Uncover effective strategies to tackle your student debt through the SAVE student loan repayment plan. Learn about loan qualifications, repayment calculation, and financial tactics to regain control of your debt.Continue reading
In this dialogue, I’m going to describe some of the things I’m doing in my financial world. Like many of you my family falls into the demographic of married couple, age range thirties through forties, and we have two beautiful little girls. We absolutely don’t have buckets of cash to invest, but we do have a lot of moving parts and life transitions that make planning paramount. It’s important for me share with you some of my values and opinions so you can better understand some of the decisions I’ve made along the way. It’s also important to be aware that I’m not the only decision maker; my wife has her inputs, and our environment has a say, too. Some key things that are important to me are; continuing my education and building platforms to share that knowledge and those experiences, providing experiences for my girls as they grow up and an education for them in the future, spending time together and traveling with my family, I started a new business and I’d like to see it thrive as a lifestyle practice, and lastly, I do not like debt and want to be free of it (but I understand it’s a tool to be leveraged).
DEBT AND CASHFLOW
When I came out of college, I had significant (like six figures worth) student loans to repay. My private loans had interest rates that were as competitive as you could possibly get them, like barely over prime. My federal loans, I managed to get knocked down to 6% by working with a Fleet and Family Support Counselor through the Navy. This was possible through the Servicemembers Relief Act. Furthermore, I took advantage of a military deferment option on all of my loans, and this was I think, my first mistake. So, I’ll get to what my strategy is today later on, but here is what I think I should have done back then: Since I was newly married and a geo-bachelor (meaning I was stationed somewhere my wife wasn’t), I had very little strain on my budget. But I got sticker shock and didn’t know anything, so I kicked the can down the road. I should have figured out what I needed, how much I wanted to do for entertainment, and dropped every other cent into those loans… They’d be gone years ago.
For us, the math worked out that it made sense for us to refinance my federal loans around the same time we refinanced the house we were living in. The interest rates were super low, we could reduce the term on our mortgage (and still pay less per month!), and it would be easier for me to pay a single monthly amount by combining the several payments; so that’s what we did, I paid off two of my four federal loans from cash flow and lumped the two higher balanced ones into my mortgage. So, I went from 5 monthly payments with interest rates all over the place to one, not including other obligations like my car or private loans. Our mortgage went from 30-year to 15-year. A nice little icing is that interest paid is still deductible in April.
Three years ago, this summer, we moved to our current house. We love the town, the neighborhood, the schools, the property (obviously), and this is to be our forever home, so we bought it. If you think you’re going to move in less than ten years, don’t buy. Do the math before you even start shopping for houses to determine what you can afford without being house-poor, to see the difference of cost-of-ownership versus renting, will it fit your family over the years, etc. In my opinion, it’s a waste of money that you could be allocating to something you value more than the appearance of success through homeownership, if you just rent. Even when you first start having kids, if you don’t think you’re going to be there long enough to recover your investment and build equity, why not just wait? So now we have two mortgages…
and a car loan… and the remainder of my private loans, plus sprinkle a little credit card debt in there. The way I’m attacking these and all my other family expenses, is through a bucket system. I have my static monthly bucket which consists of all my debt and fixed monthly obligations. I have my weekly bucket, this is my “control” cash, used for all those variable monthly expenses like groceries, beers, zoo trips, and movies. The last bucket is my Goals cash. In here, I’ve got retirement savings, the girls’ college, vacation money, etc. The way I filled these buckets is I assigned accounts to them (multiple when it comes to the goals bucket) and I estimated my annual income from all sources, subtracted my fixed obligations from that number, and put it and a little extra into the monthly bucket. The remainder, I used my budget to determine roughly my weekly needs and what I could spend less on (by cutting it, or coupons, discounts, self-control, whatever); that amount goes in bucket number two, and the last bit goes in my goals bucket. This part right here, is where my values come into play because I’m taking a little extra and putting it into my first bucket and I’m not a big fan of trimming the fat on my second bucket, I’d rather just try to earn more. If this were a Ven Diagram, though, my first bucket and third would over lap and you’ll see why in a minute. Inside my monthly cash, I’m using an Avalanche to pay down my debt. This means that I pay the minimum on everything, except the highest interest-bearing obligation I’m paying that little extra I dropped in. This overlaps the third because debt freedom is one of my goals, too. Skipping to that third bucket, I have monthly payments going to 529 accounts for my girls’ educations, a little bit going to cash value life insurance policies (for a hundred reasons!), and believe it or not, I recently stopped contributing to my retirement. Oh man, that’s taboo, I know! But I did that thoughtfully. I need that little bit of cash flow to help launch my new business and stabilize my cash flow until I’m paying myself a regular salary. So, it’s ok to pause retirement savings when you’re young to pursue opportunities or protect yourself for accumulating more debt. I give you that permission, so long as you don’t let it fall off your radar for the future. I review my personal and business budgets and cashflow about monthly to see how well I did and to adjust for any changes in goals or circumstances. What’s also important to note that what Erin (my wife) and I are doing, is that we aren’t living like paupers. Anyone that knows how often we go to Disney, knows that, and we make room for other trips together, too. We do take advantage of discounts where we can. We don’t buy things that we don’t find value in. In fact, I unsubscribe from newsletters and emails regularly because I want everything I see, I just don’t need them or value them. Ironically, I sign up anytime I am shopping for membership (not credit cards or store cards) in order to get whatever deals the retailer may have. We both have a history of driving our cars into the ground; I had my last one for ten years and so did she! So, we only spend on things that are valuable and important to our family like food and Disney trips. In planning, you have two choices when a goal has a shortcoming or not enough funding; save more by spending less, or just earn more. A lot of advisor, don’t discuss this viable option. When we moved, we didn’t sell the other house. I really, really wanted to because I do not want to be a landlord, I do not want the carrying costs of another house, and in the current market my return on investment is more than I can get mathematically selling than renting and depreciation. But I’m coming around to renting it because it will free up cashflow for our other family goals and ease some of the pressures today.
MY PLANS FOR THE FUTURE
I said before that I stopped my retirement contributions. Well, that is only temporary. Every dollar I contribute today towards debt will be reallocated to long-term savings in the future. The majority will be to retirement, the next bunch to the girls’ futures, and the last to some nice vacations with family. My retirement considerations are not as simple as deferring income to get the company match or just putting money back into my Roth while I qualify. The decision I’m going to make will consider funding a SEP or a Solo 401(k) plan, and under the circumstances what will be the most bang for my buck there. Small business owners and contractors stay tuned for that blog because I’ll go through the pros and cons of all of our choices.
I am also working on cultivating additional sources of income and “side-hustles”. One example, is by leveraging my Post-911 GI Bill to obtain my master’s degree. I’m getting additional education which I value personally and professional, plus, my tuition gets paid and I get a small monthly stipend. That monthly stipend helps me offset our family costs while I transition and launch the new practice (thus allowing my savings to stretch further, less risk). As that comes to fruition this Fall, I will work on teaching a couple classes at a local university. Again, not only will this bring in additional income, but helps me fulfill my goal of sharing knowledge with others. It might even help with my girls’ cost of education in the future, too. What I would suggest to you, is that you can’t do what I am doing anymore than I can copy your life, but the approach I think is the same. Identifying the things we value, knowing our numbers, and being systematic towards pursuing the lives we want are things everyone can do at home.
According to the Federal Reserve Bank of New York, the fourth quarter of 2018 showed that outstanding student loan debt made it all the way up to $1.46 trillion! It’s no wonder then that many people my age, and older by the way, are still shouldering the weight of their educations. The impact of that is profound in that it is a serious source of anxiety for many, it pushes off other goals like children or property for many, and generally keeps a lot of great, hopeful, young professionals from engaging in financial planning because they want to clean that mess up first.
Well, that’s a lot easier said than done for most. Families and friends of mine, and yours truly too, are entering these awesome jobs with thousands of dollars looming over them and their incomes. Many are in positions to make great money, but if you asked them years after graduation, that debt will still be there. So, what are our options? How do we break free? How do I approach this systematically?
WHERE DO I LIKE TO START?
Where every good cash problem and solution starts, in my mind, is on our cash flow/budget and balance sheet. These don’t have to be crazy thorough, some of my spreadsheets get obscene when my inner nerd/engineer comes out. If you have no idea where your money is coming from and going to, we can find a time to talk about that. The point is, I like to know where I stand before I make any sort of changes and I need to know how much room I have to work with and develop strategies from. I also need to ensure that other needs aren’t going to sideline my goal of shedding these loans or other debts. The next two things you should compile are an inventory of your federal loans and your private loans. These will come from statements received or downloaded, or you can get your federal loans from the National Student Loan Data System (NSLDS), and you private loans from your credit report. You can actually pull your credit report up to three times per year for free without impacting your credit, once through each of the big three. The easy way to get there is AnnualCreditReport.com. Now, I take into account other things I have going on like if you have a 401(k) at work and what I might be contributing to that. Do I have any emergency savings on the balance sheet we just
made? So that part is crucial, it’s really hard to make any debt moves if one little bump will put you in more debt (there was an article I read that makes tons of sense that said “the first step in eliminating debt is to stop accumulating more of it”, poof, mind blown). Also, where do your values come into play? Is it more important to you to balance saving long-term with paying off debts today equally, or does your need to be history YESTERDAY; everybody has their own combination in this regard. So, my plug for those just starting out is to shoot for the balance. I like contributing enough to get the match (AKA “free” money) if available, it behooves you to have some emergency dollars starting to accumulate, and then, what’s an affordable monthly payment we can put to the student loans. The consideration for you here is to make it small enough to fit in your income but large enough so that less interest accrues. Then no matter what strategy we employ going forward, increase this savings number by a percent or two every year.
You’ll be hard pressed to even notice the difference you’re paying, but it will compound and pay serious dividends. A nice thing you’ll notice as we progress is the impact this will have on your credit score and your balance sheet.
OPTIONS AND TIPS BEFORE STRATEGIES
- If you’re absolutely not ready to pay try reaching out to your lenders and asking for deferment (like if you’re going back to school, it’s pretty easy to defer payments), forbearance will allow you to push off payments, too, but interest will likely accrue. If you’re military this is an option to defer payments while you’re in.
- If you’re military, take advantage of the Service Members Relief Act for any debt you accrued before service to reduce the interest rate to below 6%!
- Be super wary and skeptical of relief agencies. I don’t care what they promise you.
- Discuss with a professional the potential for forgiveness, i.e. public service or education.
- Take into account tax considerations of repaying student loans versus other debt you may have and the impact of your filing status if you happen to be married.
- Depending on your interest rates, balances, and current credit history, you may consider consolidating federal loans or refinancing into private loans.
- Work with a professional to determine if you qualify for any particular repayment options (PAYE, REPAYE, IBR, etc.)
- Can we refinance any of your private loans, too?
REPYAMENT OF DEBT
So obviously as just covered, there are a ton of things that will impact the amount and style of your repayment. But assuming we’ve combed through all of those options above and zeroed in on our minimum payment amounts, our interest rates, and remaining principals, we go back to our earlier decision on how much can I reasonably put towards my student loans per month.
Initially, you’ll start with paying the minimum amount on all loans not deferred, in forbearance, or forgiven (obviously on that one) within the confines of any plan you got into like the income-based repayment plan. From there, I like to use one of three techniques that I apply to all debt: the avalanche; the snow ball; and the hybrid. The way each of these works is that you will pay the minimum established payment on all liabilities and allocate additional budgeted dollars to one obligation at a time. In the avalanche, we are accelerating repayment and reducing interest
paid by paying off balances with the highest interest first. It’s a little slower, with less instant gratification, but you’ll end up paying less over time. The snow ball, is more ground-up in nature.
You’ll pay the smallest balance off first then work your way up. It’s awesome for people that need little victories to keep them engaged. The hybrid is a mix of the two. It’s nice because you’ll capture a couple small victories by knocking out a few small balances right out the gate, but then transition into the avalanche. Whichever direction you choose, your monthly outlay never changes; each time a balance is paid off, you reallocate that monthly payment to the next
debt in line.
$100/month going to loan #1 $100
$100/month going to loan #2 $100
$150/month going to loan #3 Gets paid.
Your new payment next month looks like this:
$100/month going to loan #1 $100
$250/month going to loan #2 Still paying $350 but more efficiently cutting debt.
From here, I like to grow each year by increasing my savings a little bit so that it becomes automatic and my balance sheet grows while my debt shrinks, without it hurting really at all. Any windfalls or additional income I have, I can allocate across the board according to my values automatically: I make a policy to myself that if I get, say $1000 more than expected; $500 will go to whichever debt I’m accelerating, $250 might go to my retirement savings or emergency fund,
and that last $250, could easily go towards a night out with my wife and daughters or into our “Disney Bucket.”
Whatever you choose, you have to make sure it works for you. Because like a diet, if you bite of too much too soon and it sucks, you’re not going to stick with it.