College is expensive. It probably won’t surprise you to learn that the average graduate leaves school with more than $39,000 in student loan debt.
Paying off that much debt can be difficult for anyone. Most borrowers take more than 10 years to pay off their student loans. Even Barack Obama did not paid off his student loans until he was 43 years old.
This lengthy time in debt is a problem; the longer it takes borrowers to pay off their debt, the longer it will be before borrowers can start building the financial foundation needed for important steps in life.
If you want to put an end to you student debt ASAP, here’s a five-step plan that will help to do just that.
1. Promise yourself
I know you are reading this because you are excited and determined to get out of debt and that is awesome. But believe me, when a bunch of your friends are planning a trip to Vegas next month or packing up the car to go skiing for the weekend, that excitement and determination might begin to wear down.
You can pay off your debt fast. To do so, you and everyone in your household will have to commit to the process. Some borrowers are able to pay off their loans without making any big changes to their lifestyle, but most people find they need to make some changes if they want a significantly different and positive outcome.
That’s why the first step is to promise yourself that paying off your student debt is a priority and setting a timeframe you are committed to sticking to. Unless you are going all in with your plan, it is going to be tough to keep going when things get a little uncomfortable.
Are you willing to take the oath? Great. Let’s go to the next step.
2. Refinance your Loans
The next thing you need to do is cut the interest you are currently paying on the debt you have. That way, a larger portion of your payments will go to paying down the principal, rather than just constantly fending off interest charges while leaving the principal untouched.
If you have good credit, you can qualify for a lower interest rate and refinance your student loans. When you refinance, you work with a private lender to take out a new loan for some or all of your current student loans. The new loan will have completely different repayment terms than your old one, including interest rate, minimum monthly payment, and length of repayment.
Although you can refinance both federal and private loans, there are some downsides to refinancing federal loans. You’ll lose out on certain protections and benefits, such as access to income-driven repayment plans. However, if you’re focused on getting out of debt as quickly as possible, refinancing can be an important step towards achieving your goal.
If you decide that refinancing makes sense for you, compare different offers from multiple refinancing lenders to get the lowest rate.
3. Get Aggressive on the Most Expensive
Now that you have refinanced to cut down the interest on your loans, it is time to get smart about where your payments are going. The idea is to pay as much as you can towards paying down the principal rather than wasting it on interest payments that only go straight to your creditors’ pockets.
You already started to do this in the step above by refinancing to the lowest rate available to you. Now, we are going to take this strategy to the next level by using a waterfall method to pay off your loans.
With this approach, you tackle the debt with the highest interest rates first. Begin by listing all of your loans and their interest rates. Continue making the minimum payments on all of them, but put any extra money you can towards the loan with the highest interest rate. For example, let’s say you have the following loans:
· $15,000 federal student loan at 5.25% interest
· $7,000 private student loan at 8% interest
At 8% interest, the private student loan is the most expensive form of debt you have, so it makes sense to try to pay that one off more aggressively. Paying it off ahead of schedule will help you save more money in the
4. Do the Math
At this point, you have not made higher payments, so there has been no cost to you. You have simply rearranged your debts and payments to optimize your spending, while also organizing your finances in a major way.
These are all big wins and you have accomplished a great deal. Still, taking these steps probably has not been enough to shave eight or more years off of your debt schedule.
To make that sort of impact, you will need to gather a little more information. First calculate how much money you’ll need in order to pay off your debt in three years.
Let’s keep things simple and assume you owe $40,000 and your blended average interest rate is 6%. If you pay $444 a month, you’ll be done in 10 years. But you can do better than that.
Doing the math is the easy part, while coming up with the extra cash can be much harder. That’s where the next step comes in.
5. Earn the Money
You can earn money for debt repayment by either spending less, earning more, or doing a bit of each. This step is harder than the preceding four, but not impossible.
Go through your bank and credit card statements for the last three months. Circle each item you can live without for the next three years. If it’s an ongoing expense that you really don’t need, cancel it right away. If you see a pattern of spending, like dining out or expensive vacations, make immediate adjustments.
If you have already cut back as much as you can, think about ways to earn more money. One of the best ways is to add in a side hustle to make extra cash on your own schedule. Working just a few hours a week can bring in hundreds each month, which you can apply to your debt repayment. That extra income can help you pay off your loans years ahead of schedule and save money on interest charges.
The most important thing is to stay focused. Celebrate your progress even if you can’t get this done in three years. You’ll be amazed at how good it feels to see those debt balances melt away. Once you have a taste of success, it will be easier to find more ways to apply more money towards your debts.