You can pretty much think of student loans as your shadow until you finally pay them off or at least get them "forgiven" since they are not something you can get rid of through bankruptcy or any other means. How do you get them forgiven? Easy, make payments for 25 years and get them approved to get them forgiven. Even if you are just making minimum payments, 25 years of minimum payments will be greater than the principal you originally owed. Add to the fact that student loan minimum payments are not stable. When you make a big payment on one, then the minimum amount due will decrease. The other way to get student loans forgiven is to die. So in reality there are three ways to get rid of your student loans, making payments for 25 years which will be a huge burden on your wallet, dying, or paying them off. I guess there is one other way, which is to get a federal job/any other job that will pay off your loans for you. So I guess some public jobs, and some private jobs will also rid you of your loans. But if you're like me and work in the private sector and your company will not pay off your loans for you, then the most reasonable thing to do is pay them off yourself as quickly as possible. Some people will make an argument that say you are on a 10 year payment plan, and you only the minimum, and use the rest of your money that you were going to pay off loans to invest that you will actually end up with more money after 10 years than the person who was on the payment plan. That is a valid argument, but it is also more risky. For me at least, most of my loans are in the range of 6% interest rate. So for me to actually make more money by investing I would need to find something that gave me rate of return greater than 6%. Not extremely easy in the economy we are in today. You will certainly not make greater than 6% from your savings accounts. So long story short, for me at least the best way to get rid of my student loans is to pay them off as quickly as possible. There are many theories here as well as the quickest way to pay of your loans, and if you have mathematical data to show that your way is better than mine, then by all means tell me because I'd love to find a way to pay them off quicker.
So I guess the best way to show how to pay off your loans quickest is through an example. I'll just make myself the Guinea pig. I started off the summer with $37,000 in student loans. So I'd place myself in the middle of the pack for debt. The way my loans were setup, I had about 10 different loans, some of them had the same interest rate, some had different ones. Luckily for me though, most of them were managed by one company so I can see my loan information pretty easily. Of my loans, they ranged from 6.8% to 4%. Many of my loans had already started to accumulate interest when I graduated. Unlucky for me, whenever I made a payment, the payment would deduct from the interest first and the principal with the remaining. My first payment I made was $500, and it was pure interest. So what you are going to want to do to figure out your payment plan is get all your loan information in front of you. I usually just use Excel and make a table to look at my data.
The first step you want to do is basically rank your loans from highest priority to lowest. Highest priority is always your loan that has the highest interest rate. So for me my number 1-5 were all my loans that were 6.8%, my 6-7 were my loans that were 6.0%, my numbers 8-9 were 5.5% and my number 10 was 4%.
It looked like this
- 6.8%
- 6.8%
- 6.8%
- 6.8%
- 6.8%
- 6.0%
- 6.0%
- 5.5%
- 5.5%
- 4%
The amount owed on each one is not important, the important part is the interest rate. So what you are going to want to do is make the minimum payments on numbers 2-9 and on your number one priority pay as much as you can. For me, I decided that I can live comfortably paying off $1000 a month. So I pay about $325 in minimum payments for my 2-9 loans and about $675 a month on my number one loan. Once your number one loan is paid off, you move to your number 2 loan. So after I paid off my first loan, I made the minimum payments on 3-10 which was about $300 and paid about $700 a month on my new number 1 loan. The important part is that once you pay off a loan, that you do not reduce the amount you pay per month. It totally ruins the process if you reduce the payments after each loan is paid off. From my calculations I should have all my loans paid off in about 2 1/2 years from now.
And if you need some incentive on paying off your loans, you can calculate your interest with this simple formula. Simple for two reasons, one because it is easy math, and two because most student loans are calculated using a simple interest rate. That means that your your interest is only calculated on your principal.
The formula is this: (Principal * Interest Rate)/ 365.25 = Daily Interest accumulated.
So if you owed $5,500 on a loan with an interest rate of 6.8%, the daily interest that you would owe would be as follows: ($5,500*6.8%)/365.25= $1.02 a day. And to see how much that is in a month just multiply it by the number of days in the month, so a 31 day month would be $31.75 extra you owe by not paying off your loan. From my own loans, I calculate that I accumulate about $100 a month in interest. Thanks DebtFreeAdventure.com for the interest formula.
