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.