Student loans are a fact of life for many Americans. Many will go to college despite the high cost (and with the understanding that they will graduate in debt) because a degree is valued, and often required, by employers. You personally may owe anywhere from $5,000 to $150,000 in student loans. And wherever you land on the spectrum, chances are that you are only paying the minimum each month—this needs to change.
A healthy financial life calls for a debt-free lifestyle, so prioritizing paying off student loans should be your new goal. Use the following advice to help you create a plan to pay off your student loans early.
Gathering information is a great place to start any financial journey. Have you looked at your loan statements lately? If you haven’t graduated yet, do you know what your monthly payment will be? Educate yourself. Know your payoff quote, interest rate and loan terms.
This information should do two things: 1) make you angry, and 2) help you set a payoff goal. Your motivation for paying down loans can come from a lot of places, but the best place to start is with your emotions. Whether it’s anger or impatience, you need to find the emotional connection that will motivate you to accomplish your goal.
More pressing short-term goals can often shift long-term goals, like paying off student loans, to the side. But if you have an emotional connection to this goal, you are more likely to press forward.
There are two main reasons you need to pay off your student loan early. First, you will save money on interest. Second, the sooner your loans are paid off, the sooner you free up the cash currently being used for payments.
If you still aren’t convinced you should make a plan to pay off your loans early, let’s get the math involved. If you have a $30,000 student loan at 4 percent interest, and you are making $300 monthly payments, then you can expect to pay $6,448.12 extra in interest over time. If you set a goal to pay off your loan in five years, then you’ll have to increase your monthly payment to $552.00, but you’ll only pay $3,149.71 in interest—saving you extra cash in the long run.
Once you’ve determined that paying off your loans early is the smart plan, then you have to find a way to fund the higher monthly payment. Cutting expenses and making lifestyle adjustments may be the only way you’ll be able to afford the higher monthly payment. If you are just graduating from college, you are in a great place to make good choices.
Start by using your new student loan payment as a basis for your budget. If you bring home $2,000 a month, and your new student loan payment is $552, then you need to budget remaining expenses from the $1,448 that’s left over. This means your rent, vehicle expenses, food, entertainment and medical expenses all have to fit in your new, smaller budget. If you’ve already been living on your own for a while, finding the money will be harder since you are more financially enmeshed.
Cutting expenses is your first course of action, but it may come down to making bigger decisions like renting a cheaper apartment, taking the bus to work, or cutting out travel. It’s important to remember that any sacrifices made are temporary. You can either live off of $300 less each month for the next 10 years or you can live off of $552 less than your income for five years. The choice really is yours, and in order for any debt pay-down plan to work, you have to be totally on board with every aspect of it.
The only good thing about debt is that it requires you to learn discipline. The discipline to live off of less of your income will serve you well your entire life, but you have to push yourself first. Find your motivation, make a plan, cut expenses and you will be well on your way to a student loan-free life.
Peter Dunn, aka Pete the Planner, is an award-winning financial mind who has authored five books, hosts the popular Pete the Planner radio show and travels around the country offering financial education. His signature wit will have you laughing as you learn. For more from Peter, visit www.petetheplanner.com.