Powered by Blogger.

Student Loan Debt: Getting Rid of It Faster (Financial Friday #2)

how to payoff your student loan debt

My husband, Landon, will be doing a series of guest posts about money and financial things each Friday this month. Since he's a banker, he's got lots of opinions about finances--so I figured that he should share them on the blog! Last week, he discussed student loans, and how to determine if they are right for you.

This week, he's talking more about those student loans, and is tackling the topic of how to speed up your debt repayment.



_________________________________

Hi, Natalie's blog readers. It's Landon again.

This week I'm going to talk about paying off your student loans. Maybe you took out too many (like I discussed in my post last week) or maybe you came out of school with a reasonable payment.

No matter what your monthly payment, it's still debt. And no one really likes that, right? Just think about the things you could be doing if that student loan payment was gone: you could go on vacation. You could start a family. You could go out to eat more. You could buy a house.

So, let's talk about how you can do those things instead of putting your money each month towards student loan debt.

What you do not want to do is ignore the debt. It's there, and it will not go away (current federal mandates say that you can only get out of your student loan debt if you die--harsh).

You want to pay it off as quickly as possible; doing this will mean that you'll waste less money in interest.

As you're getting in the mindset to do a debt snowball, there are three important things to remember:

  1. To make this work, you're going to have to make it a priority. Say goodbye to weekly movie dates; plan on wearing your shoes for another season. All that money needs to go towards your student loans during a debt snowball.
  2. Don't incur any new debt during the snowball. That completely defeats the point. No new car payments, no store credit cards, and no upgrades in the housing department. Your new rule during this payoff period will be, "If I can't buy it cash, I can't buy it."
  3. Reward yourself along the way to maintain a commitment to the debt reduction. Set a goal (like paying off the first $1,000) and then have a nice dinner to celebrate. Even though you're spending some of the extra money that could go towards the debt snowball, you're actually keeping your momentum up. Think of this as the cheat day of your strict diet.
Okay, so you're now in the right mindset to pay off those debts. Congrats! Your life is about to change for the better. 

How do you pick which loan to pay off first? 

There are two schools of thought on this. The first is one that Dave Ramsey of "Financial Peace University" touts. He says that you should pay off the smallest loan that you have. This will give you momentum to keep going with larger loans. 

The next school of thought is the one that Natalie and I use. We focus on the loan which is responsible for the largest monthly payment with respect to the payoff amount.

My student loans are broken into about 22 different loans, each of which has a different interest rate, repayment schedule, and monthly payment. I looked at each of these little loans, and determined which loan would make the biggest difference in my overall loan payment once it was gone. By doing this, I will be able to reduce my total monthly payment by over $200 just this year. 

Confused? You probably are. Here are some examples to help you figure out how I snowball my debt:

student loan payoff

Which one should you pay off to get the most bang for your buck? 

It's Loan #3. By paying off that $2000 (either in one monthly sum, if you have that extra cash lying around, or through accelerated monthly payments if you only have a little money that you can put towards the payment), you will free up $75 dollars a month. You can put this towards another of your loans to further speed up the process. Continue snowballing until the debt is gone.

I hope that helps all of you with student loan debt out there. My philosophy is just to dive in and get rid of it--like pulling off a Band-aid. Yes, you'll have to make adjustments in your life for a few years, but wouldn't you rather tighten your belt for two or three years rather than have your student loans hanging over your head for ten?

P.S. This type of debt reduction can be used for any type of debt, not just student loans.

_________________

Check back next week for Financial Friday #3: Managing your credit.