Ben Todd | Jun 3, 2017 | 2
The Ultimate Guide How to Pay Back Student Loans
Our ultimate guide to paying back your student loans is going to take you through the process on a step-by-step basis. There are no shortcuts and no secrets. There are no tricks and no methods to help you cheat. From your perspective, it may look like we are giving you a hammer and chisel and telling you to bring down a mountain, but what we are actually doing is telling you where to hit the mountain rock with your chisel so that the mountain crumbles over time.
We offer you the grown up, mature, honest and impossible-to-fail method for repaying your student debts. This article assumes you are making your monthly payments towards your student loans and you are now looking for a way to make bigger payments to get your debts paid off sooner.
Impossible to Fail? – Are We Having A Laugh?
Other articles offer students secrets that don’t work or that are not applicable because there are no secrets. Paying back your student loans takes discipline and hard work. However, with discipline and hard work, you are unable to fail. Follow each point on our guide without deviation, and you simply cannot fail to repay your student loans unless you become unemployed and extremely broke.
Before You Start Your Student Loans Repayment Effort
In cheap-tips articles and big-secrets-revealed books, you never hear about the groundwork and pre-planning behind loan repayment, but if you want to pay your student loans back without failing, you need to lay a lot of groundwork. If you do not, then you will fail, and if you want to fail, then go read cheap tips articles or big-secrets revealed books.
Pay Back Your Credit Card Debts First
You must get out of credit card debt first. It is the biggest stone that will hang around your neck and spoil all of your future plans for financial control and freedom.
Credit card debt is the worst because people fall into it, they max out their card, and then they only pay the minimums, which means they stay in debt for years and years. If you are serious about paying off your student loans, then start by paying off your credit card debts.
Pay Back Your Personal and Overdraft Debts Next
Next, you need to pay off your personal loan debts and overdraft debts. Start with your overdraft debts because they tend to be smaller. Once you have paid them off and you can get to your next payday without spending the cash, you need to cancel your overdraft to take the money out of your control.
Paying off your personal loans is a little easier because you just make the monthly installments while adding a bit here and there until it is paid off. Try our article called, How to Get Out of Debt on Your Own The Ultimate Guide.
Pay Off All Other Debts Before Starting on Your Student Loans
Like an army general mopping up the last of the remaining enemy fighters on the field, the final debts you owe need to be mopped up and paid off. You need to be debt free before you start paying off your student loans because any sort of debt will be a big hindrance and will significantly lengthen the time it takes to repay your student loans. Any debts you owe to stores, friends, phone companies, taxes, or whatever, need to be cleared.
Put Off Getting a Mortgage Until It Is Paid Off
This one puts a crimp in some people’s petticoats. You need to pay off your student loans before you get on the housing market. This means getting on the housing ladder later, but once your student loans are paid off, you will have far more money and a far better credit rating to enable you to get a mortgage with great interest rates and you will have more disposable income that you can put towards your mortgage to pay it off faster.
The Mathematical Reason for Delaying Your Mortgage
Billy pays $330 towards his student loans every month and $550 towards his mortgage. It takes him 181 months to pay off his $60,000 student loans, and 300 months to pay off his mortgage.
Larry pays $880 per month towards his student loans and has no mortgage. It takes him 68 months to pay off his $60,000 student loans. During those 5 and ½ years, he built up a great credit rating for a great rate on his mortgage. He pays $880 towards his mortgage every month and pays it off in 156 months.
Larry paid off his off his student loans first and then got a mortgage. Larry was out of debt and a homeowner in 224 months and he spent less money. It took Billy 300 months to get out of debt and he paid more money.
Both took out a mortgage at $110,000 to start with, and I gave each an APR of 3.5%, even though Larry’s would have been less. Billy will have paid over 25 years and will have paid a total of $138,360, whereas Larry would have paid over just 13 years and would have only paid $111,458. In truth, Larry would have had a better APR and would have probably paid even less than that.
Do Not Get Into More Debt
It goes without saying that if you are fixing to pay off your student loans and get that monkey off your back, then you shouldn’t get into further debt later down the line. Stay out of debt until after you have paid off your student loans.
Stay Out of Car Debt and Consumer/store Card Debt
A common mistake is to get into car payment debt or store card debt. Remember that to become financially independent and wealthy, you need to do the hard stuff first, and that means paying off your student loans and then your mortgage. Once they are clear, you are going to have a lot of disposable income that you can throw around, or you can invest to make yourself even wealthier.
Laying the Groundwork for Your Student Loans Repayment
We are not at the stage of paying your student loans just yet, there is still more scene setting to do, but if you have done the points listed in the previous section, then you are well on your way to becoming debt free (albeit eventually).
Set Up an Emergency Fund
I understand why people do not take this tip seriously. After all, why have $900 sitting in a bank account doing nothing when it could knock a two months off your student loan payments.
That is a valid argument, but your emergency fund is there to stop you getting into credit card debt again. You are going to hit trouble at some point. Maybe you will need to pay off your sister’s store card debts, or your mother’s house payments, or whatever the problem may be. If you have an emergency fund, then you will not have to get a credit card and get back into debt. It is your safety net that catches you if you almost fall back into credit card debt.
Create a Long-term Repayment Plan
Take a serious look at how long repaying your student loans will take. Use one of the many online calculators to see how far you will get by paying your installments each month. Once you know what to expect, you can start planning accordingly. Those calculators will also offer a good incentive to overpay on your student loans when you see just how quickly your overpayments will pull you out of student debt.
Consider a Daily, Weekly and Monthly Budget
Making your monthly payments should be easy because it is just another bill like your Internet bill and water bill. However, if you wish to over pay, then you need to create a budget and stick to in order to manage your budget.
Learn How to Budget
It is not as easy as it sounds. For example, you are supposed to overestimate every outgoing by 20% and underestimate all your income by 10%. You have to set up contingency funds for the unexpected, and you have to adjust and maintain your budget or it loses all meaning.
Learn How to Enjoy Budgeting
The best way to keep something up is to start enjoying it. Budgeting can be fun when you see the fruits of your labors. When that extra chunk of money leaves your account to go to your student debts, you do feel an odd sense of pride because your budget was created, it works, and you stuck to it. Take pride in your budgeting and you will start to enjoy it.
Have Your Loan Forgiven if You Become a Civil Servant
There are loan forgiveness methods you can try, and they involve taking a job as a civil servant for a number of years. You need to sign up to the scheme before/as you become a civil servant because the money doesn’t come off your loans on its own.
Do Not Try the Poor-Person Method for Loan Forgiveness
If you have a job for 20 years that doesn’t pay you enough to make regular payments on your student loans, then the loans will be wiped if you sign up for student loans forgiveness. Do not try this method because it is then worth it. The Larry and Barry example from earlier showed that you can be out of debt and own a home in just 25 years, so why live a life of being poor with a poorly paid job for 20 years just to cheat your way out of debt and guarantee that you don’t have your own your own home in less than 25 years from now.
Student Loans Payment Methods
Now you have laid your groundwork and you have all your plans ready to start paying back your student loans, it is time to get down to the nitty gritty and start paying them.
Continue Your Snowball Efforts With Your Disposable Cash
One may assume that you used the snowball technique in order to pay your bills and debts prior to starting to repay your student loans. If that is the case, then you may use your snowball money to repay your student loans.
For example, If you had been using the snowball method and you used to pay X-amount onto your debts, you simply continue paying your monthly installments on your student loans, and you add in the X-amount that you were paying on debts. Doing this will set you off on the right foot, and very little will have to change because you were already paying off X amount to pay off your debts, so you will not have to alter your lifestyle in order to make the payments
Check Your Balance Once Per Week and Deposit Your Change
It is always a good idea to check your balance frequently if you are keeping and maintaining a budget. It is also handy for spotting the illegal use of you account. When you do check your account, you should round up your account to the nearest $10 each time. Round it up by putting your spare change into your student loan debt. If your money is already rounded, then put $10 on your student loan every time you check your balance online.
For example, if you had $577.30 in your account, then you would transfer $7.30 onto your student debt and it would leave you with $570. This technique doesn’t drain your funds, but it does add a consistent “extra” amount onto your student loans every week, and that money builds up to a very tidy sum that may knock years off your student loan.
If you think about it, at an average of $5 per visit, that is at least $260 per year. If you were Larry from the example earlier, you would pay off your student loans in 66 months rather than 68, and all for the sake of adding a little loose change on a weekly basis.
Create an Auto-bill Pay for Your Installments
It is imperative that you do not miss your student loan repayments. They should be set up monthly, and they are probably based on how much you earn and how far over an earning threshold you are. If you are smart, you will opt to pay a little more than what you were first told you have to pay.
No matter what you do, you should set up auto-pay so that you do not miss any payments. If you do forget to put the student loan money in your account, then you overdraw in your account rather than miss a student loan payment.
Sell Things for a One-Off Payment
We all have stuff we don’t want from time to time. I have just been bought another indoor grill that looks like a sandwich toaster for my Birthday, even though I am a vegetarian and have no use for it. I will probably sell it, and when I do, I will put the money into my investments and savings. When you sell your stuff, you should put it into your student loans. After you have paid your student loans, you should put it into your mortgage. When you have paid your mortgage, you should put it into your investments and savings.
It may seem like a bit of a waste putting your sold-goods money into your student debt accounts, but it gets you out of debt ever so slightly faster, and the faster you are out of debt, the sooner you can start building wealth. It is an investment into your future wealth and security.
Find a Happy Way of Adding More to Your Student Loan
Is there a way of earning a little extra at work? Do you get an extra $4 commission for selling a phone or camera, or do you are you able to work paid overtime at will? If so, find a happy way of adding money to you student loans.
The reason I use the word happy is because the whole process can become fun if you allow it to become fun. Become competitive with yourself and push yourself to add a little more than you planned or expected.
Even chipping a few dollars off your debt in one afternoon is more motivating and liberating than you may think. It makes you feel like you went the extra mile and did a little more with your day. It can become a happy experience if you “allow” it to become a happy experience.
Less on Your 401k for a While
Opt to put the minimum into your 401k while you are paying off your student loans and mortgage. You may start adding more to it and topping it up when you are out of student loans and mortgage debt. At that point, you may also start investing into a Roth IRA.
There are some good arguments for adding more than the minimum to your 401k while you are young, and I can’t say you should ignore them. I simply feel that getting out of debt is more important. Nevertheless, from a personal wealth standpoint, you may have more to gain if you pay slightly more than the minimum into your 401K as you work your full-time job. The tax benefits alone (after you hit the age of 60), are one good reason, and the growth your money has from now until then is another get reason.
Auto-pay a Little Extra Such as a Percentage
You should be auto-paying (a direct debit instruction) your student loan payments every month. If that is the case, and you have a fair amount of disposable income, why not opt to auto-pay a little more for the expressed reason of paying off your student loans earlier. You can always change the auto-pay order to lower the amount you pay later on if you have money troubles (in other words, you can go back to paying the minimum if you get in trouble).
You may prefer the idea of paying the minimum for your student loans via an auto-pay order, and then adding your disposable cash into the debt account manually. However, can you honestly say that you will remember every month?
Plus, if you are using auto-pay, then have your student loans come out the same day that you are paid so that you do not miss the money. If you never see the money, then it is just like when you pay into your 401k; you do not see the money, so you do not miss it.
Extra Ideas for People With Great Discipline and Willpower
These tips are not very everybody. These are for people who have a lot of discipline. Here is a way of testing if you are suitable for this section of the article: You have just won $32,307 on a small local lottery. What will you do with every penny of that money?
If your answer was something other than save or invest it, then this section is not suitable for you. If your first thoughts were to save or invest the money, then this section is for you. Most people will have started thinking about how they would pay off this debt or that debt, or how they would buy something for their mother of re-fit the kitchen. If your first thoughts were to save or invest the money, then you may have the discipline and/or willpower to try these tips.
Dramatically Lower Your Standard of Living
I have met people, and I have read of people, who are able and were able to lower their standard of living in order to save money. They became very money conscious and started spending just what they needed to get by.
Even if you do not like the idea of dramatically lowering the standard of your living, you can probably lower it a bit. You can buy cheese that isn’t already grated, and shoes that are not from a famous brand and you can use the bus more often to save on gas money.
Spend Your Money on a Credit Card and Repay It Every Month
Some credit cards offer rewards and cash back if you use them frequently. Find one that has such offers and put all of your monthly expenses onto it. At the end of the month, simply pay off the balance and start again next month. The reason you need willpower and discipline for this technique is because it is tempting not to pay it off, and if you do not repay the balance, then you will find yourself back in credit card debt (which as you remember is one of the biggest hurdles and hindrances to paying off your student loans).
Refinance Your Student Loans a Little Later
As you earn money and get out of debt, you may like to try the credit card method listed just above. Spending a bundle on your card and then repaying it in total every month will make your credit rating rise. Plus, your job and your increased repayment of your student loan will help improve your credit rating. When your credit rating looks great and you have been in your job two or three years, you should look into refinancing your student loans.
You may only save between $500 and $3000 (sometimes more), but if you were Larry from the previous examples, then that could help knock off between one and four months from your total repayment time, and that is not to be sniffed at.