Life after college: Getting out of debt
Start with a goal. Make a plan. Never — ever — lose sight of how powerful interest can be. And look for big-money wins. (That doesn’t mean you have to cut out your daily coffee fix.)
For me, adulthood sank in when my first student loan payment was due. According to my servicer, I would soon have to begin paying back all the money I had borrowed for tuition and textbooks and, OK, yes, a onebedroom apartment in a fancy part of Houston. When lenders are circling your campus with loan applications and giveaways, they don’t warn you about what you should and shouldn’t buy with borrowed money.
I had borrowed $10,000 using student loans. It was an amount that, let’s be honest, would be a dream for today’s graduates. The average student loan borrower carries a debt load of $39,400, according to Student Loan Hero. But paying it off quickly felt unrealistic. Plus, my lender gave me 20 years to pay off the debt, which really drove home the idea that I wasn’t going to do it anytime soon.
I realized that I had no idea where to begin. I needed a plan.
START WITH A GOAL
My first real job after college paid me $25,000 a year. It wasn’t much, but it made me think it was possible to pay off this loan before my 40th birthday. More than that, I was motivated to pay it off because I had a goal: I wanted to travel to Europe. Wouldn’t it be nice to use my new salary for something, I don’t know, fun? It also meant that making the payments wouldn’t just feel like a punishment, but that I was instead actually working toward something.
INTEREST IS WHERE THEY GET YOU
When I started to devise a plan to pay off my debt, I realized why my lender was so amenable to a 20-year plan: The longer the repayment terms, the more money the company made off me.
Logging into my lender’s website, I found some important details about my loan: my principal balance ($10,000 — the amount I originally borrowed) and my interest rate (8 percent — the percentage of my principal balance that I had to pay in addition over time).
Using a basic student loan calculator online, I realized that the total amount of payments I would have to make over the 20 years would total just about double my original loan amount.
Americans’ student debts have skyrocketed over the past 15 years, and lenders have been cashing in.
But for me, it was a recipe for going broke.
According to the calculator, if I paid off the loan in two years instead, I’d pay only $800 in interest, making my total repayment amount $10,800 — a sum much easier to stomach.
PICK BETWEEN THE SNOWBALL AND THE AVALANCHE METHODS
Based on my math, if I wanted to pay off my loan in two years, my monthly payment would have to be about $450. At the time, a bowl of $7 pho soup paired with a cold $4 beer was the ultimate luxury, so $450 felt like a fortune.
But I knew I could probably afford more than the $100 minimum payment every month.
Complicating matters, though, was $3,000 in credit card debt I also had.
I wasn’t sure which debt to pay off first. That’s when I discovered two methods to prioritize your debt: the snowball and the avalanche.
With the snowball, you focus on paying the smallest debts first. The idea is, if you see those start to chip away, you begin to feel like you could actually get out of debt altogether. It keeps you motivated to keep going.
Then there’s the avalanche method. Instead of focusing on small balances, and building from those, you prioritize your debts with the highest interest rates. The idea is to start big and go down from there. After all, debts with the highest interest rates cost the most to keep over time.
My credit card balances were smaller, and they also had higher interest rates than my student loan, so it was a no-brainer to start with them.
THE ‘B’ WORD: BUDGETING
I soon realized I had to do something I had been avoiding: come up with a budget.
I started with my teeny salary, then subtracted my basic living necessities and bills from that amount to calculate how much I had left over every month. This is what money types like to call discretionary income.
I had about $200 of discretionary income left each month after I accounted for those living expenses and a few hundred bucks for spending cash. (Shame me all you want, I will never regret seeing the Strokes perform live.)
Whenever an unexpected sum of money found its way into my life, I used it to treat myself. Treats made me happy and kept me motivated. But I didn’t burn it all on fun things. I allowed myself to spend 10 percent of any windfall on a treat, while the remaining 90 percent went toward debt. If I was lucky, that 10 percent was enough to buy pho and beer.
PUT EXTRA MONEY TOWARD YOUR BALANCE
There’s a sneaky trick lenders like to pull. When you pay more than the minimum required payment, instead of applying that extra amount to your principal balance, some lenders will put it toward your “future interest,” which is the interest that’s due on the following month’s payment. It’s a way for them to keep making money off you so that you can never really get ahead.
I learned this the hard way. After a couple of months of payments, I was so excited to see my $10,000 balance drop. But when I went online to my account, I noticed my balance had not decreased very much at all, despite paying more than my minimum. I called my lender and asked what the problem was. “Did you want that extra money applied toward your balance?” they asked, in so many words. Yes, it would be nice to break free of your heinous clutches someday, I thought to myself.
Going forward, I was going to make my request clear by writing “apply to principal” on my checks. I had assumed they would do what was best for me financially.
It was a solid life lesson: Being naïve about money will cost you.
Some online accounts now will tell you how the payment is being applied and give you the option to select how. But if you’re confused about what to select, it’s worth picking up the phone and asking your lender how these extra payments are applied. (The Consumer Financial Protection Bureau even suggests sending your lender a letter with explicit instructions on this. The agency even has a sample letter you can use.)
SOMETIMES YOU GET LUCKY WITH BIG-MONEY WINS
I tried to be frugal when I was in debt, but I’d be lying if I told you that cutting back on coffee was the secret to getting out of it. I needed cheaper housing. I needed a better job. In order to really tackle my debt, I needed big-money wins.
Even though I liked my job, I spent my downtime searching for a better-paying one, and after 12 months of hunting, I finally found it. I made $45,000 a year to write manuals for a huge oil and gas company.
I kept living as if I still earned $25,000, however, which allowed me to pay off half my loan in just a few months.
Another big win? I boomeranged. With just $5,000 left to go on my loan, I moved back to my childhood home. I had become the stereotypical millennial.
It was unpleasant. I was in my mid-20s with a 10 p.m. curfew. If it was below 70 degrees and I wasn’t wearing a sweater, my well-meaning but overbearing mom lectured me. But it helped me save $1,000 a month in rent.
Shortly after paying off my loan, I celebrated in the best way possible: I saved for, and then took, a two-week trip to England, Italy and Greece.
While I was paying off my debt, a friend asked why I was so obsessed with that goal, why I was so obsessed with money. “Just enjoy your life,” he advised. People like to tell you money doesn’t matter, that there are more important things in life, like family and friends and travel. They’re absolutely right.
The problem is, money gets in the way of those things. Money was a constant roadblock that kept me from focusing on the more important things.
Paying off $13,000 took a little over a year of nose-to-the-grindstone focus. But being able to watch the sun go down in Santorini, not even once worried about money, was worth it.
“Americans’ student debts have skyrocketed over the past 15 years, and lenders have been cashing in.”