Wednesday, October 14, 2015

how to pay off student loans early

i went to a private Christian University, so it cost a pretty penny for college. long story short, i started college right after high school, ended up taking 3 years off, and then went back to school. so, i wasn't able to get all of the scholarships i had right out of high school. 

my first year, i had to put everything on a private student loan. after the first year, i got some scholarships and was eligible for federal loans, but the amount of loans each year was still cringe-worthy. 

i worked part-time at a grocery store during college, but obviously didn't make the big bucks. i did make some money though, and i used it to pay interest while i was in school. once i graduated, i believe i had 15 years to pay back the private loan, and 10 years to pay back the federal loans. 

i graduated in December 2012, so pay back officially started in June 2013. (they graciously give you 6 months until you have to start paying back the loans.) we got married in May 2013, so basically our whole marriage we have been paying on my student loans. 

even though i had a ton of money to pay back (when i graduated the total was $55,000), i did a few things that helped cut down on the ever-growing amount of loans. i took classes over the summer (hello cheaper summer classes!) and graduated a semester early. so instead of having 4 years of loans, i ended up only having 3 1/2 years worth of loans to pay back.

also after living on campus for 2 years and paying for the dorm plus the mandatory meal plan, i moved off campus. a family from my church let me stay in their spare room my last year and a half, and that helped me save around $12,000. so that was less money i had to take out for loans. 

i also turned 24 right before my last semester, so i was able to get a federal grant. when you are 23 and younger, the government uses your parents income to decide if you get financial assistance (even if they don't pay for your schooling). so my first 3 years, i didn't get any assistance. 

however, when i turned 24 and they started looking at my tiny income, i was able to get a certain grant which i believe was specifically for people over the age of 24. (i forget the name of it, but if you're in this situation, ask your financial aid office about it and they will know!)

the grant was even available for summer school that year, so i was able to do 2 summer semesters for free, and then it covered most of my last semester. i still had to take out a small federal loan my last semester, but no private loan! hooray!

being an accounting major, and my father's daughter, the first thing i did when i graduated was create a pay-back plan on my loans. it was during this time that i realized what compounding interest was, and that i hated it! even though the amount i owed was $55,000, with compounding interest i would have a larger principal than that when it compounded, and more to pay back in the long run.

i was determined to pay as little interest as possible, so i created a schedule to pay back all $55,000 in 3 years. if i stuck to this plan, i would save $13,000 in interest! (so even though they give you 10 years to pay it back, if you pay it off early you really save a TON of money!)

in order to pay my loans off early, we have been paying about triple what the minimum payment is. as time has gone by, the minimum payment has gone down, so right now we are paying about 5x what the minimum payment due is. 

what this has looked like, is basically half of my take home pay goes towards loans each year. and we also put a good majority of any extra money we get towards the loans. that means that tax refunds, bonuses, and even some birthday/Christmas money has been put towards student loans these past 2 years.

since i started paying the loans off in June 2013, that means my 3 year plan will be ending in June 2016. (which is only 8 months away... i thought i would never see this day!) we have been steadily paying on these loans and i am so excited to say that we only owe a little over $15,000 now! and i want to share with you some of the things we did to make this possible!

HOW TO PAY OFF STUDENT LOANS EARLY (or any loan, really)

1) pay interest while you're in school.
if you can afford it, pay interest payments while you're in school. if you don't, after graduation when you have to start paying back the loans, all of the interest that built up those 4 years will start compounding. so if you pay the interest as you go, there's less to compound at the end. (what that means is, when it compounds it is added to the principal, and you will have to pay interest on it. so you're basically paying interest on your interest.)

my first semester, the interest payment was about $40 a month, and then it increased each semester when i had to borrow more. luckily after my first year i was able to get more scholarships, so the amount i had to borrow for the rest of the years went down. i really can't remember what the interest payment was my last year, but i want to say it was only around $100-$150 a month.

2) don't just pay the minimum payment. 
that's how they get you - the minimum payment is basically a large chunk of interest and a small amount applied to the principal. if you don't pay over that, the principal hardly gets touched those first few years & the interest keeps building. if you pay over the minimum payment, more of your money will go towards the principal, and it will keep your interest from growing as much.

3) allow yourself to take off a few months. 
give yourself grace and allow for breathing room. let yourself skip paying extra a month here or there. if you really have other expenses that come up or just need to save some extra money, allow yourself to. don't get overwhelmed. 

when i graduated & saw that i had to pay back $55,000 it really freaked me out. but i've learned to just take it a month at a time. it will feel slow when you are paying it back, but if you keep steady & then look back at how much you have paid off you will see how slow & steady wins the race! (seriously if you told me in June 2013 that i would have paid off $40,000 of that debt in 2 years i would not have believed you! but the numbers don't lie now that i'm looking back on it!)

last year when we found out Thomas's job was ending, we took a few months off of our extra payments so we would have that money incase he was out of work for a while. because we did that, we will probably be a few months behind my original plan of having it 100% paid by June 2016. but just remember that you are still paying it off early even if it's a few months behind what you planned.

4) at the same time, don't skip too many months of extra payments. 
don't continue justifying why you can't pay extra. once Thomas got a new job, we started back the extra payments right away. it would've been easy to say we need to save more or find excuses to spend it on other things. but sticking to the plan as much as you can will pay off in the long run. literally. :)

5) use tax returns & bonuses on debt. 
you don't have to spend all of it on debt, but spend at least 50% on debt. it's fun to have extra money to treat yourself - but the sooner you pay off the debt, the more money you will have in the future. the longer the debt sits, the more interest builds. so take those bonuses and put a portion towards your debt. 

then once you are out of debt, you will be used to not blowing all of that bonus money at once and you can be more responsible with your money! and when you're paying hundreds (or thousands) of your bonus on debt, remember that the faster you pay it off, the less interest you will pay. and the faster you pay it off, the more bonuses you can enjoy 100% of later!

what are some of your tricks to paying off loans?

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