I Paid Off $40,000 in College Loans - Here's How
My first ever college loan payments were due on Christmas Day in 2012. I most certainly was not so holly jolly about that! Fast forward to October 2018 and I was as jolly as can be as I made my last payments on those loans! I truly cannot describe the feeling of paying off such a HUGE chunk of money, it’s like a outer-body experience. The world of college loans can be a dark, depressing thing but if you work smarter instead of harder at paying them off, the reward is that much sweeter in the end.
So today we are going to be talking all things college loans. From breaking down terms and phrases you may here, to the types of loans available, repayment options, to what I’ve paid off so far, and some really strategic tips from my own personal experience that I use every single month. Yes, I still have college loans I’m paying off so I’m right there with you and fully understand what you’re going through! You’ll be able to implement these tips & tricks right now into your own personal college loan journey.
So grab that cup of coffee [or wine, no judgement here my friend!] and a notepad, and let’s dive into the world of all things college loans!
TYPES OF LOANS
Federal Student Loans - the main types are Stafford and Federal PLUS
Subsidized - not responsible for making any payments until after you graduate
Unsubsidized - responsible for making payments on the interest while you are in school
PLUS Loans - for parents of undergrads or for grad students
Consolidation - combines all of your federal loans into one
Private Student Loans - get through banks and financial institutions
TERMS TO KNOW & UNDERSTAND
Principal - this refers to the original amount of the loan; it can also refer to the balance remaining or the amount still owed on the loan.
Interest - this is ultimately the cost to borrow money.
Accrue / Accrued - refers to the amount of interest that has accumulated since the principal investment.
Capitalization - the addition of unpaid interest on the principal balance of the loan. This can typically happen during periods of deferment or forbearance.
Grace Period - the amount of time from when you graduate to when you must begin repayment on your loans. The time period is typically 6 months, but can be longer in certain instances.
Deferment / Forbearance - allows you to temporarily stop making payments on your loans or to lower the monthly payment. More detail on these below.
Fixed Rate - the interest rate doesn’t fluctuate throughout the duration of the loan, it is set and remains the same percentage.
Variable Rate - the interest rate fluctuates throughout the duration of the loan and can increase or decrease; also referred to as a floating interest rate.
PAYMENT OPTIONS
Avalanche Method - with the avalanche method, you are ultimately paying off the loan/debt with the highest interest rate first, then working your way through the next highest, to the next highest, until you ultimately are left with the loan with the lowest interest rate to pay. So lets say you have a credit card balance of $10,000 with 18% interest, a student loan with a balance of $5,000 with 5% interest, and a car loan with a balance of $1,500 with 4.25% interest. With the avalanche method, you would focus on paying off the credit card balance first because it has the highest interest rate. You’d still pay your minimum on the student loan and car loan but you wouldn’t focus much attention to them until your credit card was paid off. You continue with this idea of focusing your attention on the balance with the highest interest, until you have paid everything off. This method can be a bit daunting and hard to see the light at the end of the tunnel because it takes so much longer to pay off $10,000 at 18% interest than it does to pay off $1,500 with 4.25% interest.
Snowball Method - with the snowball method, you are doing pretty much the exact opposite of the avalanche method. You start by paying off the loan with the lowest balance, regardless of interest rate, and work your way to the highest balance until you’ve paid off all of your debt. This method can be much more rewarding than the avalanche method because you see your efforts paying off [pun totally not intended!] more quickly. Once you pay off the smallest balance, you move to the next and the next more quickly, making that final large balance not seem so terrible after all. As with the avalanche method, you’ll continue to pay minimums on all other loans and balances, but focusing your attention on the smallest balance.
Refinance - I personally have not refinanced any of my loans so I can’t speak to it from a personal experience standpoint. There are lots of companies out there though that deal with refinancing such as SoFi. With refinancing, you are generally working to get a lower interest rate or even a lower monthly payment. Refinancing is a new loan at a new interest rate and/or a new term. You can refinance both federal and private loans, and your interest rate is determined based off of your credit score and other financial stats.
Consolidate - I have also not consolidated any of my loans so I can’t speak to it from a personal experience standpoint. With consolidation, you are combining multiple federal loans into one monthly loan payment. The interest rate is decided by taking an average of the interest rates on all of the loans you are combining. Just from the research I’ve done personally, this doesn’t seem like a very financially smart option because even if your monthly payment due decreases, it generally is spread out over a longer pay term.
Deferment - if you decide to defer a loan, you are ultimately hitting pause on the monthly payments. In some instances you can lower your monthly payment for a specified amount of time. You may also not be responsible for the interest accrued during the deferment period. You do have to meet certain requirements to be able to defer payment on your loans, so not everyone is eligible. I also have not deferred payment on any of my loans so I can’t speak to this option from a personal standpoint.
Forbearance - this is similar to forbearance but the main different is that you are responsible for paying the accrued interest during the forbearance period. If you have a balance on the accrued interest when the period ends, that gets added to the total remaining on your loan, ultimately meaning you owe more money. This doesn’t seem like a financially smart option in my opinion and again, I have no personal experience with forbearance.
A LOOK INSIDE MY COLLEGE LOANS
I thought it would be helpful to take a peak inside my college loans to put some of this into perspective and not be so definition’s based in a sense. So as a background I went to school out of state; I’m from Upstate NY and went to school at Temple University in Philadelphia. I changed my major 4 times so it took me 5 years and I graduated in May of 2012. The school my major was in, the tuition was also highest there and it went up my last 2 years. I was on the dance team throughout college and we received no financial aid or scholarships [some of the super huge schools do receive scholarships]. I used loans for basically everything those 5 years…tuition, books, rent, etc. So needless to say, I’ve got quite the balance to pay back!
So now let’s get into what I’ve paid personally. As the title of this blog post says, I’ve paid off $40,000 in college loans. This $40,000 is just in principal and does not include any interest paid. I have quite a few loans out so my parents have helped with some payments but you bet your bottom dollar I will be paying them back! I wonder what the family interest rate is?! LOL
As I said in the very beginning of this post, my very first loan payments were due on Christmas Day back in 2012. These 2 loans were through SallieMae, now known as Navient, and let’s just say we became BFF’s for the next 6 years as I paid these bad boys off. I have to say, once the loans got down to 4 figures, I really started seeing the light at the end of the tunnel. And then once they got to the $5,000 range I remember that “YES ALMOST DONE” feeling setting in and constantly doing the math to see when they’d be paid off and how I could get them done even just a month earlier.
I did not refinance or consolidate these loans but was thankful enough that they had such low interest rates, like 2-3%. Because the interest rate was so low on these, that’s why I started paying them down first [think snowball method]. In the end with these loans, I ended up paying around $4,200 in interest on top of the $35,000 principal…which to me is not that terrible.
I also have 2 loans through Discover that I’ve been chipping away at. These, unfortunately, have very high interest rates…like 6% and 10.25%…GAHHH!!! I’m sort of doing a combo snowball-avalanche method with these. I’m overpaying on both of the loans but focusing more funds towards the loan with the 10.25% interest rate. So say the loan with the 6% interest monthly minimum is $225 - I’m paying anywhere from $230-250 on it. For the other loan, I am just throwing money at it to get that principal down so I can ultimately pay less in interest, like paying 3x the minimum. The monthly minimum is lower on the 10.25% loan so all of the extra money I’m putting towards it has made such a difference in knocking the principal down. It’s certainly working and I’m in that $5,000 range for that loan so the end is so so close!! Like, it should be paid off early 2020 close [I’ve paid about $4,000-5,000 already in principal].
I also have a Federal Stafford loan that I will start taking over from my parents in 2020. I’ll have to do an updated college loans post at the time to share where I stand, what I’ve paid off and all that jazz.
STRATEGIC TIPS & TRICKS
Now that we’ve gone over the basics of college loans and taken a look inside my current status, I want to share some strategic tips & tricks that you can easily implement right now. The goal here is to pay off these loans as efficiently as possible to ultimately save us money in the long run. We’re already spending thousands, so any savings we can make along the way translate into more money in your pocket.
Remember when payment(s) are due - the easiest way to waste money on college loans, or any bills for that matter, is paying a late fee. Do not pay late fees. I repeat, DO NOT PAY LATE FEES!!! Set reminders on your phone, reminders on your calendar, put sticky notes on your nightstand and mirror - anything and everything to remind you of the payment date. Hmmm, maybe WUPHF would come in handy right now! [The Office reference for anyone confused AF as to what I’m talking about]
Pay a few days before the actual due date - sometimes payment dates can fall on the weekend or on a holiday and therefore might not process until the next business day…making your payment late [see bullet point above]. This actually happened to me on my very first loan payment. It was due on Christmas, I paid it on Christmas, but it wasn’t going to process for a few days…so it was technically late. Paying early also ensures that if anything comes up unexpected in life, you don’t have to worry about your loan payment. For example, if my loans payment is due on the 18th of every month, I’ll take a look at when that falls in relation to my paycheck schedule. I ensure that my first paycheck of every month is used to pay the loan payment, so it usually gets paid the first week of the month.
Always overpay on the amount due - let me say it again…always, always, always, always, ALWAYS overpay on the amount due each month. Even if it is just $5 or $10 dollars, every little bit counts and makes a different to help knock down the principal balance of your loan(s). When I first started paying my loans back, I would round up to the nearest $10 at least. So say my payment due was $233, I would pay $240…or even $250 if I was feeling “generous” to good ol’ Sallie Mae. Now that my Sallie Mae loans are paid off, I’ve been really focusing my attention on my Discover Student Loans because the interest is absolutely re-dick-you-luss. So with that, I’ve been paying upwards of 3x the payment amount due.
Use part of your tax return or performance bonus as an extra payment - your tax return or performance bonus at work might seem like free money to just spend on all the things but remember, we are here to be smart with our money! Now, this doesn’t mean you can’t treat yourself to a little something but let’s not blow it all. I think it’s important to take a significant chunk and put it towards your loans [and another significant portion to your savings!]. It helps to knock a decent amount of your principal off, which ultimately helps you pay less in interest over the course of repayment.
Figure out which repayment method works best for you - we are all different, we all have different amounts of loans we took at, and we are all in different financial standpoints so finding what works best for YOU is key. There is no shame in having to refinance or forbear your loans if it works best for your current financial well-being. It is also important to decide between the snowball or avalanche repayment method. I think finding a plan that works best makes it one, more strategic, and two, you won’t feel like you are just “throwing out money” month in and month out. As I said in the last section breaking down my loans, I did the snowball method and started paying off the loans I had with the lowest interest rate first. I’m now doing a combo snowball-avalanche for my Discover loans because that is what is working best for me now at my current financial standpoint.
There you have it my friends, a look inside the world of paying off college loans! Have and questions or tips?! Share below in the comments!
Photography: Theresa Regan