How to Create a Student Loan Debt Payoff Plan

Do you have student loan debt? I do, too.

We’re not alone. Many others join our ranks of “The Education Indebted.” 44.2 million Americans to be exact.

This may inspire you to make rude gestures with your hands or send nasty letters to the board members of your student loan servicer.

That’s natural.

I’d argue, however, that it’s a little too easy to get caught up in lamenting the frustrations surrounding student loans. What’s a good deal more difficult is using that energy to figure out what we can do about the debt itself.

So yes, though I could write 100,000,000 words on questionable nature of offering such high debt to people of such a young age, and expound on my near certainty that some of the practices used today will be illegal in 30 years, I’ll save the breath and focus on the action instead.

After all, wouldn’t the sweetest revenge be to pay off your debt with minimum interest paid to the lender?

I think so.

Below you’ll find a fairly meaty guide to paying off your student loan debt. It’s as comprehensive as I could muster in one blog post, though repayment plans can always benefit from more ideas. Please feel free to make it a living document by leaving suggested additions in the comment section below.

Let’s begin.

If You’re Taking Out Loans

Yes, that’s right. We’re starting at the very beginning. This is important. Your student loan repayment plan shouldn’t start when you begin repayment. It should start as soon as you even begin entertaining the idea of taking out student loans. Though I’m living proof that this doesn’t always happen (I took out my loans without a second thought), I want to underline the importance of taking your debt seriously from the get-go. It will be tied to you following graduation and can’t be declared in bankruptcy. It’s sticky.

A couple of things you can do if you’re thinking about taking out loans:

Take Out the Minimal Amount of Loans Possible.

You do not need to take out the max amount of loans that are offered to you. I repeat, You do not need to max out the loans you take out just because they are offered to you.
This is arguably harder said than done. Taking out fewer loans (or no loans, ideally) may mean that you need to get extra funds in another form, whether that be from your savings, scholarships, or parental assistance.

Yet consider this – the efforts to write an essay for a scholarship or time spent researching alternative funding can save you thousands of dollars. Further, if anyone pushes you to take out more student loans, push back just as hard. You must be ready to set your financial boundaries.
Instead of going with the flow, first calculate the minimum amount you might need to attend school. Borrow that — and only that — and leave the rest (with all its gnarly future interest payments) on the table.

Ask More Questions than you want to.

Chances are, the first time you take out substantial debt will be when you take out student loans. That means you’re a beginner! There’s absolutely no shame in asking questions when you don’t understand. And be certain, there will be plenty that you won’t understand.

Ask questions about debt to the people who know more about it than you. What is interest? What is a federal student loan? What is a subsidized vs. unsubsidized loan? Do not take all answers as truth, but use their answers to learn the vocabulary. Familiarize yourself with the basics and don’t move on until you have a grasp on these. Knowledge is what will empower your repayment in the future.

Compare Personal Loans:

If You’re Pre-Repayment

Now then, let’s take a look at some of the things you can do in the time between when you take out your loans and when you begin paying them. We’ll call it the “Pre-Repayment” stage.
Don’t be fooled into thinking this stage is a holding zone. There’s plenty you can do at this stage that will benefit you in the future.

Begin Making Interest Payments in College.

You can begin repayment for most loans while you’re in school. This might be contradictory to the point of a student loan, but remember this — whatever you can pay down while still in school will be money you do not have to pay later down the road.

Further, the lower you can keep your principal balance, the lower your interest payments will be. This is crucial to remember. Paying more sooner—and yes, when in college — will work to your benefit.

Seize Any and All opportunities to Reduce Interest Rates.

There will most likely be opportunities to lower your interest rates during the application process. Every single one of these opportunities is worth the effort (assuming, of course, that it’s a legal and financially sound company offering it).

For example: You can reduce your Federal interest rate by a fraction of a percent if you opt for online statements rather than paper statements. Take it! A fraction of a percent may not sound like much, but it can save you hundreds or even thousands of dollars down the road. Small reductions can add up.

Don’t Spend Your Loan Money on Pizza.

I feel like a jerk for writing this bullet point, but not enough so to leave it off the list. Using loans for frivolous purchases will only bite you in the butt. Student loan money is essentially money that needs to be paid back with a premium. Would you like to borrow $100 from a friend, only to be required to pay them back $200 in a year? Using your loan money to fund trips or unnecessary purchases is like doubling the cost. Don’t do it.

If You’re at the Beginning of Your Repayment

The stage right after you finish your schooling and enter into the big shiny new world can be an odd and confusing one. On the one hand, your brain is riper than ever. On the other hand, you may need to begin paying dues for that juicy knowledge.

It’s a bit like jumping into a cold pool. It’s not exactly pleasant, you’ll get a shock up front, but in time your body will acclimate to the change.

Here are some things to consider:

Determine How Much you can Pay Above the Minimum Payments.

Minimum payments are the scum of the earth. I say this with a smile on my face and a truth in my heart. These payments are often what keep people in debt for longer than they should be, and have become a white whale for me and others who see past the nonsense.
Why do I loathe them so? Because making minimum payments doesn’t do squat for your debt. The minimum payment amount suggested by your lender is usually just enough to satisfy the monthly interest accrued.

If you only pay the interest on a loan and never even touch the principal, you’ll be in debt for how long? Forever is the answer. This is why I say minimum payments are the scum of the earth and this is why it is absolutely essential to figure out how much you can afford to pay above the minimum payments. Paying above the minimum will hack away at your principal balance, eventually reducing your interest payments and eventually getting you out of debt.

Do not Mistake Forbearance as a Freebie.

I did something silly after college. I ignored my student loan debt. It was intentional, too. I was confused by my repayments and didn’t feel like I had enough money to pay them anyway. So I opted to take advantage of the “forbearance” option. Forbearance basically means putting a pause on your required loan payments.

To the unassuming, it sounds like a great idea and a bit of a vacation from reality. And it can be under the right circumstances (for example, if you have a rock solid job lined up, but you won’t be starting for six months). Most of the time, however, it results in the borrower accruing more debt.

You see, your debt still collects interest when you’re in forbearance. What’s worse, if you decide to choose forbearance right at the beginning of your repayment (as I did), the interest will accrue on the highest principal amount you’ll likely carry for your student loan debt. I’ve said it before, but just to be crystal clear, the higher your principal, the higher your interest payment will be. All this to say, be careful about putting payments on pause unless there is a good reason for it. Breaks from repayment don’t equate with freedom from debt.

See if You Qualify for a Special Repayment Program.

There are a few programs that can help you with your payments, depending on your career trajectory. The most commonly used programs were designed to help teachers and those who work in public service. Be aware that they require you to meet specific requirements and follow a special repayment plan. You can read more about these options here.

If You’re in the Middle of Your Repayment

Student loan debt repayment can span for decades. It can feel like a weight around your neck and a hindrance to your financial security. Trust me, I know. You will get through it, though. I promise. What’s been most helpful to me (and many others in our position) is to systemize repayments so that they become second nature. These payments are painful, sure. But you must tackle with consistency for the greatest effect.

Get into the habit of paying on time, checking in with your debt every six months or so, and putting on your marathon face.

Here are some things to help you for the long haul:

Never Stop Visualizing the Progress of Your Repayment.

There’s not much that’s intuitively inspiring about a student loan payment. Student loan bills, in fact, consist largely of things that are totally uninspiring. Things like a general overview of your interest payments, but no way to quickly see how much you’ve paid.
Graphics give you a more compelling payoff narrative:

SEE DOC FOR IMAGE!!!!!!

The above graph was created using the free online tool unbury.me. It’s a simple, but useful way to keep track of your progress and your projections. When you can see how far you’ve come (and how far you have to go) it can be incredibly inspiring to your repayment.

Increase Your Monthly Payments When Your Salary Increases.

It’s nice to get a raise, but it’s even nicer to use it to free yourself from student loan debt. The same concept of “paying extra” when you can includes contributing windfalls or tax returns to your repayment.

Note: this tip depends on your overall financial plan. If you’re gearing up to get rid of student loan debt, then it makes sense to increase your payments when you can. If you’re opting for a slower repayment track because you want to contribute more of your savings to retirement, then you may organize your payments differently.

That said, if you can contribute comfortably to your payments then you should.

Consider Consolidating Your Debts (if appropriate).

Consolidating your student loan debt is a rather new option, yet one that’s pretty intriguing. It can be a helpful way to reduce your interest rates and simplify your payments if at least two conditions are met. 1) You meet the requirements (which can be stringent) and 2) you work with a reputable consolidation company.

If you can match both of the above requirements, then, by all means, explore the opportunities. As mentioned earlier, lower interest rates will benefit you in the long run. Be sure to read the fine print before proceeding. You want to be absolutely sure you can make payments according to their system, so you don’t face penalties down the line.

Do Not Make Payments Based on the Lender’s Schedule.

Several tricks can trip up your repayment, due dates being one of them. I strongly urge you to make your payments regularly (automate them if possible) regardless of what the statement due date says.

Here’s why.

My student loan servicer, Nelnet, has the sneaky habit of advancing a due date when I pay over the minimum amount due. The thinking there is that if I pay extra, then I must mean I’d like to use the surplus to pay for future minimum payments. They assume you’ve “paid ahead” when in reality, you’re simply paying more for the payment cycle. Now, why is that tricky? Because interest still accrues, regardless of a due date.

Ignore the silliness of that system and build a repeatable payment pattern for yourself. In most cases, that will be to create a monthly (or better, bi-monthly) payment that will automatically go towards your student loan, regardless of whether you’re ahead or not.

If You’re Nearing the End of Your Repayment

Determine Your Payoff Celebration.

It feels a bit odd to pay off your debt. You expect balloons to fall from the air and strangers to break out into song and dance, but you usually don’t get more than one last summary from your student loan servicer. Full payment of student loan debt is something to celebrate (and celebrate well!).

Thinking about what you’ll do when you finally make the last payment is motivating and also gives you a well-earned pat on the back. The celebration can be as small as a nice dinner, permission to buy the fancy Greek yogurt you always want to, or as large as a weekend trip. Just, of course, organize something that is within your means. There’s absolutely no reason to celebrate paying off debt by going into more debt elsewhere.

Figure out how You’ll Reallocate Your Monthly Payments.

The most exciting thing about paying off student loan debt is that all the money you were previously shoveling into repayment is now yours again. That’s not to say this money should be squandered. You can use this (along with the great financial habits you developed along the way) to fortify your future finances.

For example, my payments were hovering around $500 per month. When I finally pay off my debt, that monthly $500 will sit pretty in my Roth IRA retirement account. What you do with your new surplus of money can dictate the future of your finances. Determine what your goals are (for example, do you want to buy a house? Do you want to travel?) and plan how you’ll use the extra money to get closer to achieving them.

If You’re Struggling to Make Payments

Pull Off the Band-Aid.

I can tell you with absolute certainty that inaction is not an effective repayment strategy. It feels all consuming and scary to not make payments. You are not the first to feel this way, and you certainly won’t be the last. Don’t feel the need to suffer alone. There are resources just for you.

Commiserate.

The wonderful thing about personal finance (if you don’t already know) is that it has an incredible online community. Whatever hardship or worry you’re facing, be sure to know that you’re not the first to have faced it. There are blogs and forums that can help you feel understood and heard. I do feel it’s worth mentioning that not everything you read online is fact, so please do your due diligence before making any decisions based on online advice.

Ask Questions.

I brought up the need to ask questions at the beginning of the post. It’s sound advice for most stages of repayment, but it’s most certainly important when you feel as if you’re struggling. I’ll say once again, there is no shame in asking questions and seeking knowledge that you don’t have.

In fact, the term “financial literacy” is proof in the pudding; Literacy means “competence or knowledge in a specified area.” You cannot achieve this competence without careful studying and learning. Those who are financially literate are not smarter than you or wiser than you. They’ve simply had more exposure (most likely by asking questions!). You have it in you. I know you do.

Tools

unbury.us
Student Loan Hero
Federal Student Aid site

Go Forth and Conquer!

As of publication date, I’ve managed to pay down nearly 25K of my 27K student loan debt. My goal is to reach zero debt by January 1st, 2017. I’m not saying it was easy or pleasant. The repayment has been with its fair share of frustration and pain.

But it happened. And in case you were wondering, yes it feels brilliant to almost be on the other side of student loan debt!

Now that I’m so close I think I can finally say with confidence that you can do it. I’m not guessing, I’m telling you from my own experience. Now, go forth and kick your student loan’s butt.