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Sign up to have the minimum payment automatically withdrawn from your bank account.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.
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.