I am writing this post in honor of my sister who will be graduating from college in two weeks. The sooner she comes to terms with her debts the sooner she can work her way out. My brother made the joke recently that as my sister passes the podium degree in hand I will have her loan repayment schedule waiting for her. My three step response was as follows:
1. Buy a Lotto Ticket
2. Win Lotto
3. Pay off student loans
I later reflected on this joke and realized it stemmed from what many college students face when they get to the opposite end of that podium. A sense of a tunnel with no light at the end. May the post below be your glimmer of light.
I believe I am in Student Loan purgatory, the grace period. Students have 6 months after they graduate to set themselves up financially before the harsh reality of student loans sets in for a 10 year ride. The students who see the light take this purgatorian opportunity to seize the day and make huge leaps on reducing the principle on their student loans that will pay in dividends over the years. The students who look down during their purgatorian vacation slowly realize on that 6th month and 1 day that the vacation is over.
Now my situation is unique and as I found out over the last 15 months very beneficial. As you will find out over the course of my blogs I am a “silver lining” type of guy. Now as I laid out in a previous post I had over $50,000 in student loans as broken down below:
|Unsub @ 6.8%||$26,507.65|
|Interest Accumulated||$ 2,420.22|
Before going further I must go into detail on my unique circumstances. Typically when one graduates from college he or she goes out and seeks a job. In my situation, in order to graduate from my graduate program I had to complete a one year paid residency in which I lived in the community, worked 8 to 5 at the organization, and completed some topical paperwork on how my on-the-job experience rounded out my didactic studies. The key word to the situation is the “paid residency.” So technically I was still a student and yet had an income to cover my living expense and then some. Essentially, I had my 6 month grace period turned into an 18 month grace period, but nothing is free of course. During that 12 month paid residency I paid out $3,894.00 in tuition in addition to all the payments I was making to my student loans to keep from going further into debt.
So the “silver lining.” I had 18 months to make the biggest dent in my student loans possible which will in turn save me thousands over the course of the debt. The goal was to pay off the interest accruing unsubsidized debt before the grace period of June 15, 2010 comes around meaning we had a $28, 927.87 dollar hill to climb. Daunting to say the least.
Tools to complete the Job:
DINK (Dual Income with No Kids) household – Both of us are paid bi-weekly meaning we had a total of 4 extra paychecks a year. I automatically considered half of each of these paychecks, and sometimes more, as earmarked for the student loans giving us an even greater accelerated pay-off period.
18 Months in which to break down payments (would have to average at least $1,607.10 not including any additional accrued interest over the 18 month period)
Intangibles: Knowledge of loans, income, expense, and determination to take aggressive steps to rid self indebtedness
Understanding of student loan process at ACS-Education (a BoA loan agency)
I found out my 3 student loans had been placed into 2 groupings. The first had one part the $8,500 subsidized amount at 3.475% variable rate. The second had two parts. $26, 507.65 unsubsidized and $17,000 subsidized both at 6.825% fixed rate.
I am not 100% sure how I figured this out, but I could chose between the two groups to make my payments. So of course I made the payments to the 6.825% rate. What I came to find out 6 months later is that the loan company was dividing principles payments between the subsidized and unsubsidized portion meaning that I was paying down principle amounts on loans that were not actively accruing interest against me while the unsubsidized half of the loans were.
I learned that I had to make a verbal request by calling their 1800 number, could not set-up a standing order, to have the entirety of my payments applied to the unsubsidized portion, thus decreasing the total amount of active principle ticking interest against me daily and in turn saving me more money. I have made this phone call for every loan payment since I discovered their allocation method.
All this to say, I stumbled upon this phenomenon and because I got lucky and discovered the process to give my loan payments surgical precision I was able to save substantial amount of money which in turn got applied to the principle saving me eve more money.
Be very critical of your loans and do your homework. The credit companies are not there to walk you through the process, they want to make as much money off of you as possible.
I thought that consolidation was some magic process that my loans were reduced and the payment period could be shortened. I was very disheartened to find out that consolidation does nothing but make it more “manageable” for the lendee to make payments. The basic consolidation equation is the weighted average of your student loans + a charge or fee for the process. The only scenario this would be an effective measure is if the majority of your student loans was on a variable rate plan with an extremely low rate at the moment. Since over 80% of my loans were at the fixed 6.825% rate it made no financial sense to pursue the consolidation adding an additional 1-3% charge to the principle for the process. Also, I found that consolidation did very little if you were on an accelerated pay-off period, because by the time you saw any savings from the reduced interest rate you could have paid off the majority of the loan.
So as of today I am approximately $2,000 away from our goal with two months of payments left to make.
You may be reading this wondering why are they in such a rush to pay off these loans. Student loans have a tax incentive up to $2,500 dollars, they are “good” debt, and we had 18 months to say up money.
The biggest reason why we got debt crazy is because I do not like having my money spent before I make it. Knowing that nearly $400 of my money would be gone before I even brought it home pissed me off. I also have a strong feeling that if we had not made a conscious decision to apply this money to something constructive we would have found ways to waste it away. The trap many 20 something’s fall into, buying cars with payments, tvs, and other expensive toys. This task was not easy and as I broke our financial picture down into ratios we learned we were giving 20 cents (20% of take home pay) of every dollar we made towards our student loans. The thing that makes us sleep easier is knowing that 20 cents over three years is a lot better than paying 10 cents a day for the next 10 years in turn “making” us money.
As you read this post ask yourself if you have a firm understanding of your student loans. Do you know your interest rates? Do you know when your grace period ends? Do you even know how much your student loans are? Now is the time to take an hour and figure these questions out. That one hour could be one of the highest paid hours of work you ever make potentially saving you thousands in the years to come.
Please leave a comment below outlining what student loan situations you may be in or how you paid yours off. Did you find this post helpful in framing how you approach your loans?