Tackling $tudent Loans & Debt

It took us 3,832 days to get to this point and I am proud to declare that the student loans are officially GONE!

My wife and I both graduated from college with what I would classify as “job ready” degrees. She, a pharmacist and myself with a degree in economics, we were both fortunate enough to step into great jobs fresh out of graduation and began earning steady incomes immediately. But what came as a bit of a shock to both of us was the sticker price that accompanied those degrees – a cost that now needed to be re-paid, to the tune of nearly $100,000!

While it did take us nearly 10.5 years to get it done, I’m very thankful that the student debt season of our life is now behind us. Having had a chance to reflect on the process we went through to satisfy our obligations, there were three particular strategies that helped us and we felt worth sharing.

1.  Building a debt Snowball – Graduating with a degree in economics and priding myself on my financial “wizardry,” I thought it was a no-brainer that you start tackling debt by knocking out the loan with the highest interest rate first. That is, whichever loan has the highest interest rate should take first priority in receiving any extra principal payments we were able to make.

What I didn’t consider was just how discouraging it felt to make those extra principal payments and still feel like we were making no progress. So, we decided to shift course and instead try a different approach – we built a debt “snowball.”

 It worked like this: rather than apply extra principal payments to the loan with the highest interest rate, we applied them to the loan with the smallest balance. In doing so, we immediately saw progress as the loan balance more quickly approached, and then became, zero (we also allowed ourselves to celebrate a small milestone in the process). With one loan balance now completely satisfied, the monthly payment that we had been making on it could be applied entirely to the next smallest loan. We were now building real momentum, like a snowball does as it rolls downhill, and became even more excited watching another loan balance approach, and then become zero. And so on and so forth, until the very last loan was paid off. While strictly speaking this may not be the best approach, mathematically, the tangible progress we could feel provided us with added motivation to attack the loans more aggressively than we otherwise would have. In turn, this helped us pay off the loans more quickly than simply following the basic math .

2. Understand how your lender applies excess principal payments – We know the power of compound interest and how it works against us in tackling debt. Because of this, my wife and I were diligent in making an “extra” payment each month to more aggressively pay down the principal balance of our loans.

What we didn’t immediately realize was that the loan company was not applying 100% of our additional payment to the principal balance as we had intended.

Instead, the extra payment was being applied to our future monthly obligations in the traditional interest first, principal second fashion. While it was nice to build goodwill with our lender in being ahead of schedule with our monthly obligations, our goal was to knock these loans out as quickly as possible. So, we shifted course. Instead of continuing this faulty approach, we combined the two monthly payments into one – same overall monthly amount, but now being made 1x per month instead of being split in two. This change caused for 100% of the additional amount to now be applied entirely to the principal balance rather than the next month’s obligation. In turn, this allowed us to better realize our goal of more aggressively tackling the debt (and save on interest costs).

3. Use a balance transfer offer for credit card debt – Taking on credit card debt is absolutely and without a doubt the worst financial decision we can ever make. Everyone hears it. I’m pretty sure, deep down we all know it. Yet somehow, someway so many of us still find ourselves dealing with it at some point in our lives. We too were there early in our careers and the 12% interest rate we were paying was no way to get ahead -- though we did collect some great t-shirts from the cards we signed up for in college. Once we decided we were going to get the credit card debt off our personal balance sheet as quickly as possible, we employed a strategy which took advantage of balance transfer offers which are commonly offered by credit card companies. If you have a decent credit score, there’s a pretty good chance that you may qualify for a new credit card that offers a 0% introductory rate on a balance that you transfer from an existing credit card to a new one – and that’s what we did. We researched online to find the cards that offered the longest promo period at 0% interest, the lowest balance transfer fee, and then opened a new credit card with that company. Once established, we worked through the online process of transferring the balance from the high interest rate card to the new one. We then calculated the monthly payment that needed to be made to ensure the debt was satisfied by the time the promo period expired – because there is no interest to consider, the calculation is simply the total balance divided by the number of months at 0%. While the monthly payment was still decently high, at least 100% of the payment was now being paid exclusively to the debt balance and allowing us to climb out of the hole much more quickly. Once the debt was paid off, we made a vow to never again put ourselves in that position.

While getting into debt may be fun while it’s building, it is never an enjoyable experience to climb out of. Still, nearly each one of us will likely find ourselves in some form of it at some point in our lives. While the climb out may put a temporary strain on monthly cash flow in the moment, the sense of freedom that is felt upon finally getting rid of it makes the short-term sacrifice more than worth it. I’m hopeful that the steps above can help you climb out a little sooner -- just like they did for my wife and me.