Month: March 2015

The Nitty Gritty of How I Paid Off my Student Loans

I paid off my loans last Friday.  From my first minimum payment to the final payment, it took 459 days. Crazy.

I’ve had a few people ask me how I did it. The lifestyle side of paying off debt is tricky and personal. I’ll get into that later. I felt it would be a better use of my words to go through the technical details of what I did.

Here are the 7 key steps for how I paid off $45,330 in federal student loans.

1. Select a Repayment Plan that lowers your monthly payment.

Loans are automatically enrolled in standard 10-year repayment. Switching to a different repayment plan can significantly lower your monthly payment. I switched from Standard Repayment (10 years, same payment every month) to Graduated Repayment (10 years, payment starts low and goes up every 2 years). This dropped my minimum payment from $525 to $311. Switching to Income Based Repayment (“IBR”) or the Extended plans (Standard or Graduated) are also options.

A lower payment gave me greater flexibility each month. On the safe side, I had more money available to divert to an emergency should something happen. On the aggressive side, I had more money available to target individual loans. Thankfully, I didn’t have any emergencies and things got aggressive.

2. Sign up for Direct Debit

Sign up to have the minimum payment automatically withdrawn from your bank account. By doing this, you will never miss a payment. Never missing a payment is very important. Also, some loan servicers will reduce your interest rate for signing up. With FedLoan Servicing, this cut my interest rate by 0.25%. On Standard Repayment, I saved nearly $700 in interest.

3. Create a bank account solely for your loans + a buffer

I set up a savings account solely for my loan payments. Capital One 360 (referral link) is great for this because they let you have 25 savings accounts. When I got paid, I would transfer money to the account. This transfer included my expected minimum payment for that month and any extra I could spare. Hubs would also transfer money to me for this account. By having a separate bank account, I never had to worry about other debits. This was for student loans only.

I kept a buffer in the account to cover 1 month’s minimum payment. This came in handy as my minimum payment changed. It went down after I paid off each loan (I originally had 5), but it also went up twice for no identifiable reason. FedLoan Servicing couldn’t give me an explanation for the increases. Neither of the increases were drastic (~$10-15), but if had been riding the line with my account, it could have been an issue. Better to be safe!

My buffer gave me peace of mind should anything happen to my income. Over the course of repayment, my paychecks changed from twice per month paid current to every other week on a 1 week delay. The transition really screwed with my first bi-weekly paycheck. Having the buffer made transition less impactful.

This also gives me a final “slam dunk” as I paid off my loans. After my March payment came out on the 23rd, I didn’t need a buffer anymore. I used whatever was left in the account to give my last payment a little extra oomph.

4. Pick a payment strategy and Target one loan at a time. 

There are 2 main debt strategies out there. The Debt Snowball and the Debt Avalanche.

I used the Debt Snowball. All my loans had the same interest rate, so it was an easy choice. Because of this, I put any extra money on my smallest loan.  When I paid off a loan, my minimum payment dropped. Then I’d use all that new available extra money and apply it toward my next smallest loan.

**Remember, I created more extra money by lowering my minimum payment!**

The Debt Avalanche works when you have different interest rates. Start with the highest interest loan and work down through the interest rates. Targeting the loan with the highest interest rate will save money. Here is a thread on Reddit goes through the numbers of why it works even if you can’t pay more.

There is a third strategy that is a combination of the two. I call it the Quick Win Avalanche. If you have any low balances (i.e. less than $2000), target those first before attacking any higher interest rates. The quick win will give you more momentum to stay the course. All other debt is treated the same as the Debt Avalanche.

The key is to target one loan at a time. Don’t split your payments between obligations. You won’t get where you want to go as quickly.

5. Make multiple payments

Whenever I had any extra cash, I made an extra payment. Any time I had more than $100, it went to my loans. By making more frequent payments, my loans barely had time to accumulate interest. With less time to accumulate interest, more of my payments went my principal.

Caution: Be careful about how many payments you try to make. US Federal law limits how many withdrawals you can make from a savings account each month. FedLoan Servicing limited me to 8 transfers per month. During high random money months (like Tax Refund Season or December) I had to consciously consolidate payments. Note: Your minimum payment counts as a payment.

6. Track your Interest and Payments 

I made the horrible mistake of not closely tracking my payments in the beginning. This was a big motivational no-no. Luckily, I was riding high from my initial progress. Starting in May of last year, I tracked every payment and how much went toward interest. For interest, I tracked how much I was paying per month and per day.

Look at it drop!!*

Look at it drop!!*

Knowing how much I was paying in interest per day was incredibly motivating. In May, I paid 185.88 in interest or ~$6/day.  That’s a lunch! In March, I paid $15.01 or $0.55 per day. The only thing 55 cents can buy me is one step closer to freedom.

* Your eyes aren’t deceiving you. My interest payments did go up slightly in September. I didn’t make my normal large payment at the end of August because I was in England. This let extra interest accrue to be paid in September.

7. Throw ANY extra money at your loans.

Whenever I got my hands on any extra money over the last 15 months, it went to my loans. My tax refunds? Went to debt. Birthday money? Went to debt. Work Bonus? Debt. Raise? Debt. Hustle money? Debt. Savings from eliminating or lowering bills? Debt. Money sitting in a savings account doing nothing? Debt. Random money I found on the ground? Debt.

It all went to debt.

I didn’t give myself the option to spend the money on anything else. No matter where the extra money came from, it went to debt. Because it was extra, I didn’t want to absorb it into my budget. I also didn’t want to inflate my lifestyle. My expenses didn’t expect the money before I got it, so I pretended like it never happened. Similar to increasing a 401k contributions when you get a raise, you can’t become attached to money you never have. By directing every windfall to my student loans, I was able to pay them off faster and get out from under them.

Boy, am I glad I did.

And that’s how I paid off my student loans. 

Any questions?

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Today is the day.

I made my final student loan payment this morning. Paid in full. I thought it would take until next payday to get there. But as seems customary this close to payoff, Hubs and I decided it was best to tap into savings and be done. So, we are done.

I don’t have student loan debt anymore.

That’s a pretty cool thing to be able to say. While I was in school, that’s what I wanted more than anything. Now that it’s here, it feels like a lie when I say it out loud. My inner monologue rejects the idea. “Of course you have student loan debt. You graduated from law school 2 years ago. All law school grads have debt.

I don’t have student loan debt.

Being free of student loans feels great, but I don’t know what else that means. I’ve tried to put my thoughts into words, but nothing feels right. Perhaps it doesn’t mean anything right now because nothing is different yet. Just like before, nearly my entire paycheck went toward my debt. It’s kind of like I’ve been working for free for the last year. #slavelabor

It might be perfect for me to pay off my loans 2 weeks early. I was preparing for April 10 to be different. Now, April 10 will be different. When I get my first post-debt paycheck, I’ll be able to keep it. I won’t have a minimum payment, I won’t have an extra payment. I won’t have a payment. It will be me and my money, together at last.

How does it feel? It’s a huge relief, but it’s weird. I’ll probably cry later, but that’s just how I process things.

What’s next? Not quite sure. I’ve got savings accounts to refill, delayed purchases to act on, and a lot of stuff to save for: Travel, a house, more travel.

It has been an empowering journey over the last year or so. I’ve learned a ton about money and even more about myself. Who knew talking about money on the internet could be so entertaining and enlightening. Thank you to everyone that’s been along for the ride.

Now I have to learn how to save. Eek!

Observations from a Retirement Seminar

I went to a Retirement Seminar last Tuesday. I had two main motivators to go: 1) I care about my own retirement, but more importantly 2) I wanted to see who else cares about retirement, what questions they asked and what sort of advice the presenter provided. So I went. Operation: What the heck are they teaching us? was in full effect.

This is what I saw.

First Observation: The young people are missing.

I was one of the youngest people in the room. I went with a coworker that is 1 year younger than me, otherwise, I would have had the youngest spot on lock down. There were maybe 2-3 other guys in their late 20s and 1-2 in the 30s. (Yes, all men.) The rest were a mix of men and women in their upper 40s, early 50s. How can we get young people, especially women, to harness the power of early investing if no one cares until later?

Second Observation: People expect shenanigans from financial people.

This seminar was put on by my employer for employees only. There was very little sales in this presentation. The only sale was that we can get discounted help if we’d like it. This was 95% information, 5% we can help. Even with that tone for the seminar, people still expected the presenter to be fishy.

I heard one attendee say as we were leaving “Telling us that our money needs to last 30 years is just a scare tactic.” Ummmm. No. Living into your 90s is getting easier and easier. The average life expectancy in the US is 81 for women and 76 for men. That’s average. In 2010, there were 1.9 million Americans over the age of 90.  In 2012, there were 5 million Americans over 85. As modern medicine improves, these numbers will only increase. This is not a scare tactic. This is a fact of life.

I don’t know about you, but I’d rather have a little cash stashed away to feed myself should I live to be 90. I will only being eating cat food as a dare.

Third Observation: People are scared.

It broke my heart to see how many people in the room had the “deer in headlights” look. 80% of the audience was within 15 years of retirement. That’s not a lot of time to make up for lost ground. After the presentation, half the crowd bolted to the front to grab the presenter’s card. I’m glad these people want to do something now, but you can do so much more if you start earlier! See First Observation.

Fourth Observation: His numbers were wrong.

The powerpoint presentation listed the 401k match and catch up numbers for 2013This didn’t bother me initially. I justified “Oh, the limits were the same in 2013 and 2014. He probably just didn’t update his deck. Sloppy, but he’ll say something.” BUT HE DIDN’T! Not only did he not mention that his deck was old, but he said out loud that the limit was still $17,500. I should have corrected him, but I didn’t. Perhaps I didn’t want to reveal myself as a hopeful super saver with so much fear in the room.

Fifth Observation: The framework numbers weren’t all bad.

Retirement planning takes a lot of guesses. I get that. Most of his numbers were fine. (even though I was looking for holes!) He used 4% for inflation. That seemed a little high, but high on the good side. 3% seems to be the average inflation number used.  For return, he used 7%. That’s normal. Nothing too crazy here.

I was pleased to hear that he recommended that we plan for a 3.8-4% withdrawal rate. However, this number confused the bejeezus out of the crowd. Questions came up like: How much/what percent do I have to save to do that? What rate of return is that based on?  I’m not an expert on withdrawal rates, but with so many people so close to retirement, I expected them to have a better grasp on this. ((The same guy that said living for 30 years in retirement was a scare tactic said he was planning on a 15-20% withdrawal rate. *facepalm* ))

Sixth Observation: We aren’t being asked to save enough.

The presenter was straight up asked how much we should be saving for retirement.

His answer: 10%.

 

Perhaps he gave a lower estimate because most of the people in the room have a pretty decent pension waiting for them. Maybe he gave a low estimate because he didn’t want to scare people. Either way, industry standard is 15%, and that’s if you start early. It seemed irresponsible to tell people to save less than they were expecting to hear.

Have you ever attended a retirement seminar?  Did it surprise you?