How to Pay Off $25,000+ in Student Loans in 5 Years!
Let’s talk about everyone’s favorite topic; student loans. I know they aren’t the most exciting topic. In fact, they are extremely boring but learning to understand them may be the most important thing you can do for your finances. Student loans are approaching a tipping point with a total national debt quickly headed towards $1,500,000,000. There’s a lot of 0’s there so if you lost count, it means trillions. $1.5 trillion dollars, or an average of $34,000 per person! Total debt has doubled in the last 10 years and more and more people have quit making payments. Recipe for disaster right?
Student loans can be terrifying and to be honest, I think that they are positioned perfectly to prey on young naive people. Just like mortgages were in the early 2000s and may still be now, they know how to get to their target market. People who use student loans aren’t dumb by any means, they just get sucked into a great sales pitch and before they know it, they’ve signed the paperwork. I remember these papers vividly, I even thought one was a scholarship, not a loan. Luckily I didn’t sign and was fortunate enough to graduate with no student debt.
The reality is most people need student loans to afford higher education and there is no way around it. The price of college has been growing exponentially (which is a whole different issue) and there is just no other way to pay for schooling. Since the beginning of this article, you may think I’m 100% against any form of student loans but that’s not true.
What I am against is people not educating themselves on the topic and being taken for suckers. Making payments on debt sucks, trust me I do it every month. But I understand that debt is an investment to better my life. Unfortunately, I don’t think most people think this way. Ask yourself why you’re taking out these loans. Are you attending college to make your parents happy? Or are you just following your friends and looking for the next party? If you’re not using these to better your future self, don’t do it. Sure seems fun at the time, but I promise you’ll regret it when you’re paying down these loans in your 40s.
Since I don’t have any experience with student loans I interviewed a friend who does. Much like my article on Before You Buy Your First Home Read This! I want to give you the best, most accurate information possible and this one is packed with gems.
Andrea is the success story that I wish everyone would strive for. In May of 2012, Andrea graduated with her undergrad from Wichita State Universtiy. Two and half years later she had her masters from Friends Universtiy, a private school. How much did Andrea have to take out in loans?
Well, just over $25,000!!
Before we dive into her loans and how she repaid them in just under 4 years, I want to give you some background. Andrea is from St. Francis, Kansas, a town of just over 1,000 people. If you asked most Kansans if they knew where St. Francis is, they’d have no clue. It’s that small. Andrea’s father passed unexpectedly when she was young, leaving her mom to raise her by herself. She did this all off of a teachers income, a commendable feat in itself.
No one was going to pay for Andrea’s education except herself. The only two options were scholarships and student loans. I did some back-of-my-napkin calculations and came to the conclusion that she did fairly well when it came to scholarships. Student loans though covered the rest.
Her Loans and Plan
Breaking down every one of Andrea’s loans would make for a long dry article. Instead, we’ll talk about undergrad vs. grad school. For most of you, undergrad will be what you are most familiar with.
Andrea had three different loans totaling about $10,000. These loans were subsidized which means that the government pays the interest that accrues while you are a student. They also do this during the grace period, which is usually 6 months after graduating. All of her loans had a fixed rate somewhere between 3.4% – 6.8%.
As soon as Andrea finished her undergrad she started paying down the loans. Her plan was simple and has worked again and again. All she did was access the online portal for Fedloan and schedule a bi-weekly withdrawal of $250. She scheduled the payments for a date right after she would receive her paycheck so she knew the money would be in her account. She then budgeted the rest of her money accordingly. It’s simple right? This process, which became 100% automated, paid down her undergrad in just over 2 years.
Grad school was slightly more tricky. Again she had three fixed-rate loans that averaged between 3.4% – 6.8%. The total was $12,500 and these were not subsidized so the interest started adding up immediately. Since Andrea was still working full time, she just followed the same process as before but didn’t wait until graduation to start paying. Again she slowly chipped away and added another rule to help. Each time she’d get a raise at work she would increase her payment amount. What a great idea!
By December 2017, a little over 5 years after finishing her undergrad, she had paid off all $25,314 worth of loans. She is proof that making a plan and being aggressive literally pays off.
Andrea’s Best Advice
I could transcribe a piece of what Andrea had to say into my own words but it wouldn’t do it justice. So, here is exactly what she said. Read it, then read it over again.
“I would also advise to only take what you absolutely need for student loans for SCHOOL only. DO NOT use your student loans to pay your rent, to buy an iPad (because you ‘need it’), buy a car, etc. Student loans are not meant for you to live your life, they are meant to better yourself through education. If you can not pay your rent without student loans, then let’s talk about finding a job or looking at other ways to save.
I say this as someone who was raised by a single mom with a teacher income and as someone who regularly worked 3-4 jobs in college while also being highly involved around campus. The financial decisions you make in college will impact you the rest of your life. Let’s be honest, no one wants to be that guy still ‘proudly’ paying off student loans at 50.”
Ok, let’s break that down. Reading that puts a huge smile on my face. It’s so important, so simple, yet most people don’t do it. They receive the money and all of a sudden it’s like they won the lottery. I know so many people personally that will go on a spending spree as soon as the check hits their account. STOP THIS! Just because you don’t have to pay interest now doesn’t mean it’s free money.
This all goes back to spending within your means. Student loans aren’t an addition to your monthly income. Getting a second or third job, as Andrea mentions, is.
The second great piece of advice Andrea gives revolves around repayment. Like I mentioned above Andrea did her undergrad in 3 years instead of 4, saving her a couple thousand dollars. This was a smart move on her part but her views on what a loan is and how to repay them are even smarter. Here is what she had to say:
“Be smart on your repayment. Be aggressive, do not pay the minimum amount if you can pay more. I get it, the first job out of college isn’t amazing for salary (I was making around $30,000), but be diligent. I scraped by for a few years to now live a financially healthy life where I do not have student loan debt.
Investing in your education is the smartest investment you can make – but, be smart about it. Are you taking out $10,000 a year in loans but you don’t really know what you want to do with your major and you skip class often? Then you’re making a poor investment. Are you going to a four-year university because your parents want you to but you’d rather be in trade school or a tech school? Then taking out loans is a poor investment. Invest in yourself and be smart about your future.”
What She Wished She Knew
You’ll never know everything you want to know about loans before you’re knee deep in them. It’s a harsh reality, but that doesn’t mean you shouldn’t prepare yourself as much as you can. Andrea emphasizes how important it is to use the resources that a university gives you, in particular, the office of financial aid.
These people have seen every scenario imaginable and probably know the answer to your question off the top of their head. If they don’t know the answer, they know exactly where to go to find it, saving you a ton of headaches.
Whether you go online or go into your financial aid office, you need to take initiative and educate yourself. There are not many people out there that actively care about your financial choices. While people may want the best for you, they aren’t going to act for you. This goes for everything in the world.
Wrapping it Up
Student loans are a valuable tool for people that want to make a long-term investment in themselves. If you can take a step back and view it as an investment, then you will succeed. On the contrary, if you view it as free money you’ll be paying on them for the majority of your life.
Yes, there are ways to get your minimum payment lowered. But all this does for you is prolong the inevitable payments while the interest is adding up. If you choose this route, you’ll be in debt for a majority of your life, the numbers don’t lie. Sometimes you can find loan forgiveness programs. Usually, this means you have to sacrifice in another aspect of your life, like choosing to work and live in a less than ideal area. Why do that? Sit down, make a plan, and pay them off.
The last thing I want to do is commend Andrea on paying off her loans. I knew she had taken out loans (that’s why I interviewed her) but I had no idea the amount or other details. She used hers to invest in herself, advance her career, and put her into a great situation today.