Ok fellow Millennials. Let’s talk student loan debt. I can sense the cringing already. But hey, you clicked on this article voluntarily…so you must be somewhat okay talking about it.
First let’s throw out some common talking points — some objective and others more subjective. Student loan debt is crushing young people in the U.S. to the tune of $1.3 TRILLION and about 70% of students graduating with a bachelor’s degree carry some form of student loan debt. According to Forbes, the average graduate from the class of 2016 has over $37,000 of student loan debt. These are crisis level figures, especially when you take into account many graduates enter the workforce underemployed and struggling to make a living wage.
My wife and I fell pretty in line with the average when we graduated close to a decade ago. Unfortunately for younger Millennials, the average continues to rise.
I was lucky initially because I had a salaried job out of college with benefits and a 401k retirement plan available. My wife, not so much. She graduated in spring 2009, possibly the worst time to enter the workforce in decades due to the Great Recession of 2008-2009. Unemployment rates were at 9.5%, on their way to 10%. And unemployment rates for our age range, 20-24, rose above 15% in 2009. She eventually found work at a temp job, but was not hired for a full time position until 14 months after graduation.
Lucky for us, our student loans had six-month grace periods before payments were due. Unlucky for us and others strapped with debt, it doesn’t stop the interest from accruing. So a $15K student loan could easily be $18-20K by the time payments begin.
Without further ado, I present our two stages for paying off $50,000 of student loan debt between mid-2007 and early-2016. Stage 1 was our clueless stage. Stage 2 was when we started to get a clue.
Stage 1: Minimum Payments for Four Years, One Lump Sum Payment from Co-Op Job
For me student loan payments were just another bill in the beginning. If you had asked me how much student loan debt I had, I probably would not be able to tell you. But I could tell you the monthly payments.
My wife developed a similar minimum payment approach before we were married, until she received some fiscally responsible advice from her dad. As part of her Engineering curriculum, students took a semester and a summer off from the classroom to work as a Co-op for a local engineering company. It was a temporary reprieve from tuition costs for those periods, plus the Co-op paid a very generous wage. Since she was not paying tuition those semesters, and the Co-op money was more than a college student is used to at a regular campus job, she pooled all the money earned and cashed out her small 401K at the advice of her dad to pay off a significant portion of her student loan debt. (Aside: due to tax implications and retirement planning purposes, I would be cautious and understand the implications of cashing in a retirement account when leaving a company.)
It took until 14 months after graduation for her to find another full time position, so she continued only making minimum payments.
The problem with this approach was that the monthly payments were never going away. We would still be paying our last student loan in 2029 with this approach — the same year our daughter Caroline will begin high school. If we are still paying off our own student loans four years before SHE goes to college, how are we ever going to help pay for HER college?
Sometimes sound advice from a parent is not enough to revamp your thinking, but having kids suddenly forces you to re-evaluate financial goals. After we were married and decided to start a family, it pushed us to take a different approach to student loan debt.
Stage 2: Increase Payments by Reducing Expenses, Accelerate Repayment Time
When we got married in 2011, we had approximately $25,000 in student loan debt left. I had paid off $6,500 of mine and she had paid off about $18,500. The monthly payments from our loans were $398.38. If we made minimum payments, we would still be making payments on the longest loan until mid-2029 (18 more years).
We made some extra payments for a couple years while we were married but not yet thinking about a family. The extra payments were from small cuts in our budget, like fewer trips to Target. But nothing substantial. When my wife became pregnant early in 2014, we made the commitment to kill the rest of our student loan debt within two years, and did the math to figure out how.
When we made the commitment to accelerate student loan debt payoff in early 2014, we had one loan remaining with a $14,072.81 balance. The interest rate was extremely low at 2.5% since we paid off the highest interest rate loans first. The payment was only $90.11, but still had 189 months (almost 16 years) remaining. Instead we made the commitment to pay it off in 24 months.
A simple calculation in Excel, and we knew that $601.76 per month would be enough to kill our student loans within 24 months.
Below is the calculation in Excel. Put simply, =PMT(interest rate/12,number of months until I want to be done paying student loans,(negative) outstanding total of student loans,payoff amount of 0,0). The value returned is the adjusted monthly payment for 24 months to pay down my debt to $0.
The calculation was the easy part. The hard part was coming up with $510 more per month for two years, while also buying diapers, setting up a nursery, and preparing for hospital bills.
It was time for some long overdue expense reductions. In a way, increasing debt pay down has the positive side effect of forcing us to re-evaluate our spending. And boy were we overdue.
From 2013 to 2014, we made major cuts to expenses in the following categories, adding more than $600 to our bank account each month to apply toward student loans:
- Groceries from $540 to $415 (down 23%)
- Restaurants from $614 to $461 (down 25%)
- General shopping like Target from $257 to $130 (down 49%)
- Gas from $188 to $134 (down 29%)
- Home Improvement projects from $228 to $76 (down 66%)
These changes felt like sacrifices at the time, especially considering the new baby-related expenses had to be squeezed into the modified budget. But spending almost $1,200 on food for two people in 2013 was outrageous and was an opportunity for substantial savings.
On February 26, 2016, we sent in our final student loan payment.
Since 2013 we have greatly overhauled our expenses despite no longer having a student loan payment of our own. When we took the time to realize we were throwing away money each month, it was the first step toward truly owning our financial future.
Tips for Debt Payoff
- Consider refinancing by obtaining a quote from LendEDU. You may be able to improve your interest rate and customize the length of the loan anywhere from 5-20 years. It can save you thousands over the long-term and does not impact your credit to check your rates.
- Apply lump sums to the highest interest or lowest balance debt (i.e. tax refunds, work bonuses, unexpected windfalls, annual raises, etc.)
- Use calculations like mine in Excel to increase your monthly payments and accelerate your student loan payoff date. Set a milestone in your life to payoff a specific loan (i.e. I want to be free of student loan debt by my 30th birthday. I want to be free of student loan debt before my first child is born so I can start a 529 college savings account.).
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