How I Paid off Six Figures of Student Loans in Five Years

It’s no secret that many people graduate from college and graduate schools in deep debt.  Tuition can run $30,000 or more per year, and many students take out extra loans to cover books, rent, and personal expenses during school. After graduation, they may take on more debt to cover living expenses while looking for a job. It is not uncommon to owe tens or even hundreds of thousands dollars of debt by the time you graduate, especially if you earned a graduate degree.

There are many ways to think about paying off your loans. How quickly you are able to do it depends in large part on your salary, but even if you’re not making bank, you can create a plan to pay down your loans quickly by setting your priorities and managing expenses.

Paying my loans off earlier than they were due was a priority for me because while I was fortunate to get a great job, I graduated with my law degree during the Great Recession and had no idea how long it would last. I also didn’t want to have to make all my career choices based on money while my loans were hanging over my head.

So here are the five steps I took.

1. I set my priorities.

  • Obviously you want to pay down your student loan debt. But what else do you want to prioritize? Retirement? General savings? A down payment for house? A wedding fund?
  • Here’s what I did:
    • My priority was to get out of debt quickly while creating an emergency fund and saving for retirement.
    • Retirement savings were important to me not only because one day I would actually like to retire but also because funneling money into my 401k earned me some tax savings.
    • An emergency fund was important to me because I essentially had no savings when I graduated and moved to a very expensive city. Also, the economy had tanked, which didn’t exactly make me feel very good about my job security. The thought of getting laid off without any money in savings to tide me over was terrifying.
    • I was also willing to prioritize paying off my loans even if it meant adding years to the timeline to buy a house or make other large expenditures.

2. I figured out my monthly budget.

  • In order to figure out how much you can afford to pay each month on your loans, you need to understand how much money you have coming in every month and how much you have going out.
  • There are lots of different tools you can use from websites like Mint.com, software like You Need a Budget, or old fashioned pen and paper.
  • Once you get a sense for your monthly cash outlay, figure out where you can cut back on expenses or ways to make more money, even if it’s as simple as taking advantage of windfalls like yearly bonuses or credit card reward points.
  • When cutting expenses, think big and small. We’ve all read the articles promising a debt-free life by cutting out your morning latte or your avocado toast and putting that money toward your debt. Over time, that will certainly help you reach your goal. But making a one-time decision to rent a cheaper apartment is also a simple solution with big rewards. You may find that keeping your fixed expenses low will do more for your bottom line than lots of little changes.
  • Here’s what I did:
    • I am not a great line-item budgeter. I would rather focus on big-picture items.
    • So first, I rented an apartment in a cheaper neighborhood with a roommate.
    • Then I gave myself a set amount of spending money per month, across all “categories” (entertainment, restaurants, groceries, clothing, etc.) and I kept that money in a separate amount from the account where my paychecks were deposited.
    • Using a separate account helped with the temptation to overspend. I used the debit card tied to this account for all of my monthly expenses.
    • Another easy way for me to avoid over-spending was to shop online for groceries and household items. It’s so easy to wander into a store for one item and walk out with three! Those little trips add up.
    • A bonus of this plan was that I could take advantage of online shopping programs like Ebates (now Rakuten) to get money back over time. It does not add up to a lot, but every little bit counts when you’re staring down mountains of debt.

3. I set a goal.

  • Once you understand where your money is going and where you can cut expenses, set a goal. This is the amount of money you are planning to pay each month to your loans, beyond the minimum payment.
  • How much can you afford to pay on your loans per month? Be realistic but aggressive.
  • Think about the speed and manner in which you want to pay off your loans. Do you want to focus on your smallest loan first? Or pay them off in order of highest interest to lowest interest in order to save more over time?
  • Here’s what I did:
    • I picked an amount of money that I thought I could actually save each month extra toward my loans. Keeping it realistic helped me stay motivated when I met my goal each month, but it was still a number I had to work to achieve. So if after accounting for my bills and discretionary spending each month I discovered that I easily had $100 left over without even trying, I set a goal of paying $150 extra for a bit of a challenge.
    • I put this extra money toward my oldest loans first, which also happened to have the higher interest rates.
    • In addition to a monthly goal, I set a long-term goal. I decided I wanted to pay off my loans before I hit 5 years out from school. This was a tough but not crazy goal based on my salary. Remember: be realistic but aggressive.
    • Also: whenever I paid off a loan or got a raise, I funneled ALL that extra money to the remaining loans. This helped me avoid the “golden handcuffs” and inflated lifestyle of a higher salary and allowed me to pay off my loans even faster.

4. I put my plan into action.

  • Once you figure out what to prioritize, what your budget looks like and how much you want to pay on your loans, it’s time to put your plan into action.
  • This is the hard part. You know what you need to do, now you just need to do it. Staying motivated while you knock out thousands of dollars in debt can be difficult. That’s why it is important to set realistic goals for yourself based on your actual spending habits and life priorities. If your plan makes sense, it will be easier to follow.
  • Here’s what I did:
    • Because I did not want to have to track every day-to-day purchase (see above – line-item budgeting is not really my thing), I worked at a higher level.
    • First, I set up all of my accounts to auto-pay: rent, cell phone, utilities, retirement contributions, regular savings for my emergency fund, and the monthly minimums on my student loans.
    • Next, as I explained above, I transferred my monthly discretionary spending amount to the separate checking account on the first of each month. All of my fun money came out of this account, as did necessities like groceries. It saved me from having to keep a super specific budget of these categories, and I could just check my account balance online whenever I wanted to keep an eye on things. And when the money is gone, the money is gone until the first of the next month.
      • Note that in order for this system to work, you cannot cheat by say, paying your credit card out of another bank account. BUT if you want to take advantage of a credit card rewards program, you could use your credit card for daily expenses instead of a separate checking account. Just make sure you can trust yourself not to overspend and add to credit card debt to your money woes.
    • On a set date each month, I wrote a check to the loan companies. I directed them to use the extra payment toward the principal so that my monthly balance stayed the same. (That step is important! You may have to call the loan companies directly to have them apply the money properly. Even though I sent a letter and made a note on my checks that the money was for the principal, I had to make a call almost every month asking the loan company to apply the extra money to the principal when they instead just applied the money as an early payment for next month.)

5. I tracked my progress.

  • Tracking your progress is crucial to staying motivated while you work through your plan.
  • Here’s what I did:
    • I set up a spreadsheet listing all of my bank accounts and loan balances in a column down the left side of the spreadsheet and placed the months of the year across the top row. I listed all my bank accounts in black and my loan balances in red font. I then added up the account column to total my net worth, using red font again to indicate when it was negative.
    • Every month I updated the numbers under that month’s column. It was so motivating to see more rows turn from red to black over time as my net worth went from a hugely negative number to zero, and finally to positive, and I was able to pay off my loans completely just shy of five years after graduation.

That’s it – five steps and I was on my way to being debt-free. As I said at the outset, there are many ways to attack your debt. If your student loans are at very low interest rates, you could funnel your extra money into index funds where you think you’ll get a better return and make lump sump payments years in the future. If your loan payments are super manageable, you might decide to pay the loans on schedule. If you’re one of the lucky few who qualifies for a public interest loan repayment program, you should focus your energy on making sure you continue to tick the boxes to qualify year after year.  Do what’s right for you, your financial goals, and your risk threshold.  

Pic Credit: Oliver Thomas Klein (via Unsplash)

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