a gamble to assume this will always continue. It's also a gamble when you consider the market has good years and bad ones, and you can't really time the market if you're hoping to generate a payoff fund.
Let's consider the following example. If your student loans are at 6% interest, and you think you can average 9% in the market, you're risking a lot for a 3% gain. Particularly when you consider the fact that this 3% will be taxed as capital gains, so you're really not even earning 3%.
It's hard to sit on the sidelines when every Robinhood trader appears to be getting crazy rich in this bull market. Just remind yourself that many of them are taking a major gamble and most will end up losing out because they never developed discipline around how they manage their money.
I made this mistake too. First trading biotech stocks hoping for a homerun. Spoiler – I got totally wiped out. A few years later, I made the same mistake with Bitcoin. I'd invested in Bitcoin early and during the big bull market rally of 2017, I had enough money to pay off my student loans. Instead, I let greed get the best of me and I ended up taking almost no profits until the market collapsed. This sort of reckless money management is a guaranteed way to feel even more lousy than you already do about your finances.
There is one exception where you might be able to offset your student loan interest in a responsible way.
If you're responsible enough to religiously park money into an FDIC insured payoff account with high interest (like a money market fund or no-penalty CD), and this account has a higher yield than your student loan interest rate, I think this is an acceptable decision. This sort of interest rate arbitrage is very difficult to do now with rates so low, but when rates were higher it was possible to do this with a 5-year adjustable rate and high yield savings accounts like Marcus, Capital One 360, and Wealthfront.
Even if you're able to score this sort of rare arrangement, remember that your money is parked in a fund where it's making minimal returns compared to what you'd be making if you paid off the loans and started investing in the market.
Reminder: Student loans cannot be discharged.
Student loans are unique among all other loans, because they cannot be discharged in bankruptcy. It's pretty ridiculous when you think about it. Think about someone you know who is horrible with money. They can buy a McMansion in the suburbs, finance a boat, lease a new Mercedes, and max out a few credit cards. When they're no longer able to cover these expenses, they can just file for bankruptcy and have their obligations wiped clean. Their credit score will take a hit for a few years, but they'll be totally free from debt.
Now, let's compare that to student loan debt. Say you're the first person in your family to go to college, you made excellent grades in high school, and now you have the opportunity to go to a prestigious 4-year school. You've always heard that "education is a great investment" and your family is cheering you on towards university. You qualify for some financial aid and work part-time, but you still have to borrow $50,000 per year to cover tuition, books and living expenses. You graduate with $200,000 in student loan debt after interest and fees are factored in. You get a great job right out of school earning $60,000 per year, but your loan payments are $2,000/mo. You can select one of the income based repayment plans to stay current, but you'll only pay $500 per month which won't even cover the monthly interest.
Your loan balance will continue to grow and become harder to pay down over time. Even though you cannot afford to pay the interest and the loan continues to grow, there is no way to discharge this debt by filing for bankruptcy.
I've talked to so many borrowers who sum up their feelings with that one word – hopeless. It's common to feel hopeless when you're staring down an inconceivably large debt figure, but DO NOT let this feeling turn into apathy. Sure, it's more comfortable to stick your head in the sand, ignore your loan balance, and just trudge along making minimum monthly payments. This will have disastrous repercussions on your financial life. Your student loans do not care how you feel. They will just keep growing and within a few years, you'll wake up to find you're $50,000 further in the hole.
This was me. For years, I stuck my head in the sand. Any time I logged on to my loan servicer's website, I would literally put my hand over my loan balance. I didn’t want to face it. I knew my balance was growing, but I told myself there was nothing else I could do to pay it down. I signed up for income based repayment, made every single payment, and recertified every year. Within a few years of graduating, my loans had grown by $70,000.
Don’t make this mistake. You will end up paying for it, just like I did. I could have saved myself tens of thousands of dollars if I’d faced my debt instead of avoiding it.
Exercise: This is your future on student loans
I’d like to take you through a short exercise that was extremely helpful to me in reframing the impact student loans would have on my life. The following questions and points for reflection should help you think about your future and what role student loans will play. As you reflect on each question, try to paint a vivid picture for each scenario. The more realistic the better.
I want you to fast-forward five years into the future. You took massive action and completely eliminated your student debt. Picture yourself logging on to your loan servicer’s website, entering that last payment, and seeing your balance go to $0. You’ll have thousands of dollars more per month to save, invest, or spend as you see fit. It’ll be easier to grow your family, qualify for a mortgage, and take regular vacations. If you’ve been working a job you’re not interested in, you’ll have the financial freedom to change careers. Take a few minutes and think about that future and what you’ll do with no student loans.
Now, let’s consider the alternative. Picture yourself a decade from now. You’re 10 years older and grab your iPhone 20 as you tiredly stumble out of bed. There’s a notification that your student loan payment is due. You log in to your loan servicer, you see the balance: $401,581. This is your 120th consecutive monthly payment, yet your balance is twice what you originally borrowed. There’s still 15 years left before the loans are eligible for forgiveness, and you'll be facing a giant tax bill on any amount forgiven. Take some time to think about what the next 5, 10, and 25 years will be like if you put your head in the sand and just wait around hoping for forgiveness. How will this impact your ability to start a family, buy a house, go on vacations, or save for retirement?
This exercise can be painful, but I hope it gets you motivated to take massive action. It's not worth trading your future for ignorant bliss now. Decide that you will do whatever it takes to eliminate your loans as quickly as possible.
I'm going to give you some ideas for creating a debt attack plan, but before we do that, I want you to think about your attitude towards student loans. First, it’s critical that you stop complaining about the student loan system and seeing yourself as a victim of it. I’ve wasted hundreds of hours ranting about how unfair the student loan system was, and if you’re reading this book, I bet you have your fair share of complaints too. There's certainly a need for better discourse around student loan reform, but I want you to avoid this until you’re making progress towards eliminating your debt. If you spend too much time dwelling on areas you’re unable to change, you’re going to feel more powerless to change things within your control (like paying down your debt).
I also recommend filling your mind with positive thinking in what you read, listen to, and watch. I’m not saying that positive thinking will make your debt magically disappear. You’re about to tackle a seemingly insurmountable pile of debt, and you’re going to want a steady source of motivation to keep you moving forward.
If you spend a lot of time in the car, listen to the Dave Ramsey podcast. If you're sitting at your desk working, put on a Tony Robbins YouTube playlist in the background. It doesn't matter who or what you listen to, so long as it resonates and helps you feel inspired. You'll start to feel energized and excited to pay down your loans. I also recommend subscribing to personal finance newsletters and getting active in online communities like r/personalfinance (reddit) if you want to share your journey.
Setting regular progress goals will also keep you motivated. I cover goal setting in more depth in the final section of this book. So, for now, just recognize that having a plan with reasonable milestones will make the process manageable.
Goal Setting: The Right Mindset to Pay off your Loan
Goal setting is vital if you want to tackle six figures of student loan debt. Without a clearly defined goal, you’re just hoping that somehow you’ll get out of debt at some uncertain point in the future. By setting a proper goal, you’ll be better able to track your progress, more accountable in sticking to your goal, and less likely to procrastinate when starting out.
“Most people overestimate what they can accomplish in a year and underestimate what they can achieve in a decade.”
Goals Should be Specific:
Your goal should be specific. For something like a student loan, you’ll want to be highly specific about the pay off date. Example: “Pay off all student loan debt before January 1, 2026.”
Goals Should be Ambitious:
It’s good to be ambitious when it comes to goal setting. There's a certain amount of tension that drives every action you make. When it comes to setting your goals, be sure there’s enough pressure so you feel compelled to take consistent action towards the goal each day. Make sure the goal is actually achievable though. Add supporting goals (described below) if you think your goal is feasible, but there are some big things that need to happen to get you there.
Milestones & Supporting Goals:
If you’ve got a mountain of debt, and your pay off date is several years in the future, I recommend setting some milestones in between. For instance, let’s say you owed $240,000 and are targeting a full payoff by January 1, 2026 like the example above. You might benefit from setting a milestone goal of, “Get loans balance below $200,000 before January 1, 2022.”
I also recommend setting other smaller financial goals that will help you reach your primary goal of paying off your student loans. Example: “Increase my income by $500 per month in the next 90 days.”
Being broke and shouldering a quarter million in debt created enormous pressure for me. I never felt comfortable. If I wasn't working, learning, and building, I was moving backwards. This isn't a hyperbole. My loans were negatively amortizing by $1600 per month. Once I started setting goals, I felt less like a victim to the debt and more in control with an ability to turn my situation around. As I worked harder and increased my income, I updated my goals with a new faster pay off date.
Set Stretch Goals:
When circumstances change, update your goals accordingly. If you have 5 years left to pay off the remaining debt under your original goal and you could conceivably do it within 2 years, you should go ahead and change the goal to 2 years out. Don’t let yourself get too comfortable.
My Experience with Stretch Goals:
In the fall of 2018, I did something that felt absurd at the time. I set a goal of paying off my remaining $150k in student loans before the new decade. For the previous two years, I'd set some arbitrary goals that were 5-6 years out and I just threw whatever I could at my loans, but I lacked focus. My new goal was virtually insane, and it would take 15 months of paying over $10,000 per month.
I developed a laser focus around this goal and was hell-bent on knocking out my remaining student loans before 2020. There were months when it was extremely painful to transfer giant sums of income to pay off that debt. I listened to Dave Ramsey and other personal finance podcasts any time I was driving, to stay focused on my goal. This is why I recommend you listen to personal finance podcasts, subscribe to student loan newsletters, and read personal finance books when you have time. By continually filling your mind with this material, you’ll stay focused on your goal and discover ways to achieve it faster.
When my side business income exceeded my salaried income in June of 2019, I was tempted to leave my day job, but I knew there was no way to hit my goal without two sources of income. As my business continued to grow and represent a larger share of my net worth, I felt more and more pressure to give it as much attention as I could muster...nights, weekends, holidays, and any other spare time I had. As we were doing a big software rewrite last summer, I used all of my vacation days to push the release across the finish line.
It was all worth it when I zeroed out my student loans in August of 2019 – exactly 10 years after taking out that first law school loan and 4 months before my December 31st deadline. After years of feeling trapped and helpless, it's hard to describe the relief of suddenly being free from such a mountain of debt.
So What Are Your Options?
Your options are pretty simple. You can either get serious and create a plan to pay your loans down as soon as possible, or you can sign up for an income based repayment plan and hope your loans are forgiven in 10, 20, or 25 years from now. I wouldn’t suggest the latter.
Public Service Loan Forgiveness
If you’re in a job that qualifies for Public Service Loan Forgiveness (PSLF) your loan balance is forgiven once you've made 120 payments (10 years). BUT, it's critical that you do your research and make sure you qualify.
In 2019, only 1% of applicants qualified for PSLF.
This is the only forgiveness option I recommend, and even then, it may not make financial sense. It totally depends on your occupation and debt burden.
Good news, you aren't on the hook for taxes on the portion of your loans forgiven. Other forgiveness plans will have a tax bomb waiting for you in 20 years, which makes those plans much less desirable. Hence, it is imperative that you do your research.
Qualify based on your employer:
- Local Government, State Government, or Federal Government
- Non Profits. Make sure it's a valid 501(c)(3) Eligibility based on your employer, not what kind of job you do.
- Faith Leaders (as of August 2020)
Here's what you need to do to ensure you qualify:
Go to the Federal Student Aid site and use the Public Service Loan Forgiveness help tool . This tool will walk you through a series of steps to help you figure out if you qualify and it will point you to the official forms you need to certify qualifying employment and apply for forgiveness.
Make sure you fill out this form. It will ensure that you're able to track your progress on the forgiveness track and will make it easier to apply for forgiveness after 10 years have lapsed.
Once you've submitted the Employment Certification Form, they will review your employment history and your existing loans to let you know if you qualify.
Income Driven Repayment Plans
For many, they sign up for an income based plan, set up auto debit payments, and forget about it. They're shocked to log in a year later to see the outstanding balance has grown by $10,000.
If you're in financial distress and unable to make payments any other way, then an income based plans will be your best option. They're certainly better than defaulting or putting loans into forbearance.
Whatever you do, don't get comfortable with the low monthly payment under these plans. If you do this, one day you're going to wake up, check your loans, and realize the balance has grown by $100,000 or more. The majority of loans will require the full 25-year plan before they qualify for forgiveness. Think about that. A quarter century of loans hanging over your head.
There are loan specialists out there who will point out that this can be a great deal once you consider inflation, salary, stock market returns, and a bunch of other factors. While that might be possible on paper, there are some huge risks and you're signing up for decades of emotional toil if you decide to go this route.
To benefit from these, you need to be okay making roughly the same you're making now with minor 2% - 3% salary bumps for the rest of your life. If you start your own business, get a big promotion and salary bump, or receive any kind of big income boost, you may be much worse off opting for one of these plans.
Also, you'll have to recertify eligibility every single year for these plans. IF you don't, you automatically get reverted back to the standard 10 year repayment term and will be in for a shocking monthly payment amount if you're not prepared.
If you owe six figures in student loan debt, make it your goal to get out of these plans as quickly as possible. They will do more harm than good and probably send your loan into negative amortization.
Warning: A Tax Bomb will be Waiting For You
When qualifying for income based repayment plans, you'll be taxed on the forgiveness amount which will result in a massive tax bill. Think about it. If your loans have been growing every year for 25 years, it's possible that your balance could grow to $500,000 or more. An additional half million in income will push you into the highest tax bracket and you'll owe the IRS at least $200,000 if your balance has grown to $500k or more.
I could write an entire book comparing each of these and going over all the different scenarios where one might be better than the other, but the key takeaway is this: DO NOT SHACKLE YOURSELF WITH THESE PLANS FOR THE NEXT TWO DECADES.
Your ability to qualify for these plans and the required number of qualifying payments will vary based on when you took out your loan. There are a few of these, and some are better than others.
- Pay As You Earn Repayment Plan (PAYE) Revised
- Pay As You Earn Repayment Plan (REPAYE)
- Income Based Repayment Plan (IBR) Income
- Contingent Repayment Plan (ICR)
It may seem tempting now, but these will be a massive drag on your career earnings. The risks are simply too high when it comes to negative amortization and the tax obligations when these are forgiven.
Keep in mind that this is sort of a hopeless position to be in. If your income ever increases substantially, your payments will increase and an even larger amount of your total earnings will be devoted to servicing your loans.
Assume you start off with $200,000 in student loan debt. Your monthly interest is $1500, but you're only required to pay $500 a month based on the terms of PAYE. That results in $1,000 per month of additional interest or $12,000 per year being left unpaid.
If you were to continue with this for the entire 20-year repayment period, you're looking at a final balance of $200,000 + ($12,000 * 20 years) = $440,000.
After 20 years, you've paid $120,000, but since you didn't cover the interest, the outstanding balance has ballooned to $440,000.
While this may be forgiven under the terms of PAYE, you're still on the hook for income taxes on that $440,000, so you'll owe the IRS a lump sum of at least $150,000.
A Final Word on Income Based Repayment Plans
Income based repayment plans aren't inherently evil. They're helpful when you're trying to find your financial footing and avoid default or forbearance. There's nothing wrong with starting repayment after graduation under one of the plans available. Just remember, if there's any conceivable way for you to start chipping away at your loan's principal, start doing so as soon as you can.
Total and Permanent Disability Discharge
You can also get your loans completely discharged if you are ‘totally disabled.’ This is very rare and you're going to need certification from a doctor. Your prognosis must be extremely dire for you to qualify.
There's not much to this except to know that student loans are discharged on death. Without getting too depressing, there are some situations where it might make financial sense to just use one of the income based repayments strategies and plan to die with outstanding student loans. If you went to school late in life and are saddled with a giant debt, it probably doesn't make sense to plunder your retirement funds to pay it down.
Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it. -Einstein
If you're unable to pay all the interest that accrues in a given period, that unpaid interest will be added to your principal. This interest will capitalize and you'll be charged interest on your interest.
If you accrue $1,000 in interest during the first month of your loan and only pay $500 toward your loan balance, your principal will increase from $100,000 to $100,500. After that, the daily interest will be even higher. Meaning, the interest will be on $105,000 not the original $100,000.
Think of student loan debt as the opposite of investing in Retirement. Instead of receiving 7% in compounding returns, your returns are -7%. Paying debt is the opposite of an investment.
Congress sets interest rates for federal student loans and rates aren't as competitive as those offered by private lenders, because they're decided years ahead of time. This is why refinancing can be such a critical step in making your loans more manageable.
Compound interest cost me well over six figures in just a few years.
I thought I was doing everything right. I'd found a good job earning $60,000 per year, but I still couldn't afford the $2,200 monthly payments under the 10 year standard repayment plan, so I filed for one of the income based plans. They adjusted my required payment to about $500 per month which was still a lot of money, but I felt okay about it because I was paying what the government told me to.
Fast forward a few years to 2016. I'd never missed a payment since signing up for the income based repayment plan and over the course of three (3) years, I'd paid roughly $20,000 towards my student loans. I logged into my loan servicer, Navient, and my balance had grown to $244,957.48. I'd never missed a payment and done everything I was advised to do, yet my loans had grown by nearly $50,000.
I broke into a cold sweat and tried to get a grip on the math. "Surely this is a mistake," I thought. I knew I wasn't making progress on my loans, but I had no idea they were negatively amortizing and so quickly. I'd had my head in the sand for the last few years and was just hoping the amount I was paying was offsetting the interest accrued.
For the next few hours, I poured over every statement available. The numbers checked out.
I looked at the daily interest. It was more than $50 per day.
Think about that. Every single day, these loans grew by $50. That's over $1500 per month. Several hundred dollars more than rent. Let me put it this way. If I didn't pay at least $1500 the next month, the daily interest would continue to grow and it would be even more difficult to get out from under my loans.
If I hadn't gotten serious about my student loans in 2016, I would've paid another $20,000+ over the last few years and my loans would have continued growing to nearly $300,000. By that time, I'd be paying $61 a day in interest.
Think of it like you're digging your way out of a giant mountain of debt. If you've got a small shovel, it's going to take forever. To speed up your progress, go find a bigger shovel.
Many make two big mistakes when figuring out how quickly they can pay down their student loan debt.
Mistake #1 - Failure to Consider Income Tax
Many estimate how much they can payoff each year based on their pre-tax income. Here's a simple example to illustrate.
You make $50,000 per year and suddenly get an amazing job offer to double your salary to $100,000. In this scenario, many would be tempted to say, "Oh, I'll just maintain my standard of living and use the additional $50,000 in income to wipe out my debt." The reality is - the increase will only add about $30k once you factor in taxes.
Here's why: At $50,000, your take home pay is about $38,000. At $100,000, you'll be in a higher tax bracket and can expect to take home about $68,000. So the take home pay is only $30k higher after the big raise.
Takeaway: As you're trying to find your target income needed to hit your payoff goals, be realistic and factor in taxes and what you'll actually take home.
Mistake #2 - Forgetting About Interest
Do not forget about interest when creating your student loan attack plan. The error goes like this: "I have $100,000 in student loan debt. If I can pay it down by $20,000 a year for the next five years, I'll be debt free."
When you're buried under a mountain of debt, you tend to lie to yourself and view things through the glossiest lens possible. I did this, and it ended up costing me thousands in additional student loan interest.
This was one of the biggest mistakes I made and what caused my loans to grow from $160k to $250 in a few years when my federal interest rate was 8%.
Student loan interest compounds daily. If you have federally backed student loans, your interest rates are probably higher than those for mortgages and even auto loans. I highly recommend googling, "student loan payoff calculator" and entering your loan balance and interest rate to get a feel for how interest can impact your payoff speed.
Any Federal Grad Plus loan over the last few years carries an interest rate of around 7.5%, so if you took out $100k, you're going to need to pay an extra $5,000 per year to cover the interest.
A Fast and Reliable Way to Increase Your Income
Think delivery for Dominoes or driving for Uber. These will have you earning a second source of income in a matter of days. Unfortunately most part-time jobs you can get right away are going to be low paying, so they may not supplement your income enough to put much of a dent in your loans.
If you're fortunate enough to be in a field where you can pick up extra gigs using your specialized skillset, you're going to have an easier time boosting your income. Examples include software developers, nurses, pharmacists, and even MDs who can pick up extra shifts at urgent care facilities.
A Slow and Unreliable Way to Increase Your Income
If you had a dollar for every time someone suggested you start a side-hustle, you'd be totally debt free by now. Sure, you can open an eBay store or try your hand a drop-shipping watches, but these efforts are unlikely to produce meaningful income and risk wasting your time and what little liquid cash you may have.
We tend to only hear about the side-hustle superstar who created an Etsy store and had blowout success or that guy from accounting who started a gourmet beef jerky empire out of his garage.
The problem with these stories is they're unlikely to be lucrative unless you hit the jackpot. Unless you've got a great idea for a side business that you would enjoy and that you can start quickly and affordably, your time is probably better spent driving Uber.
A Business is better than a Side Hustle
I want to draw a distinction between a side hustle which tends to be a casual, temporary way to make extra cash, and a bonafide business venture, which is a formal plan for delivering value and making money over the long term.
Develop a New Skill
Learning a new skill can be a reliable way to increase your income, but it may take some time. I'd recommend researching profitable skills you can learn and deploy on nights and weekends. For example, you can take online courses in SEO, Google Ad Words, graphic design, photography, or programming. For less than $30/mo, you can access a library of resources on sites like Udemy and Lynda.com. If you don't want to spend money, there are tons of free learning resources on YouTube.
With a few extra hours a day, you can get out of debt sooner and open up more doors for you career. The key is to invest time you'd otherwise waste learning and working to improve yourself. If you do this for a decade, it's highly likely that you'll be debt free and commanding an income much higher than what yours is currently.
Two Debt Fighting Levers
There are two primary tools you have for fighting debt. You can cut down your budget or you can increase your income. Budgeting is important, but I want you to think about how each sacrifice contributes to your overall financial goal. I don't think it's entirely necessary to give up every single pleasure while tightening your budget. It's more important to think about all of the optional expenses you make in a given month and think about how much pleasure you gain from that.
With budgeting, it's important to cut out big expenses that aren't completely necessary. This will certainly speed up your payoff timeline and help you get out of debt faster, BUT too many people become budgetary zealots and obsess over every little $5 transaction. This is counterproductive and your time would be better spent figuring out how to boost your income than spending hours carving out another $100 in savings from your budget.
If you've got substantial student loans, you're wasting your energy if you're obsessing over every little purchase decision. Forgoing certain small expenses aren't really going to move the needle much when it comes to tackling six figures in student loan debt. Go ahead and have the occasional Starbucks coffee or meal out.
Think about purchases in terms of the impact they have on your life.
If you're going out drinking with friends every weekend or splurging on beer and wine at home, not only is that requiring a lot of your cash, but it's also not producing any positive financial gains. Plus you're not going to do anything productive afterwards and the next day your productivity will take a hit as well.
Is the occasional Starbucks run really that detrimental to your student loan payoff? If you have a large amount of debt, it's probably not going to make a big difference at all. Think about it this way. If you're going a few times per week and on each trip you spend $4 on a coffee, you might save $500 over an entire year by abstaining completely.
But, if you're having an extra coffee because you're coming in to work early or you're using that time at Starbucks to better your career, I say go for it. If you're working out of a Starbucks every Saturday afternoon for a year, I'm willing to bet that you'll be far better off.
Don't get me wrong. Budgeting is absolutely crucial and you need to get your expenses down while paying off debt. This is a mindset and it's important to know where every dollar is going each month before that money hits your bank account. It's just that your income will have a much bigger impact and you can have a little leeway when it comes to monthly expenses.
Find a better career
No one wants to hear this after years of higher education and taking out student loans to finance all that learning.
I wouldn't recommend this if I hadn't done it myself.
After seven (7) years of higher education and six figures of law school debt, I found myself graduating in 2012 to a horrible job market for attorneys. The firm I'd clerked for the previous two years offered me a starting salary that was below $50,000.
I knew I could create more value, but I had no idea where to look. I started thinking about what I enjoyed doing and spent time researching careers in those fields. As I did more research, I came across some interesting federal jobs that would use my undergraduate degree and they'd qualify for public loan forgiveness. This sounded like a great way to get my loans covered, so I started applying for federal jobs. After months of applications and interviews, none of the jobs panned out. In hindsight, I'm lucky I didn't get one, because the harder path I took set me up for even greater long term success.
Eventually I had an idea. What if I created my own job? I already had a business idea. I just needed a designer and a coder. I was broke and couldn't hire a programmer, so I would need to teach myself to code in order to build it.
For the next six months, I used every idle moment to absorb as much as I could. I was driving a shuttle bus to make ends meet and since we couldn't afford home internet, I'd park outside of Starbucks at the end of each shift and use the free Wi-Fi to teach myself to code. I'd hide my laptop under the driver seat of the shuttle and in between pickups, I'd pick up where I left off.
The startup idea didn't pan out, but I'd taught myself enough over a few months to land an internship at a local tech company. During my first few weeks there, I had absolutely no idea what I was doing. I arrived early and worked late every day for the entire internship.
In October 2013, one year after embarking on this journey, my internship turned into a full-time job with a salary and benefits. Within one year, I'd gone from a dull, crowded job market to starting a career in one of the hottest high paying markets out there – software development. I kept working with the same intensity for the next six years and I watched my income grow to dwarf what I would've expected at a law firm.
The experience wasn't easy and was often lonely. For my twenties and early thirties, I worked most nights and weekends. I sacrificed trips with friends, out of town weddings, put a home purchase on hold and delayed having children.
But now that I'm totally free and on the other side, it was totally worth it. I'm not saying a radical career move is for everyone, but I think it's worth considering if you don't love your current job and if you can't think of how your income will be enough to pay down your loans.
For me, I simply could not think of a way to pay down my loans without a major change. I had no savings, access to capital, or family wealth. My only asset was my time, so I had to be careful in how I balanced the decision to retrain myself with working full-time and not falling further behind in debt.
Don't let sunk costs close your mind to other possibilities.
Higher education no longer equips us with the tools that provide direct value to the market, so it's up to you to do the research and figure out if there's a way to deliver higher value. This can turn into a winding path, as it did for me. I went from searching for law jobs, to hunting for federal ones, to trying to start my own business by learning to code, to learning enough code to launch a really great career in IT. In the moment, it was frustrating and I wondered if my efforts would ever pay off, but eventually all of the effort and learning did pay off. What can you learn from this? All your efforts will eventually pay off. You just have to stick with it.
Think about what you're doing now.
Is this the career you want to be in for the next 30 years?
If so, think about how you can generate more income going forward. You'll want to revisit the math surrounding your income and remaining student loan debt. How much money do you need to add to pay your loans off within the next 5 years (or shorter if desired)? Can your current career get you there? Consider your current salary and whether you could increase your income by switching jobs or moving to a different geographic area.
Be sure to think about what that income will be after taxes and also consider the impact of student loan interest.
If you don't love your career, you may be more open to the possibility of changing things up. BUT, if you're in a high paying profession, you should probably buckle down for a few years and use your high income to knock out the debt as fast as possible. The fact that you don't enjoy what you're doing will motivate you to get out of debt faster.
How to find a different career
I realize this will sound like horrible advice if you just spent seven years and six figures on a masters or doctorate, but please, hear me out.
I'm not saying you need to start from scratch. First, I want you to realize that you are far more than the culmination of your degrees and the jobs you've held. You have totally unique life experiences and a point of view that's totally your own. This means you have a totally unique skill set that no one else has. You can put that to use.
Research Market and Job Trends
Think about what you enjoy doing and then do some career research to see if there are any jobs that intersect with what you're passionate about. A simple google search will reveal a number of reports on what jobs will be in the highest demand within the next 5, 10, and 20 years. Sometimes it's better to focus on high paying careers first and then think about which one you could enjoy doing.
Learn what Certain Jobs Pay
There are several online sources that will let you search and compare salaries for various occupations. Some examples are Indeed.com, PayScale, and Glassdoor. You can google these and start searching for positions to compare salaries. In exchange for creating a Glassdoor account, you'll be able to search salaries for certain jobs at both a geographic and a company level. This is particularly valuable if you're staying in the occupation and are hunting for an employer with better compensation.
In the post-COVID world, remote work is going to be more common so if your geographic area pays lower wages, be sure to search for employers in other areas who are open to hiring remote workers. Once you've got a sense of what you could be making, it's time to compare that salary to what you're currently making.
How much extra cash does that put into your pocket after taxes? Is it enough to justify making a move?
When you've found the perfect job, don't immediately jump for it and leave your day job. There's a lot of planning you're going to need to do before you're ready to do that.
Make Asymmetric Bets
It can be helpful to make a few asymmetric bets on your journey to paying off student debts.
I'm referring to areas where you have some degree of control over the outcome. This could be starting a small business, creating a blog, or investing in an area where you have unique, specialized knowledge. I’m not talking about gambling in the stock market or buying lottery tickets.
Asymmetric bets have outsized returns when you look at the potential payoff, the likelihood of them paying off, and the amount that you're putting in. I don't think of asymmetric bets as getting lucky. I think there's a simple formula for financial returns. While there's a certain degree of luck in each bet paying off, by increasing the total number of bets, the likelihood of having one payoff increases.
Talking to Family and Friends
This gets its own chapter because it's such a common part of frustration along your journey. It's going to be much easier if you have allies or people cheering you on. This could be a parent, spouse, or a mentor.
Sharing your situation and goals for paying off your loans can keep you motivated, but just be aware that some people are negative and have nothing better to do than tell you why you'll fail. Ignore these people. While encouragement and affirmation can be helpful, you shouldn’t rely on an external pat on the back to keep moving. You should be motivated on your own to pay off your debt, because your life is going to be so much better when you're free.
Don’t be surprised when people don’t understand what you’re going through. Many won't have the slightest idea what kind of pressure you’re under. Most tend to assume that everyone has student debt to some degree and eventually it just magically gets taken care of.
Sometimes it’s helpful to vent about student debt and how backwards the current higher education system is. Be careful not to complain endlessly about your mountain of student debt. It's hard not to fall into this trap when you're annoyed about missing out on trips and outings with friends. I was guilty of this and probably came across as a whiner on many occasions. Realize that all the negative talk about student loans and complaining does zero to change your situation. If anything, it makes you feel powerless to get out of debt, so don’t fall into the negativity trap.
You should communicate your goals to your spouse and those close to you so they'll be on the same page and understand that you're not in a position to take big trips, buy lavish gifts, or do anything extravagant for the near future.
Spouses and Student Loans
Unlike other married debts, student loans remain separate and only the original borrower is obligated to repay. As a married couple, it may be your debt or your spouse’s. This can be a unifying experience for spouses and will build confidence in your ability to work as a team.
If it's your debt
This was my situation. When I got married, most of our student loan debt was mine. I was embarrassed to be such a drag on our finances, and I didn't want to stress her out so I rarely talked about the debt. This put more pressure on me and felt extremely isolating. Once I got organized and put a plan in place, I shared a spreadsheet with all the details of my plan to pay it off. She took it better than I expected, and my biggest regret was internalizing this and keeping it to myself for so many years.
If it's their debt
Well, it's sort of your debt now that you're married. While technically, you have no obligation to pay it, if your spouse stops making payments you're going to be impacted because of the blow to their credit score and the potential for wage garnishment. You're far better off having a long conversation about the debt and working together to get a plan in place.
Married Filing Strategies for Income Based Plans
The way you file taxes can impact what you're obligated to pay under income based plans. If as a married person you file separately, this can result in lower monthly payments under a plan like PAYE. Before making this decision, you'll probably want to consult your CPA. It may or may not make sense depending on a number of factors like your income, your spouse's income, and your particular repayment plan.
Optimize your loan terms and cash flow
Make payments more than once per month. It can be helpful to just go ahead and make a payment each time you get paid (assuming you're on a standard two week or bimonthly payroll). Since student loan interest accrues daily, this can make a big difference over the life of your loan.
Claim the student loan tax deduction. This can help reduce your end of year taxes, but the deduction is pretty limited. Unlike the mortgage interest deduction where you're able to apply all the interest paid in a given year, the student loan interest deduction is capped at a meager $1,500. It's also only available to you if you earn under $70k (single filer cap).
Pay during grace periods if you're able to. Right now is a great example as the CARES Act has reduced interest to 0% and payments aren't required through the end of the year. There's another 6-month grace period after graduation. Use these times to pay down your debt as fast as possible, because that will mean less interest will accrue in the years to come.
Take extreme cost elimination measures. Moving back in with your parents could save you $10k-$20k per year. If you received a large tax refund last year, consider changing your tax withholding. This will give you more money to put towards your loans sooner, which gives interest less time to accrue. You'll reach a point of diminishing returns where that extra dollar isn't really moving the needle on your student loans, so don't become too obsessive over budget tracking.
In the earlier chapter about compound interest, we discussed how powerful a few percentage points can be over the course of just a few years. I watched my loans add nearly $90,000 in interest from 2012 to 2016, even while I was making required payments under the income based repayment plan.
I was paying $52 every single day in just interest.
That's $1,600 per month.
If I'd been able to put that money into my retirement account for those five (5) years instead of throwing it away to Sallie Mae, I'd have a retirement nest egg of over $2 million waiting on me at age 65 (assuming average stock market returns).
I refinanced three times and the first time was the most difficult. I was rejected multiple times.
I was paying $52/day in interest for my 7.5% average federal loans. It took two years and applications with several lenders before I was finally approved by Ernest in September 2017. That was one of the happiest moments in my battle to fight my student loans because it meant my monthly interest would finally drop to under $1000.
Subsequent refinance attempts were easier as I'd been working hard to increase my income and pay down my debt. I refinanced again in 2018 when my balance was down to about $190,000 and found a rate in the mid 4% range. The last time I refinanced it was with Citizens Bank on a 5-year 2% variable rate. I lucked out because rates dropped in 2019 and again in 2020, and since my student loan interest rate was variable, I ended up with a rate of 0.67%.
Take a look at your most recent loan statement. Notice how much of your payment is going towards what you borrowed vs. how much is going to Sallie Mae via interest. This should motivate you to do whatever you can to decrease that interest.
There are both positives and negatives to refinancing.
You'll want to think about your situation carefully before deciding to refinance your student loans.
Positives to Refinancing
Interest rate, interest rate, interest rate. In most cases, you'll be able to drastically lower your interest rate by refinancing your federal student loans.
You can also remove a spouse or parent from being a co-borrower in certain situations. Note that in some situations it can be helpful to have a co-borrower when refinancing, because you'll have an easier time qualifying and it may give you access to lower rates.
Some lenders offer flexible options that are similar to some of the federal loan perks – like skipping one payment per year or offer negotiable payment in the event of a natural disaster or widespread issue like coronavirus.
Also, check to see what kind of discounts your lender offers. Some lenders will discount your interest rate by a quarter point if you enroll in autopay. I've also seen discounts for opening a bank account or credit card with the lender.
Shop around to see if a lender offers cash back for refinancing. Many will offer $500+ if you refinance with them.
Negatives to Refinancing
The biggest risk is that you'll lose out on some of the government programs you get with federal loans. Things like deferment, forbearance, and income based repayment plans won't be an option. In most cases, those plans do far more harm than good and can put you in a situation where your loans are negatively amortizing. They are growing even while you're making payments.
Private loans aren't eligible for public service loan forgiveness, so if you're a teacher or government worker who is several years into potential forgiveness, you'll want to carefully consider your options before changing anything. I'd recommend talking to a financial advisor or CPA.
If you borrowed loans over the course of several semesters, you probably have 10 or 20 different loans of various amounts. It can be confusing to keep track of these and one common trick is loan consolidation.
When you consolidate your existing loans, your servicer will pay off all existing loans and originate a single new loan.
In addition to the convenience of having all of your loans merged into one large new loan, you might also be able to qualify for an income based repayment plan that you didn't qualify for previously. Remember that we cover income based repayment plans and why they're often dangerous earlier.
My experience consolidating federal loans:
I didn't do enough research around loan consolidation. I'd done some cursory research and learned that I could get my loans forgiven in 20 years with PAYE, so I promptly called Navient and put things in motion. They told me I'd need to consolidate my loans first. No big deal, right?
I assumed it just meant the new loan balance would be the same as adding up all the separate loans. I wasn't changing lenders or seeking better terms.
Well, I didn't realize that by consolidating my loans, all of the interest would be added to the principal and now my monthly interest accrual would be far more than what it was previously.
Why you should think twice before consolidating
Your previous payments under income based repayment plans will be wiped out and the 25-year forgiveness clock starts over at 0!
They will take an average of your existing interest rates and round up to the nearest fraction of a percent. While this may not seem like much, it can add up to thousands of dollars over the lifetime of your loan.
Interest capitalizes and your new balance will be larger than you might expect.
Since this is essentially a new loan, your credit score may dip by a few points since age of accounts is a factor that impacts your score. This is really only an issue if you've been paying the existing loan for years and don't have older accounts on your credit report.
Overall, I don't really recommend consolidation unless you're a recent graduate and haven't accrued much in terms of interest or qualifying payments. If you can qualify for refinancing with a private lender, that will get you a better interest rate and potentially better customer service too.
Get Aggressive with Your Payoff Goal.
Understand your loan terms. It is absolutely critical that you know all the details and terms of your loan. You should know your loan balance, interest rate, repayment period, and whether your loans are private, federal or mixed. It's tempting to hide from your loans and avoid feelings of being overwhelmed when you've got a giant balance hanging over your head, I know this. But once you face the loans head on and commit to understanding them, you'll feel a greater sense of control in your ability to combat them.
Understand your income.
Know how much income is coming in at the beginning of every month, and make sure to set a plan before the money hits your bank account. Your income is the biggest debt fighting tool in your arsenal, so you want to make sure you're using as much as you possibly can to pay down debt.
Is your current income stable or does it fluctuate? Do you have the potential to increase your income through job promotion or salary renegotiation? Are you able to substantially increase your income by working more hours (e.g. sales, nursing, software development, or other freelance roles)? Do you need to change your career trajectory to get your income on the right track?
You can’t accurately assess your income without factoring in taxes. Your tax rate can fluctuate substantially between states, and just remember that the more money you earn, the higher percentage your income will be taxed. Avoid the trap of only thinking about your future earnings as gross income, because it will create an inaccurate picture of payoff speed. Always consider the amount that will be hitting your pockets once all taxes, healthcare, and other paycheck deductions are taken out.
Get a grip on your budget.
Monthly expenses are an extremely important determining factor for paying off your loans. It's surprising how few Americans know their monthly expenses and have any experience budgeting. If this is you, don't feel bad. I've struggled budgeting for years due to time constraints, lack of discipline, or just forgetting. Decide to get a better handle on your budget. There are a number of mobile apps and tools like Mint that you can use to budget effectively. You can simply connect them to your bank account and track expenses by category.
Some guiding questions to ask yourself:
Do you have non-negotiable expenses like alimony or child support?
Do you have expenses that you could cut back on like a car or apartment you could exchange for a cheaper alternative?
What about the area where you live? Is it possible to move somewhere cheaper while making roughly the same income?
You might also find that you're able to earn 5%-10% more due to lower state taxes. Texas and Florida have no income tax, whereas a state like California will hit you with 10% income tax.
Set a reasonable pace. This is a marathon. Not a sprint. You're probably looking at a time frame of 18 months and 5 years.
It's easy to be pumped up and want to talk about loans constantly when you're locked in on your goal of paying them down, but be sure not to get too carried away with daily progress updates and obsessive budget tracking.
Find a way to remind yourself regularly without making it depressing or stressing yourself out too much. Some stress is good, but too much stress can be debilitating and can cause you to give up. The best reminder will be something you can see regularly and something that can be a subtle pressure while also being gratifying when you make some progress.
Scheduling your Final Loan Payment
Once you understand the above, you're going to set a future date as your target loan payoff. Personally, I like to set two goals representing a range of possibilities.
Goal #1 is the slowest acceptable date by which I'd be happy to pay off my goals. This is there as a baseline and it should keep you from feeling discouraged if you have a setback, but you should really have your sights set on Goal #2.
Goal #2 is more of a stretched goal representing the fastest possible payoff date if you work as hard as possible and things tend to go your way. This goal should be ambitious yet achievable. You shouldn't need to rely on some miraculous payout like an inheritance or winning the lottery. It's counterproductive to rely too heavily on things outside of your control when setting your payoff goal.
Anchor Payoff Goal to a Significant Future Event.
Anchoring goals to future real life events will make it more real to you. You'll stay more motivated, and any time you think about that future event, you'll think about your goal and what you need to get there. By visualizing the payoff and adding a meaningful emotional context, you're scheduling your student loan payoff as an inevitability in your mind.
Examples of dates with some kind of significance:
- Before my 30th birthday.
- Before my kid starts elementary school.
- Before the next World Cup.
Saving, Investing, and Other Financial Decisions
Focus on saving a small emergency fund. Everything else should go towards paying down your debt. The size of your emergency fund depends on a few things. You'll want to consider your existing income and how reliable it is. You'll also need to think about your monthly expenses to know what you need to survive without that income.
Is your income steady or does it fluctuate?
If you have a steady salaried job, it's probably okay to limit your emergency fund to just two months of expenses. This also assumes you're in a good industry where you could find a new position in 4-6 weeks. If you're in a dying industry and there's less ease of movement between jobs, you're going to want much more cushion.
If you're in a commission based job or if your income fluctuates seasonally, it's a good idea to have a higher savings account to carry you through potential dry periods. This can be particularly important if you run your own business.
What if you're someone who is a "saver" by nature?
Remind yourself that it doesn't make sense to just stash money away while being crushed by student loan interest. Odds are high that your loans are growing about 100x faster than any gains you get from having funds in a typical savings account.
What about Retirement Contributions?
While many will argue in hindsight that they could've paid their loans off faster by investing in the market, that logic really only works in hindsight. There's no guarantee that you'll get returns in the market this year, BUT IT IS GUARANTEED that your student loans will grow at X percent this year.
It can be financially prudent to consider this if your employer offers generous retirement matching. If matching isn't available to you, I wouldn't even suggest that you think about retirement contributions until you've either stopped the bleeding by refinancing your student loans down the 2% range or have them paid off completely.
Should I Buy a House?
I've heard many try to rationalize buying a home by saying it's smart to buy a house when you have student loans, because you can refinance the house at a later point and cash out some equity to pay down towards your student loan. While this sounds great in theory, it rarely works out that way in practice.
First, you are making a bet on the housing market to increase. Second, home ownership can be more expensive than renting due to taxes, repairs, insurance, etc... If you're counting on having a bunch of home equity due to monthly mortgage payments and appreciation overtime, you shouldn't expect to have enough to cash out for 5-10 years. Third, you're probably going to pay a higher interest rate since you have a high student loan balance. This means it'll take longer to draw any cash out for that student loan pay down.
There's another suggestion that buying a home can be beneficial because you benefit from the mortgage interest deduction. Keep in mind that you're essentially just moving debt from your student loans to your house when you do this. Be aware that while there's a lot of excitement around home ownership, and many of these rationalizations sound good in theory, in practice, it'll take much longer and be far from a "sure thing" to get any sort of payoff.
Is it okay to use forbearance if I suddenly can't pay my loan?
You should avoid putting your loans into forbearance at all costs. When you use forbearance, your accrued interest will get added to your principal and your loans will grow faster due to the compounding effect.
The only situation I'd recommend using forbearance is if you suddenly lose your income and aren't able to make your next loan payment. In this situation, you're only using forbearance to avoid defaulting on a payment.
Instead of using forbearance, try to recertify under one of the income based plans if you've suddenly gone through a drop in income.
What about other big debts like credit cards?
Approach #1 - Debt Snowball
You can follow Dave Ramsey's "Debt Snowball" method which has worked for millions of people. With the snowball method, you pay off debts smallest to largest.
Assume you have a credit card with a $5,000 balance, a car loan with $15,000 outstanding, and your student loan has $100,000 remaining. In this situation you'd direct your extra payoff funds first to the credit card, then to the car, then to the student loans.
This is pretty simple and works to keep you psychologically motivated. It's like working out. It's much easier to keep going to the gym once you start losing weight and looking better. By paying off your debts from the smallest to largest, you're able to build momentum which gives you victories with each small debt you pay off on your way to larger debts.
Approach #2 - Debt Avalanche
Or you can adopt a more math-based approach where you pay debts off according to the highest interest rate first.
If you have a $100,000 student loan balance with 8% interest while your car loan of $15,000 carries an interest rate of 6%, it would be prudent to tackle the student loan with any extra funds because the cost of that loan is higher than the car. If you have a $5,000 credit card balance with 20% interest, you're going to want to make that your priority and pay it off as soon as possible.
Tools and Resources
I'm sharing the calculator I used to compare the various forgiveness options, future net worth, and how to tackle loan repayment. If you're considering any of the income based repayment strategies, you should definitely look at it and consider your approach.
You can find detailed instructions for this tool and a link to the Google Sheet. I'm also sharing the google sheet I used for progress tracking and motivation towards reaching my payoff. Visit my website here, and feel free to go ahead and make a copy of the sheet. Each of the four tabs covers a different payment scenario. Feel free to play around with the numbers to get a sense of how you could best optimize your repayment strategy.
Enter your current salary, and how much you think your salary will increase each year. If you're making big moves and don't expect a constant percent based growth (e.g. if you're a doctor in residency), you can enter a hypothetical salary manually in each cell.