The 3 Strategies I'm Using to Slay My Student Loans
Are you, like me, one of the 40 million Americans with student loan debt? Collectively, we owe $1.3 trillion, a staggering total reported by MarketWatch in a recent article about our nation's growing student loan crisis.
I am lucky to have escaped undergrad and graduate school with just under $30,000 in student loan debt. I know many of you are in even more debt than me. There are plenty of posts out there on ways to avoid incurring a mountain of debt upon graduation, this isn't one of them.
The deal is that we have this student loan debt, we can't undo it, and we can't neglect it. Don't pay and you'll have your wages garnished and those student loans are not discharged in bankruptcy.
What are we to do? We can't run and hide. We must tackle.
1. Determine your exposure and make a plan
How much do you owe? Across how many loans and with which financial institutions? What is your minimum monthly payment? How do you pay your bill? Gather your printed statements and email reminders. Sort.
I logged in to my lending institution's website, FedLoan Servicing, and poked around for a couple hours. I read everything. I followed rabbit hole links to learn about repayments plans.
I learned that FedLoan Servicing offers Direct Debit, an automatic minimum payment (and any additional amount you want) with an enticing 0.25% interest rate reduction. (A useful tool, certainly, but I like making my own payments).
After making payments in my first few months post-graduation, I noticed there seemed to be no logic in how the payment was spread across the loans. Frustrated, I called up FedLoan Servicing and spoke with a very nice representative who explained that their system did not work the way that I wanted it to. I wanted to pay off higher interest rate loans first or even lower balance student loans first to create a snowball effect (knocking out one loan after another). The main payment screen allowed for minimum payments on all loans and even payoff to ensure all loans are paid off at the same time (10 years down the line!).
I wanted to target loans smallest balance to largest balance. We can argue debt snowball vs. debt avalanche until we're blue in the face. Personally, I wanted to reduce my monthly minimum payments so I opted to pay off my smallest debt first. I also wanted some instant gratification knowing that I was making real, tangible progress. It's great to know that balances overall are decreasing, but there's something magical about getting a PAID IN FULL notice in the mail (all caps because it's that exciting), one loan at a time. I could not live with 10 years of a student loan rain cloud over me. FedLoan's main payment screen wouldn't allow me this pleasure.
What's a girl to do? I set out to target the loans using a "Specify Loan Amount Feature." Each month I pay the minimum (and more!) through this payment screen. But, one loan is always favored over the others. I knock out the smallest balance to the largest, systematically. This means my first debt to go was a loan for $399 and my last loan to pay off will be one in the thousands.
The result? I have little victories a couple times a year when I get the lovely notice PAID IN FULL notice in the mail. I am encouraged and motivated to pay the loans off because I feel like I have some control in my debt destiny. I sense that I am actively making progress, not passively sending money to my lending institution blindly allowing them decide how the money is allocated. (Let's remember they want you there for the long-haul to collect your interest).
If you can't find the answer you're looking for on your lending institution's site, call them. Things were much clearer when I was able to talk to a real, live person on the phone. This is a tip that Frugal Millennial suggested in How to Ditch Your Student Loans with the Debt Snowball.
2. Pay early and pay often
Once I wrapped my head around making my own payments, I became addicted. I wanted to pay early and multiple times a month.
If you log in to your student loan account frequently, you'll see the disheartening pace at which unwanted interest accrues.
To calculate your daily interest accrual, use the following formula:
Interest rate x current principal balance ÷ number of days in the year = daily interest
At my highest debt:
.068 x $27,242.98 ÷ 365 = $5.08/day
$5 may not seem like much, but that $150/month that I could be allocating elsewhere!
When I was still in school and in the 6 months following graduation, I made monthly payments to the unsubsidized loans' interest. Had I not, that interest would have been rolled in with the principal when it came time for repayment (essentially, I'd be paying interest on interest).
Now I am well within the repayment period but still am concerned about interest. I don't like seeing my account balance grow throughout the month due to interest. I have made payments as low as $5 just to ease my mind.
My lending institution, FedLoan Servicing, allows 8 electronic payments per month. It looks like I'm on track to hit that max. The sting of this interest is soothed a bit by the Student Loan Tax Credit I get to take advantage of at tax time.
3. Reward yourself
I chose my first credit card at age 19 based on the rewards structure. I ended up with the Citi ThankYou Preferred card, knowing that I would be taking on student loan debt and enticed by the option to cash out rewards as a Student Loan Rebate.
Every two months, I reach 2,500 points which I exchange for a $25 Student Loan Rebate. I call the ThankYou network and request for them to send me a check. A week later, I receive a check from my credit card company to my lending institution. I simply write my student loan account number on the memo line and send it off to FedLoan Servicing.
Each month I put my living expenses (gas, auto insurance, groceries) on my Citi card. I pay my bill in full every month.
So far, I've cashed out $685 in rewards toward my student loans.
Why not go for a statement credit? Because I do better when the money is earmarked for a cause, and paying off my student loans is priority number 1. What will I do with my card and leftover rewards when I've paid off my student loans? Citi's ThankYou network has all of the traditional rewards (cash back, gift cards, etc.) but I've got my eye on the Mortgage Payment Reward (similar redemption process to the Student Loan Rebate).
If your loans are with Sallie Mae, check out Broke Girl Rich's ode to her student loan-slaying card, UPromise by Sallie Mae)
What are your student loan-slaying strategies?
Consolidating your loans for one monthly payment at a lower interest rate is usually a good strategy. I didn't do this because when I tried refinancing calculators, I never got an interest rate or monthly payment much lower that what I was already paying; the savings were negligible enough for me to prefer to keep my accounts where they are. However, if you have loans from several banks, a high balance, a high interest rate, etc., look into it.