As we discussed in our intro to paying for school post, a college education is EXPENSIVE. And most people would agree that the cost is out of hand! The cost is so high that you might even feel like you aren’t able to pay off student loans at all.
You wanted to go to college and get a good degree so you could get a job and start living the good life. You showed up to campus the first day ready to change the world, live away from home for the first time, and meet all of your new classmates.
What you did not expect was to graduate with debt up to your eyeballs. You did everything right and got the degree everyone said would set you free, but here you are. Sound familiar?
We’ve been there. In fact, Francisco is STILL right there with you. In May 2018, Francisco graduated from medical school and is finally a doctor. But he is sitting on just about $200,000 of student debt (all from medical school) with several years of residency ahead of him. While doctors are known to command high salaries, resident doctors only make the same as the starting average salaries for new undergraduate college graduates. Ouch.
So what did we do to get out of debt as quickly as possible and secure our financial futures?
You Must Live Like You’re Still in College
Remember living in the dorms on campus? Those rooms were so small it’s hard to believe that 2-3 people lived in them. Quarters were tight, but you became close friends and everything worked out. You were frugal and ate in the dining hall or made food using the microwave. The mini fridge was often empty and on weekends it looked more like a mini-bar.
You may not have realized it at the time, but your overall living costs were super low. You were living like a broke college student, because that’s exactly what you were. We still remember our first paychecks after college. After living off of barely anything during school, we couldn’t believe how easy it was to save money.
What was the key to saving so much? Not changing the way we lived (and having a budget)!
Francisco kept sharing a three bedroom townhouse with four other people near campus, and would bike to work or take the bus. He packed his lunch everyday and did not buy a daily coffee like many of his coworkers. Camilo and two buddies split a two bedroom apartment between the three of them. Since there were only 2 bedrooms, Camilo lived in the living room.
Yup, he did not even have an actual bedroom.
Just some dividers they put up in the living room to try to create a semblance of privacy. Paying $1,050 a month in rent to live in the living room sounds crazy expensive (and it is), but he lived in the heart of NYC and paid less in rent than anyone else he knew. The cherry on top was that he earned over $100K in his first year. Sure blows the 30% rent rule out of the water, right?!
Was it glamorous and sexy? Not at all.
But you know what is glamorous and sexy? Paying off your student loans in less than four years.
By living like we were still in college, we were both able to pay down our undergrad loans with all the money we were saving. Live like a student now, so you don’t have to during retirement! (Pssst. It’s a lot easier to do this if you don’t get used to living the high life the second you get a job. Humans are incredibly good at maintaining the status quo via routines.)
Once you are earning a check, the missing ingredient is to create and stick to a monthly budget. This will hold you accountable so that you’ll know EXACTLY where and how you are spending your money. After all, you work way too hard to let your money seemingly disappear. We created a free excel budget template to get you started!
You Need To Accelerate Your Earnings To Pay Off Student Loans!
If you are a fresh college grad and you work the standard 9-5 job, you are an ideal candidate for a side hustle. This is what millenials call a 2nd job. The beauty, however, is that there are now so many flexible jobs that you can do whenever you have time (on-demand jobs like driving a Lyft or reselling things in eBay).
By increasing your income, you’ll be able to increase the amount you can pay on your student loans and get those puppies paid off ASAP.
Why is it so important to pay off student loans quickly?
Unless you are shooting for Public Service Loan Forgiveness, paying loans of quickly is clutch because student loans often have interest rates in the 6-8% neighborhood. This is a lot of interest to pay, and if you pay down debt you are essentially getting a guaranteed return on your money in the form of saved interest.
It is important to note that if you have credit card debt or other interest bearing debt with a higher interest rate (credit cards can have interest in the 18%-28% range!), you should prioritize paying these higher interest debts first before accelerating your student loan payments.
Should You Consolidate Your Loans?
Another option for those of you (like Francisco) that have TONS of debt, is to consolidate your loans.
There are companies (like ELFI and Earnest) that will take your loans and combine them into one loan and refinance them. Refinancing your loans basically means to replace a loan with a new one. This is often done to take advantage of lower interest rates.
If you have government loans at a higher rate, you can potentially refinance them and pay a lower interest rate. Depending on how large your loans are, this could end up saving tens of thousands of dollars! For many people, this is a no brainer.
It’s important to realize that if you refinance federal your loans (as opposed to private loans), you will no longer be eligible for any of the benefits of government loans down the road. For example, if you decide you want to go to graduate school down the road, you will have to continue to pay back your refinanced student loans while you’re in school.
Federal loans, on the other hand, can be deferred while you are a student. If you have federal subsidized or Federal Perkins Loans, interest will not accrue during deferment! So we suggest only going down that path if you are sure that you are done with school.
You also don’t want to refinance your loans through a private lender if you plan on pursuing public service loan forgiveness (PSLF).
Which Loan To Pay First?
There are many different schools of thought on how you should pay down your debt. The details might get confusing, but remember that the most important thing is to put as much money as you can towards your debt.
Don’t let the little details confuse you from your main objective.
Deciding which loan to pay off first is like deciding whether you should eat the burger or fries first. People will still be arguing this until the end of time. There is no right answer for everyone. Just pick what feels best for you and go ham.
Whether you throw all of the money at the smallest loan or the highest interest loan, the big picture is still the same. Pay it down as quickly as you can!
How Do We Decide What To Pay Down?
We believe in numbers and efficiency. For that reason, we choose to pay down our highest interest loans first, regardless of whether that is the largest loan, or smallest loan. This allows us to minimize the amount of interest we pay.
Typically, loan companies assume this is what you want to do and will often apply payments over the minimum payment due in that manner.
For example, if your minimum monthly payment is $200 and you pay $700, they will take the first $200 and pay down the minimum on each respective loan, and then will apply the remaining $500 ($700-$200) to the loan with the highest interest rate.
This is not always the case, so contact your loan company and figure out how they apply payments.
Remember, don’t let the details confuse you or derail your progress. Just try to pay as much as you can and well beyond the minimum amount if you can. Just create a budget and stick with it!
What Are The Main Takeaways?
The key to go from drowning in debt to swimming in cash is simple. But that doesn’t mean it’s easy. It takes discipline, energy, and sacrifice, and you really have to want it.
But if you are able to live like you’re still in college, budget your spending, accelerate your earnings, and prioritize paying down your student loans, you’ll be taking your loans out to pasture in no time. And that my friends, is what freedom looks like.
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