If you are in debt, it’s very smart to focus your energy on getting out of it. You’ll have a lot more financial freedom once you no longer have to make that monthly payment. And let me indulge the math nerd inside us all. If you can pay off a student loan that costs you 6%, it’s like earning a guaranteed 6% without any risk. That’s a darn good investment cousin. Don’t allow that debt to hang around and weigh you down for years and years. Here are 5 steps you can take to extinguish your student debt post haste.
1. Get Organized
The first order of business is to make an excel spreadsheet that lists ALL your debts (not just college loans), what the payments are and the interest rate for each debt. This is the foundation upon which we are going to wage war upon those evil encumbrances.
2. Hit List
Now that you’ve got a list of your debts, order them with the highest interest rate loans on top and the lowest interest rate loans on bottom.
At this point we are going to make an effort to reduce the cost of your outstanding debt. If you can shave off some interest and apply that money towards the principal you will really accelerate the process of being college debt free.
Contact each of your creditors. Ask if they have any new programs that would allow you to reduce the interest rate. Again, this includes all your debt – college and credit cards alike. You may not get a great response at this point but it’s worth a try.
Your next move is to approach your family. Rates are really low right now. It’s very possible that someone in your clan would be willing to pay your debt and have you make payments to them instead at a much lower rate. They still make out well because they’ll earn much more than what they collect in interest now – as long as you make your payments of course.
Once you’ve made the rounds to your family and friends, consider other options to reduce your interest expense. One alternative is peer-to-peer lending. This is a process by which a company matches investors with people who need money. If you have a compelling story on how you are good for the loan, you’ll get funded. Of course this only makes sense if the rate you’ll pay the investor is lower than the current rate. Browse the sites to get a sense of what you might pay before signing up because they usually charge a fee to post a listing.
You’ve taken steps (above) to slash the interest cost of your debt. Now it’s time to launch your second offensive. It’s a two-step approach:
- Make the minimum payments on all the debt other than the highest cost debt.
- Take all the money you can and throw it at the highest-cost debt until its dead.
- Do the same thing with the next-highest cost debt until it is destroyed.
- Rinse and repeat until you are debt free.
This may seem counter-intuitive at first but it really makes sense to put all the muscle you can towards the most expensive debt you have. That’s because it is a cancer that is growing faster and/or draining the most energy out of you. Get rid of it first and then turn your lasers on the next biggest problem.
5. Roll Up Your Sleeves
Up until this point, you haven’t really changed anything about your lifestyle or spending in order to pay off that debt faster. You’ve used your math and negotiating skills to slash the cost and apply your existing resources where they are most effective. That is great and it will help a lot.
But if you want to be a college debt free Pilgrim fast; it’s time to use some elbow grease. That means finding more money in your budget or earning more money and use those funds to pay down the debt faster.
Identify a target date by which you want to be free of debt. Then, use an online calculator to determine the payments you need to make over that time period at the given interest rate with the current balance in order to achieve your goals. This will not be exact because each of your loans has a different interest rate. That’s OK. Use the highest rate or calculate a blended rate. This doesn’t have to be perfect. We are just trying to get an idea of what your payments need to be in order to get them off your plate pronto.
If you don’t want to do the math, you can also call the creditor and ask them what the payment needs to be in order to pay off the loan in the time period you’ve identified. Once you have your number, it’s time to rearrange your spending/income in order to come up with the cash to make this dream reality.
This is where a budgeting program like YNAB can be useful. Tracking your spending is fun and easy with this nifty tool. But regardless of how you do it, I suggest you go over your spending with a fine-tooth comb. Identify those expenses that need to go and cut cut cut.
If you are very serious and totally committed, I suggest you set up your increased payments on auto pay. This means the payments you need to make to achieve your goal with be automatically taken out of your checking account at the start of the month. What that means of course is that you’ll have to find a way to live on what is left.
Personally I love this approach because it forces me to be good to myself and achieve my goals. Sometimes it’s difficult of course. But by automating your finances, you’ll erase the problems of procrastination and excuse making that plagues so many of us.
Whenever I identify a goal that has been difficult to achieve, I connect with my accountability partner and make commitments to him to execute certain tasks (not achieve certain results) by certain dates. This puts teeth into my plan and keeps my nose to the grindstone. I strongly recommend you make use of your accountability partner as well.
If you go after your college debt using this 5-point approach you’ll be amazed at how quickly things change. Create a hit list of the debt you want to extinguish and in what order. Look for ways to reduce the interest costs on each of these loans. Create a plan on how much you need to be debt free by your target date. Put the plan in place by automating your payments and using an accountability partner.
What other steps could be used? What has been your experience with paying off your student debt?