Here’s what you have heard from me in the past in regards to student loans:
- Avoid them
- Parents are often to blame for student loans, but not because they didn’t save money
- The media’s fuss about student loan interest rates is stupid
Those perspectives are great and all, but what happens if you already have loans? Are you damned to financial hell? Sometimes. But most of the time you can regain control of your financial life by taking your student loan debts seriously. A majority of the people that I encounter, regardless of their other consumer debt totals, typically only pay minimum payments on their student loans. Child please. Paying the minimums is a huge mistake. Find out why in Pete the Planner’s Guide To Paying Off Student Loans.
As you can see below, Pete the Planner’s Ideal Budget does not account for student loan payments. This means that in order to move on with your life, you need to get rid of the student loans as quickly as possible. Too many people make spending decisions in spite of the student loan debt that they hold. Too many people nonchalantly hold student loan debt longer for the entire term of the loan for absolutely no reason. You can afford more house, afford more car, and save more money if you simply get rid of your student loan debt as quickly as possible.
Step 1. Find out if you have public (federal) loans or private loans: The basic difference between public/federal loans and private loans is that federal loans are backed by the U.S. government, and private loans are backed by institutions, such as banks or credit unions. Federal loans have a standard repayment duration of 10 years, and private loans often have repayment time of at least 15 years. You may have consolidated your loans, which most likely added more years to the equation. Federal loans tend to have lower fixed rates, loan forgiveness and deferment, and income-based repayment plans. Don’t ever defer your student loans. If they are in deferment now, get them out. You can’t pay off debt quickly if you aren’t paying on the debt at all.
Step 2. Determine how long it will take to pay back your loans at your current pace: In 2011, CNN Money reported that the average student loan debt for recent grads had risen to $25,250. By using an amortization calculator, you can see how long it will take you to pay off your student loans at your current interest rate and payment amount.
Step 3. Get mad: You just saw how long it will take you to pay off that $25,000+ in student loan debt, and it’s ok to be mad. You have about 20 seconds, then go to our next step.
Step 4. Form a new plan to pay them off faster: We have good news! There is a way to pay off your student loans more quickly. The easiest way to pay them back faster is to pay more than the minimum payment. It’s an easy step, and it works. If you increase your payment by $50, $100 or more, you’ll pay off your loans faster and end up paying less in interest. Remember: The longer your loans remain unpaid, the more you’re going to pay in interest, despite lower monthly payments. If you took out more than one loan, start by paying off the smallest loan first and move through your loans in that manner. You must set a time goal.
Step 5. Pay off your loans and move on with your life: You’re done. You have rid your finances of those pesky student loan payments forever. Save more money, build some wealth, and enjoy more of life. Do a little dance (or an epic dance, which you should record via video and send to me), and move on with your glamorous adult life.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.