The fact that I work mostly with millennials, means that I see people just as they’re beginning their financial lives. They often haven’t had much of a chance to accumulate any assets, especially if they’ve pursued any higher education. They almost always have a load of student loan debt and are simultaneously anxious about managing the debt and building assets for their future. This has really been on my mind lately, and I wanted to outline a few tips that I am recommending to clients regarding their student loan payoff strategy.
Don’t beat yourself up
I’ve talked a lot about money shame. how it can be counterproductive and actually lead you to make decisions that HURT your finances. I see money shame a lot with my heavily indebted clients and spent a long time feeling it myself.
I graduated from college with a good amount of student loan debt. I spent WAY too much time beating myself up for being stupid for taking out so many loans, upset with my parents for not saving for college, and convincing myself that I would never get out from under them. This led me to swing wildly between putting every penny towards my loans and depriving myself or going on #yolo spending sprees and sticking my head in the sand. I don’t feel like either of these served me because neither was sustainable for my long-term financial health.
What I recommend clients do is to remember their student loan debt is not a reflection on how smart, capable, or worthy they are. It is merely a circumstance that they need to address and plan for going forward. Check the judgment at the door, and you will see just how much of the weight you feel is lightened and the progress you will be able to make my simply making that one mindset shift.
Look carefully at your private student loan interest
Interest rates are very low right now. It is really common to see fixed student loan rates between 4-6% these days, which is significantly lower than a lot of loans you might have. I invite you to look at your current private student loan rates, how long you have to pay off your loans, and what the potential payment would be should you refinance your loans. I would caution against a few things here:
Don’t extend the payments out in order to reduce your loan payments. So if you have 7 years left on your current repayment plan, look at refinancing to a term that is 7 years or less. That is unless you have another plan for the money savings (i.e. you’ll send the extra cash automatically to your 401(k) plan) and will actually stick to it). This is where knowing yourself and what you’ll actually do is important.
Be sure to double-check that you’re not giving up any benefits like death discharge or taking on a loan with a prepayment penalty.
Review your federal student loan repayment plan
I see a lot of people who don’t have a good handle on what repayment plan they selected on their federal student loans, which can lead to shock and frustration when they’re still making payments after 15 years and have barely made a dent. This is a helpful article to compare the different repayment types.
Call your loan servicer and ask what the monthly payments would be on some other repayment plans. Then assess whether the monthly payments/ payoff time horizon would fit in with your other financial goals. For example, you might be on an IBR repayment(which is 20 years), but have a bit more wiggle room in your budget and want to prioritize the loan payoff. Then it might make sense to switch to the standard 10-year repayment schedule, and shave 10 years off your repayment and save a lot of interest.
Decide how long you want to take to pay them off
This is really crucial. We all have competing interests and a limited resource in which to accomplish them(your cash money!). Deciding how quickly you actually want to be out of debt is crucial to do before anything else, because it will inform your decision-making on how/when you can accomplish the others.
So if you really want to pay off your loans before you have kids in 5 years, then that will help you decide how much to put towards your loans. I like to use this debt payoff calculator to see the effect this will have (interest and time saved).
Feel free to comment below or reach out here if you want to discuss further.