Three years ago I graduated with $88,000 of student loan debt. During the six month grace period before payments were required, that amount had grown to $96,000. All of this was the result of poor planning, horribly envisioned expectations, and my family’s view that this was “fine” and “expected”. You know what $96,000 is? Where I’m from that’s two foreclosed houses. Three if you pick an especially bad area!
It shouldn’t be any surprise that this horrible situation turned into a nigh-catastrophic depression that eventually fueled a massive change to how I directed my life. Sound financial management is probably the biggest focus of my life nowadays, outclassing video games, hentai, and work by a significant margin. At my last job I became known as the “personal financial adviser” to a handful of my coworkers. One of them wasn’t there long before he jumped ship to head to much greener pastures. This post should help explain my strategies for student loan repayment for his benefit and the benefit of those who still haven’t got to talk to me about this in person.
Debt Is Bad
If you’re in debt, you should have that debt at the top of your priority list. Period. Yeah, I love fancy upscaler equipment and flash carts for classic game consoles. One of my former coworkers liked the idea of having a new car. Dennis (who asked for this article) is a vinyl aficionado. These things aren’t all bad, marketing-based consumerism aside (there still are well-designed games, excellent vehicles, and life-changing music) but your first goal is getting that debt down to ZERO. Until that debt is paid, everything else is secondary.
Not Owing Anything for a Year
This is an idea I’ve developed based on having an “emergency fund” equivalent to a year of living expenses. What I recommend is that anyone with student loan debt first put away enough money to cover living expenses for a year while making minimum monthly payments on loans. Once a nice buffer is in place, pay extra on your student loans until your next payment due isn’t for another year. This way, if your lose your job and everything goes to hell, you actually are covered on two fronts; you can live for up to a year on money you saved and you won’t run into any problems with loan payments. Of course, if you don’t have things sorted out in a year, you’ll be broke and not making payments. Keep in mind, of course, there are people who if they lost their job tomorrow they would lose everything they own in a month. Plan accordingly.
Know Your Options
For some graduates with loans, consolidation is an option. You can collect all of your student loans, here assumed to be federal student loans, and roll them into a single account with a lower interest rate or lower monthly payments. You sacrifice a few advantages in the process, typically. Federal loans come with assistance programs that suspend payments due if you lose your job, as well as being wiped clean if you die. Private loan consolidators don’t usually offer such advantages, but you can do some of your own research and see about that.
Keep in mind, however, that you cannot roll Parent Loan For Undergraduate Students (PLUS) into your own loans yet. For all intents and purposes, those loans are the debt of your parents. If you wish to assume responsibility for these loans, it’s not going to be official on any paperwork. However, loan companies don’t care who pays for them, so feel free to set your bank account up to cover the payments. The student loan interest is only a tax write off (maxing out at $2500/year) for the person whose name is on the account, so be sure to give them the tax form come January.
Advanced Tax Strategies
Here’s some current stats on my loans:
Parent Loan Account: $14,000 at 7.65%, monthly payment of $715
Loan Account: $19,000 at roughly 6%, monthly payment of $325
Loan Account: $6,000 at 3.5%, monthly payment of $50
Current total net worth: -$5,000
I make the minimum payments on the lowest interest rate accounts, then put $925 on the highest interest rate loan. Of course, while I could afford to put more money towards these accounts, I have opted to tax-defer more money via 401(k) and Health Savings Accounts. The tax benefits of these accounts keeps that portion of income from going into the 25% tax bracket. The money grows tax free and the loans still get paid ahead of schedule. The long-term gains, assuming normal market conditions, will outpace aggressive loan repayment with higher taxes.
The Answer Is Always Frugality
If you’re in a situation where debt is a problem and everything seems overwhelming, put your mind to work developing good habits from Early Retirement Extreme and Mr. Money Mustache. It’s what I did to make it to where I am today. For anyone who has more questions or notes to add, I will update this article or link it to other articles I might write in the future.