A Breakdown of Student Loans
In college, I took out an incredible amount of loans to pay for tuition without really realizing what I was getting into. But that's kind of the trick, right? Anyway, even though I graduated almost six years ago (w-whaaat?!), I've still barely managed to break the surface of my student loan debt.
Like many of us, the bad economy has lead to multiple deferments over the years while we try to scrape by in the present - but the beasts of the past never go away, they only get stronger. Making minimum payments on student loans is a sure-fire way to end up paying an extra 10, 20, maybe up to 50% extra in interest alone. For the average graduate with $40k or more in loans, that much interest could go to buying your first new car!
So how do we escape the cycle of minimum-payments-accruing-interests without driving ourselves out of house and home? I've got a plan, but it starts with a little math.
STEP 1. BREAK DOWN YOUR DEBT
I first put together a spreadsheet of all my outstanding student loans, six in total, including their total amounts, interest rates, and current minimum payments.
Like many of us, the bad economy has lead to multiple deferments over the years while we try to scrape by in the present - but the beasts of the past never go away, they only get stronger. Making minimum payments on student loans is a sure-fire way to end up paying an extra 10, 20, maybe up to 50% extra in interest alone. For the average graduate with $40k or more in loans, that much interest could go to buying your first new car!
So how do we escape the cycle of minimum-payments-accruing-interests without driving ourselves out of house and home? I've got a plan, but it starts with a little math.
STEP 1. BREAK DOWN YOUR DEBT
I first put together a spreadsheet of all my outstanding student loans, six in total, including their total amounts, interest rates, and current minimum payments.
My loans are now broken down in an easy-to-read format which can easily be adjusted over time. Notice that my total balance is $16,415.57, quite a daunting number to look at on its own! That's why breaking down the individual loans is so important - it's a visual strategy to make the process less intimidating right from the start. Plus I have reference numbers and mileposts available at my fingertips throughout the journey!
As you can see, I've ordered my loans by amount from smallest to largest - this is crucial to the next part of my plan, which is...
STEP 2: SET GOALS AND BUDGETS
Now that I've got my loans broken down and sorted by amount, I can set goals for how quickly I'd like to pay them off. Tomorrow is impossible, and even within a year is unlikely. After all, I don't want to give up all of the things I enjoy, confine myself to my cold apartment with holes in my clothes and suffer because of impatience. So I've set reasonable goals for myself, ones that I know I can easily maintain.
Here's what my goals look like as laid out in a spreadsheet:
What this chart shows are the same loans and total amounts as the previous list with the goal dates added to column E. As you can see, I've spaced my goals about 6 to 7 months apart. That means I'm aiming to pay off all loans in just under three years (by October 2017). The smallest loan on my list is only $527.58, so I've allowed myself 2 months to pay this one in full.
Column F is the most important part of this step. Once deciding the when, you need to calculate the how much.Even someone with my limited math ability can figure this part out. If I want to pay Loan 1 by April 1st, 2015, that leaves me two months (more specifically, two paychecks) between now and then. The total ($527.58) divided by the pay periods (2) equals the required monthly savings (in this case, $263.79). I rounded up to the nearest multiple of 5 each time to ensure a small buffer.
There's a couple of things to be aware of when looking at this chart. 1) The totals for each loan will go down over time as I continue to make monthly minimum payments, so they will need to reevaluated at each 6-month period to find accurate numbers; 2) The money set aside each month looks drastically different from Loan 1 to Loan 6, but in addition to going down over time, the total paid in MINIMUM PAYMENTS will also decrease. Here's an adjusted total of how much I need to set aside from my paycheck each month to loan purposes:
Column G represents my current TOTAL minimum payment, based on the total amount of loans at each interval (i.e. I now have 6 loans and pay $273.39 a month, but once I pay off Loans 1 and 2, I will only owe $214.56/month).
The totals in Column H represent the combination of my monthly savings and minimum payments, and the differences between each 6 month period are less drastic when viewed in this light.
Nevertheless, it will be a gradually uphill struggle, and so it's important to stay motivated, focused, and accountable. The hard part is up next...
[Work in Progress]
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