Well we’re half way through 2018 which means it’s a handy time to check in with your student loan repayment goals. Read or watch this if you want to see how things are going for me and check out my tips for making extra student loan payments.
Estimated read time ~5 minutes estimated watch time at 1.5x speed ~ 2.5 minutes.
It’s all about your individual student loan repayment goal.
Everyone is going to have a different student loan repayment goal that makes sense for them. There is no “one size fits all” dollar amount that is right for every borrower. You’ve got to pay what is reasonable for your student loan amount, your income, and the rest of your financial goals.
The best repayment goal is $3,000 each month toward my student loans. I’ve refinanced and my required monthly payment is $1,345 each month so that means I pay at least an extra $1,645 a month on my student loans. Paying $3,000 each month is aggressive enough that I can pay my debt back quickly but still leaves me enough room in my monthly budget to spend on the experiences and things that matter most to me.
Track your repayment progress.
It’s easy to set a goal and then not check in with it until the end of the calendar year. But by then if you’re not on track it’s too late to make any changes. So I check in with my repayment progress quarterly (every three months) to be sure I’m on track and celebrate any extra success I may have had.
In the 2nd Quarter of 2018 I paid $9,840 on my student loans.
My goal was to pay $9,000 ($3,000/month X 3 months) so I was able to pay a little bit extra during the second quarter.
Use extra income for your student loans.
It seems obvious that you would want to use your extra income to pay down your student loan debt but it can be harder to practice than you might think.
The money I used this quarter to pay extra came from some consulting work I do on the side. It can be tough to convince myself to apply a percentage of that to my student loans because I hustle on top of my 40 hour work week to earn that money so sometimes I want to treat myself with it.
What has helped me to use this extra income for my student loans is to remind myself that paying even a few hundred extra means less time I’m beholden to student loan debt. Even shaving a month or two off of that debt buys me a freedom that I can’t find when I buy things or even when I travel.
Keep the big picture in view.
One thing that’s been very rewarding for me is to track my progress over the entire year.
In 2018 I’ve paid $20,385 toward my student loans. I feel great about that number. I started with almost $65,000 in January and now I have just over $45,000 left to pay off.
Each payment gets me a little bit closer to my #debtfreedream.
What are your student loan repayment goals? I would love to hear them and cheer you on toward success. Let me know in the comments below or on the Repayable Facebook Page.
Last week’s article discussed the normal cycle of motivation while repaying your student loans. If you’re looking to ramp up your motivation, today’s post will give you a few hacks to get from where you are to where you want to be. I’ll also share my journey through the stages of motivation.
Estimated read time ~ 8 min. Estimated watch time at 1.5x speed ~ 5 minutes
Hack#1
Pursue your curiosity and allow yourself to learn information without being obligated to take action.
Early on, borrowers often feel a huge weight of indecision. There’s too much information out there and it seems impossible to make a choice. By approaching learning with a sense of curiosity and no obligation to take action, you can look into the stuff you’ve been wondering about and start to learn and piece together the world of student loan debt. When you remove the pressure of action you aren’t crippled by the possibility of making an incorrect choice, because you’re not making a choice, you’re simply gathering information.
Hack#2
Make a decision about what you’re going to do with your student loans.
Once you’ve started collecting information you’re in the preparation phase. In order to move into the action phase a decision needs to be made. You’ll have to decide what exactly it is you want to do with your student loans.
If you don’t know what you want to do with your student loans, it’s going to be tough to take actions that land you in an ideal repayment situation. It’s OK to have one or two different options that you can start taking actions on. Your actions on both will help you move toward either choice and may help you finally decide which one is best.
Hack#3
Develop a plan that you can financially sustain and consistently work toward for the long term.
In order to have an action to maintain until you achieve your goal, you need to be able to sustain it. If your repayment goal is too aggressive, an emergency may arise and you won’t have the cash flow you need to both pay your student loans and deal with the emergency. If you make a misstep early on because your plan was too aggressive, you may lose motivation to work toward your goal entirely. That can leave you feeling unmotivated to sustain your repayment plan. You can always increase the intensity of your goal later if you find you’ve got a lot of room in your budget.
My Student Loan Motivation Journey
During College
While I was in college I wasn’t particularly motivated to worry about repaying my student loan debt. I worried enough that I worked two jobs, applied for scholarships, and borrowed only for tuition and fees but I didn’t worry enough to check my student loan balance regularly or think about the interest accumulating on my unsubsidized loans.
Immediately After Graduation
When I graduated college I became a pharmacy resident which meant instead of a six figure salary I was looking at a salary that was less than half of that. I was motivated to make payments and figure out a repayment strategy because at this point I realized I had accumulated $10,000 of interest on my unsubsidized student loans while I was in school.
Although I could enter forbearance and not make payments because I was in residency I didn’t want to do that because I would still accrue interest, and at an average interest rate of 6.5% for $128,000 that interest would accumulate fast. I had originally picked a 10 year standard repayment plan but discovered those payments were $1500 per month and I couldn’t afford to pay that much with my resident salary. I enrolled in the income-based repayment plan and paid about $380 each month and paid extra when I could afford to. That year I paid $6,000 on my student loans but that wasn’t enough to keep up with interest and my loan balance crept up to $132,000.
After Residency
When I was finally making full-time pharmacist salary I knew I had to tackle these loans quickly. The rate of interest accumulation was staggering, and I would dig myself into a deep hole quickly if I didn’t repay aggressively. So that’s what I did, I changed my repayment plan back to the 10 year standard plan and paid extra. My first year I paid over $28,000 toward my student loans, but then I had an unwelcome surprise.
I paid almost $14,000 in interest and couldn’t deduct any of it on my income taxes. I was really mad because the government was taking my money twice. I was being taxed on my earned income and then paying interest on my federal student loans. Then I discovered refinancing, halved my interest rate, and entered a 5 year repayment plan.
After Refinancing
After I refinanced my student loans I had an initial flood of motivation. My monthly payment was $1345 and my goal was to spend at least $3,000 a month on my student loans. However, I also realized I wanted to travel and I had the cash flow to do it if I just didn’t make an extra payment on my student loans that month.
So for a couple years I went on skipping extra payments and averaged paying about $2,000 a month toward my student loans. It’s not that this was terrible, but I wasn’t exactly meeting my goal.
Today I’m going to be out of student loan debt by September 2019, if I could be more aggressive it’d be awesome to be out before my 30th birthday (August 2019), but we’ll have to see about that. Because the end is so close for me I’m incredibly motivated again and I can almost taste the freedom from my student loan debt. I’ve been paying at least $3,000 per month on my student loans since January 2018 and I don’t let myself off the hook for making those payments.
Today, I owe just over $48,000 on my student loans. My motivation to get rid of that debt is here to stay until it’s gone.
What’s your student loan motivation journey? Have you had up’s and downs? What stage are you currently at? Let me know in the comments below or on the Repayable Facebook Page.
This post is for anyone wanting to see how I approach solving my own student loan debt. I’ll share my specific monthly payment goal and how I pay that amount each month. I’ll also share my first quarter progress. Estimated read time ~9 minutes.
My Student Loan Debt Goals
At the peak of my student loan debt right after I finished residency in 2014 I owed $132,000 in federal Direct Loans. After paying 6.8% interest on those loans for a couple years I discovered refinancing and it changed everything.
January 1st 2018 I owed $64,672.61 in student loans.
I knew the end was near and I could get out of debt before 2019 was over if I set an aggressive goal and stuck to it. So my student loan repayment goal for 2018 is to pay $3,000 per month on my student loans.
How I pay $3,000 a month on my student loans.
Let me make something explicitly clear. My education and student loan debt earned me a job that pays well. That means I can comfortably afford to repay my student loans aggressively.
There’s nothing magic about what I repay, and this post isn’t going to share BS ideas about making money appear from nowhere to eliminate your debt. I’m privileged to be paid six figures a year and I’m privileged to be able to tackle my student loans aggressively without sacrificing actual needs.
This post shares my personal experience repaying my debt. Your experience may look totally different and that’s OK.
I spend my money intentionally.
When I first became a pharmacist I wanted to stop pinching pennies and living like a poor college student because I wasn’t anymore. I was making six figures and dammit I wanted a taste of that standard of living. I wanted to buy clothes that actually looked good not just ones that were on sale, I wanted to buy organic food and fuel my body because health is wealth, I wanted to adventure and see new things because life is short, and I wanted to buy myself, my family, my friends dinner out without being wracked with guilt. So I did.
When I was staring in the face of six long years of student loan repayment I couldn’t stand the thought of sacrificing these things when I could actually afford them now.
So, I half-assed my financial sacrifices.
To be fair I didn’t live like a queen but if I wanted something I got it. I was worn out from denying myself through six years of college plus a year of residency while working two part-time jobs. I earned good money and I wanted to spend it.
Now that the end was in sight though I wanted to speed up my repayment. So I made paying $3,000 toward student loans my first priority (bills and investments already accounted for) and my wants came later. It was hard to say no to myself at first. I would want to try some new makeup or pick up a few little things on a whim.
I started waiting until my next bi-monthly paycheck. To see if I still wanted this “stuff”. I discovered that most of the “stuff” I wanted was a fleeting interest and that when I really did want something I could buy it. This is the delayed-gratification mindset that got me through college in the first place.
I put all my surprise extra money toward student loans.
Specifically I’m talking about my tax return. Putting 100% of my tax return toward my student loans was a tough thing for me to do. Ever since I started working at age 14 and I’ve filed my taxes my tax refund has been my money to do whatever I want with.
I’ve always viewed tax returns as fun bonus money. I remember using my first tax return to buy an iPod Nano with a massive 1 G of storage space!
This year I put all $1,400 of my tax refund toward my student loans.
At first it was kind of depressing because I really wanted to revamp my professional wardrobe. But then I reminded myself that using this tax return to pay down my student loan debt gets me two weeks closer to freedom.
I save up for big spends.
I got used to my pharmacist cash flow and not really having to save for somewhat larger spending like a vacation. I would just not pay an extra $1500 on my student loans that month and boom vacation funded. But the problem was, I did that a few times a year and was slowing my repayment down.
My 3 month emergency fund is topped off and now anything over that amount is mine to spend. I’m saving that money for travel, a wardrobe revamp, or something else that comes up. Since January I’ve put just over $1,000 in there.
The mindset that helps me pay my loans aggressively AF.
This year is the first year the end of my student loans is in sight. I have 18 months left of repayment at this rate. I can truly believe and feel that these small sacrifices are only temporary. I don’t know about you but for me sacrificing my present standard of living to pay student loan debt is hard.
When I pay my student loan debt it feels like I’m investing in my past rather than my future.
I’m already reaping the benefits of a higher salary in work I enjoy because of my education. I already sacrificed to study and worked to pay for college years ago. Now it’s tough to keep paying for it after the fact.
I seem to find myself stuck in a counterfactual mind-game. Thinking Oh imagine if I had this $10,000 to invest and save and spend. But without the student loans I wouldn’t be making six figures. So it’s an endless cycle of wanting my cake and eating it too.
Now I can see how being rid of this debt makes my future self free. My future self is working 0.8 instead of full-time. She doesn’t have to do all her blogging on weekends and evenings and all the space between her full-time job. She still has money to invest and save and spend. That version of me is almost here. So for now I’ll say No thanks to piddly stuff and bring on my #debtfreedream!
How did I actually stack up on my $9,000 goal?
My goal was to pay $3,000 a month on my student loans so I should’ve paid $9,000 in the first quarter of 2018. Because of my tax return and a little extra contribution on my part
I paid $10,545 in the first quarter of 2018 and exceeded my goal.
I still have $54,702.65 left to go but that freedom is coming.
What are your student loan debt goals? I would love to hear them, we’re all in this repayment boat together so let’s inform, inspire, and encourage one another. Please share your goals in the comments below or on the Repayable Facebook Page so I can cheer you on!
Read this post if you want to see the exact impact student loan debt and it’s interest has. Estimated read time 3 min.
Student loans are not low-interest loans. Even federal student loans have interest rates ranging from 4.45% for Direct Subsidized loans to 7% for Graduate PLUS loans. That means interest starts adding up quickly. This makes the student loan interest tax deduction extra appealing. But is that tax deduction juicy enough that borrowers should keep their student loan debt around? In short, no way. Let’s see why that is.
The maximum value of the student loan interest deduction
The most money a borrower can get back from the tax deduction is $625 each year if they’ve paid and deducted a maximum of $2,500 in student loan interest and are in the highest eligible tax bracket.
A borrower example
Let’s look at a borrower with $37,000 (the average debt for a 2016 graduate) of student loan debt. These loans have an average interest rate of 5%. The tables below compare repaying under the 10 year standard repayment plan or aggressively repaying that debt in 5 years. The borrower makes $60,000 per year. Their repayment schedule looks like this.
10 year repayment term
Interest
Deduction Value
$10,093
$2,523
5 year repayment term
Interest
Deduction Value
$4,894
$1,224
The borrower who chooses the more aggressive repayment term will be out of debt five years sooner and they will also pay 52% or $5,200 less interest than the borrower who repaid over 10 years. That’s enough money to take a long international vacation! The borrower will get $1,299 less back in the form of a tax refund. But if you look at the five year period both were paying interest their tax deductions earned about the same amount.
The financial picture
The tax deduction is great when you’re already repaying your student loan debt. It’s a helping hand and can give back up to 25% of up to $2,500 in student loan interest. That being said, it’s not a good enough incentive to keep your student loan debt hanging around.
Read this if you’ve heard “student loans are good for your taxes” a time or two. Estimated read time ~3 minutes.
What is the student loan tax benefit everyone is talking about?
In short if you meet certain income requirements you can reduce your taxable income (and therefore your taxes) by subtracting the amount of interest you paid on your student loans.
How much interest can a borrower deduct?
Borrowers can deduct up to $2,500 from their taxable income if they fall below certain income limits.
What are the income limits for the student loan interest deduction?
This deduction starts to phase out once you make over $65,000 if you file as single and you can’t take the student loan interest deduction at all if you make more than $80,000 annually. If you make more than $165,000 as a couple filing jointly you can’t take this deduction at all but it starts to phase out at $135,000.
If you’re married filing separately you’re not eligible for the student loan interest deduction.
What is the most money I can save with the student loan interest tax deduction?
The most money a borrower can save by claiming the student loan interest tax deduction is $625.
Here’s how you can quickly estimate your savings: Student loan interest paid (max of 2,500) X % tax in your tax bracket
For this example that was $2,500 X 0.25 = $625
The tax deduction decreases once you’re over $65,000 as an individual or $135,000 as a couple but I’m not able to find a clear estimate of how that deduction phases out and changes. Essentially your maximum deduction happens when you make from $38,000- $65,000 per year (that means you fall into the 25% tax bracket) and you pay the maximum of $2,500 in interest.
How do I claim the student loan interest tax deduction?
Claiming the student loan interest tax deduction is pretty simple. You simple find your 1098-E form from your lender. Typically these forms are located in a “documents” type section of your online account or it gets emailed, or snail mailed to you. Then you plug your number into the indicated box on your tax form.
Read this if you want to know for yourself whether it’s smarter to invest your extra money or pay down your student loans each month. Estimated read time 7 min.
What’s the dilemma?
Investing, it’s a long term fiscally wise thing to do. Over time investments provide a rate of return around 6-7%. For the sake of our discussion we’re going settle on 7%. That means you can get a rate of return at least the same as all available federal student loan interest rates (7% is the Direct PLUS interest rate and is the highest federal interest rate). This rate of return compounds on itself year after year and will continue to grow even if you stop making contributions.
The best investors have enough money invested to live off the compounding interest, and continue to invest dividends indefinitely. Yep that’s right you can invest enough money that you can withdraw money each month without actually losing anything from your originally invested amount.
Indefinite compounding interest sounds awesome and all but what are borrowers to do when we have mountains of student loan debt holding us back from financial freedom?
How can we pay for our current existence without robbing our future?
Today’s post highlights the results of an objective calculation that identifies the repayment strategy leading to the most growth in net worth. Spoiler Alert it’s not what common wisdom would suggest.
Assumptions.
First we’re going to discuss the assumptions that today’s formula makes. Market rates of return are variable and perform better or worse depending on the year. This formula assumes a 7% constant rate of return from the market which reflects average market performance. Recognizing some years may have stronger performance like in 2017 when I got a 13.5% rate of return from my 401K or 2015 when I had -0.57% rate of return.
This borrower is able to contribute enough money to get the full match from their employer-sponsored retirement plan no matter what repayment strategy they choose. This example is not about choosing to invest or pay down debt exclusively. It’s about deciding how extra monthly income on top of usual debt repayment and investing performs when used to pay down debt or invest.
Another important assumption made is that once you pay off your student loan debt you invest all the money you were spending to repay that debt. If you pay off your debt and funnel that money to anything other than investing this formula doesn’t hold up.
A $19,000 loss from investing.
Common wisdom goes like this. If your student loan interest rate is lower than the rate of return you expect to get from the market invest your extra income instead of making extra payments on your debt. Well here’s the thing, that math doesn’t add up. Seriously. Common wisdom is flawed. Let me lay out the scenario for you.
Sallie Jones has $100,000 of student loan debt and makes $100,000 per year. Her current student loans have an average interest rate of 6.2%. Even under the most aggressive repayment strategy she can afford to contribute $5,000 per year to her employer-sponsored 401K which earns her a $4,000 match. The market rate of return is 7% and for the sake of simplicity it compounds monthly.
Let’s compare an aggressive 5 year repayment strategy, a 10 year repayment strategy, and an income-based repayment strategy that takes 11.36 years. Each strategy assumes that she invests the money she would have been paying toward her debt.
The 5 year repayment strategy:
Increase in net worth after 11.36 years (invested value – interest): $327,103
The 10 year repayment strategy:
Increase in net worth after 11.36 years (invested value – interest): $312,924
The income-based repayment strategy:
Increase in net worth after 11.36 years (invested value – interest): $308,601
Despite the fact the student loan interest rate in this example was less than the market rate of return,
the borrower who invested the money created by a less stringent repayment plan had a net worth $19,000 less than the most aggressive repayer after 11.36 years.
Key takeaways.
-There is no “one size fits all” strategy for debt repayment or investing. You need to customize your repayment and investing strategy to your personal financial goals and specific debt and income situation.
-Choosing to follow common wisdom instead of exploring your options can cost you tens of thousands of dollars.
-This formula doesn’t take into account your non-financial goals and your attitude toward debt and investing. If you make the calculation and find one strategy has the slight edge on the other but you don’t want to take that strategy then don’t. This isn’t about getting everyone to conform to a certain standard, it’s about making sure everyone has the best information available to make decisions.
Will your net worth grow more if you invest more or repay your debt faster?
Don’t be overwhelmed, it may seem daunting but it’s a lot of plug and play where you use your actual financial information in an online calculator rather than crunching the numbers yourself. End the debate about where to put your extra monthly income. The guide is available for download here it only requires your email address.
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