So you’re trying to pay off student loans.
Been there. And I think I can help.
University is expensive. And not all of us have parents that are able to pay our way.
For me – my parents saved what they could to help me out, but I think that amounted to $2,500. The rest was up to me to cover.
After graduating from a bachelors then a masters degree, I owed the government $31,000 in student loans.
I would have owed more, but I worked my butt off through high school and university to save up as much as I possibly could, to put towards my student loans when I graduated.
The Silver Lining
Before we get talking about the mindset to pay off student loans, I want to point out one thing.
Most of us think of student loans as a negative – a huge burden we’ll need to undertake for the next 10 years of our life.
The plus side to student loans however that isn’t talked about enough, is the work ethic and money management skills that it tends to instill in you along the way.
Anecdotally, my friends who’ve had student debt are quite a bit better with managing money now that they’re out, as compared to those who never had to worry about it.
Knowing I’d have to pay my own way through university, I worked 25hrs/wk at my part time job through high school, alongside being an active member of a number of sports teams. In university, I upped that to 35hrs/week with a full course load.
So let that fuel you.
You’re learning some major life skills that will serve you through the rest of your life.
Repayment Calculators
If you haven’t already done this, the first thing you need to do as you go to pay off student loans is to have a look at a repayment calculator.
The great thing about these tools is they’ll tell you what portion of your payment is actually going towards paying down the principal (ie. the amount you originally borrowed), and what portion is just going to the interest fees you’re incurring.
Let me tell you, this can be eye opening.
And VERY motivating.
If your loan provider has a repayment calculator, you might want to start there. Otherwise, this repayment calculator from Bankrate is nice and simple.
Step 1 : Evaluate the given loan terms.
If you have a repayment term laid out for your loan, use that number. For example, my loan repayment terms meant I would pay off student loans in 9yrs.
Input those numbers and the calculator will tell you both the expected monthly payment you’ll owe, along with how much you’ll pay in interest over the course of the paydown period.
Note: things like fluctuating interest rates will change your numbers a little, but the important thing is to get an overall idea.
When I ran my numbers, I learned that if I took the 9yrs the government was expecting me to take to pay down my loan, I would have been looking at over $9,000 in interest.
No thanks.
Step 2: Set a goal.
Rather than just taking the terms given to you by your lender, determine what you can afford to pay back monthly.
Take your monthly take home pay and subtract any recurring monthly fixed costs like rent, hydro, and cell phone. What’s left over?
From there, decide how low you think you can get your grocery budget, your shopping budget, etc. An estimate is okay. Now subtract this from your leftover income calculated above, and you’ve got a monthly payment amount.
This is an amount you’re going to commit to paying.
Now use your calculator and figure out how many years it will take to pay off student loans with your new monthly payment you just calculated. Write it down.
For me this was four years.
Step 3: Now set a stretch goal.
Use the calculator to play around with your loan duration to see how quickly you can get this paid off.
Start with the term and payment you landed on in Step 2.
Now subtract one year. Is that payment do-able? A little uncomfortable maybe?
Subtract another. Getting more uncomfortable?
Keep going until you’re excited at the prospect of having your loan paid off that quickly. You shouldn’t feel confident that you’ll be able to make those higher payments. But you should be thinking, “if I could pay this off that quickly, I’d feel SO GOOD about that.” This is your new stretch goal. Write down both the term and the payment amount.
Based on my salary and expenses, I figured if I could almost eliminate my shopping spending, I could get rid of this thing in 2 years.
Be aggressive.
The Pay Down Period
The first few months of paying off my student loan, I would use the ‘pay yourself first’ method – or in this case ‘pay the lender first’.
As soon as money hit my bank account on payday, I would set aside half of the money I would need at month end to make the payment I committed to paying in Step 2. I put it into a separate savings account and wouldn’t touch it until the end of the month when the automatic bill payment I set up would send it for me to my lender.
Beyond that, I would make additional loan payments when I had an extra $250 or $300 laying around…which you can imagine wasn’t very often.
Things started slow.
I was making the payments I committed to in Step 2, but I was hardly making any progress towards my stretch goal laid out in Step 3. This was proving to be the wrong approach, so I quickly changed my strategy.
The Mindset
I continued with the ‘pay the lender first approach,’ setting half my committed payment aside each payday and sending it to my lender at the end of the month, but I changed my strategy for ad hoc payments.
Instead of waiting until I had a sizeable chunk of cash to send to my lender throughout the course of the month, I started sending them smaller sums. I’d send random payments of $100, $75, even $50, in addition to my month end payment.
I’d make these smaller payments quite regularly. Once or twice a week sometimes – whenever I felt like I could spare it. If there was money sitting in my chequing account and payday was three days away, I’d tell myself I can go three days without spending, and I’d send my lender that money.
Every spare dollar goes to the loan.
We don’t tend to have $250 or $300 in our account that we’re able to part with, especially not straight out of school. I think a lot of us feel like any payment smaller than that isn’t worth it.
But what ends up happening then is we so rarely will make additional payments. When we leave that money sitting in our account waiting for it to grow large enough to make a payment, we so often spend it instead.
If we shift our mindset to telling ourselves $25 is a worth while payment, then we’re at least putting down $25. That’s a lot better than nothing. Do this once a week and you’ve just upped your monthly payment by $100, every month.
Beyond that, I found that when I went through the steps to send my lender $50, I’d often end up saying to myself, “You know what, I can spare $75.”
For me, this method was incredibly motivating.
Instead of watching my loan sit largely idle, only dipping slightly at the end of the month when I made my one larger payment, I got to watch that number drop week over week, sometimes a couple times a week.
It became a game.
How quickly can I get this thing down to zero?
I kept a spreadsheet with targets for myself. “By the end of June this year, I want my loan owing to be down to 12,000. And 6,000 by the end of December.”
Suddenly, it wasn’t depriving myself when I told myself I couldn’t eat out. I was moving myself forward in my challenge.
I found myself out shopping and wanting a new shirt or pair of pants. Rather than purchase the shirt for $60, I’d say no and tell myself that money would be better off spent to pay off student loans. And I’d follow through. I’d transfer $60 to my lender on the spot, from my phone.
This mindset that any amount was a worthwhile payment snowballed into a COMPLETE shift in the way I managed my loan, and paid it off.
I paid that sucker off in a year and a half.
Here’s the thing – There are thousands of “tricks” you can search online that will help you pay off student loans faster, but it comes down to making payments as aggressively as you possibly can, which means making sacrifices elsewhere in your budget.
And the beautiful thing about that? You’ll take these habits with you through the rest of your life.
Now that my loan is paid off I definitely go out for drinks a little more than I used to.
My old shopping habit though? That’s now been replaced with the habit to question every single purchase. Which means my savings account is growing a lot faster than it would have had I not learned this through paying off my student loans.
Got any more tips that worked well for you?
Share them in the comments below.