It’s Payback Time
For 37 million Americans, student loan debt is a financial albatross around their necks. And it’s growing. Debt from student loans has increased by 300 percent over the past eight years to nearly $1 trillion, according to a report from the Federal Reserve Bank of New York. That makes student loan debt the largest consumer liability after mortgages.
And it can take decades to pay off. The majority of borrowers still paying back their loans are in their thirties or older. In fact, people in their 40s with student loan debt owe more than $150 billion collectively and borrowers now in their fifties still owe more than $100 billion, according to research from American Student Assistance, a nonprofit student loan repayment solution center.
Carrying a debt for that long, though, can hamper your ability to purchase a home, save for retirement or reach other financial goals. Want to cut your pay-back time down? Get ideas from these five borrowers who paid off their student loans in record time.
Bridget Farrell, 24, Davie, FL
During college, Bridget Farrell took out a total of $20,000 in student loans. By the time she graduated in December 2011, she had paid off all but $9,000. By the following August, she had paid off all her debt.
Farrell started by making decisions that would allow her to borrow as little as possible. For example, she applied to many schools but ultimately chose the one that offered her the best financial package and allowed her to live at home during her schooling. She also participated in work-study programs, through which she would work for the school and receive tuition discounts in return. Finally, Farrell focused on earning income throughout her college years: She worked part time at a restaurant and took on odd jobs like dog sitting. “Every extra penny I had went toward paying off my debt,” she says.
Her advice: Paying off a student loan is, “like anything else worth doing, a long-term process that you really must commit to,” Farrell says. “You need to make a plan and stick to it.” For borrowers who have more than one loan, Farrell recommends starting by paying off the smallest one first. “While this may seem counterproductive, it really worked for me because seeing a whole loan paid in full, no matter how much it was, motivated me to keep pinching pennies and paying off my loans,” she says.
Lisa Lee, 23, Queens, NY
Lisa Lee owed a little more than $12,000 in student loans when she graduated college in 2012. She paid off the full amount in a year, “a huge relief and personal accomplishment in retrospect,” she says. “I knew saving versus spending my first year out of school would be smart in the long run, so I made a commitment to make a good chunk of my biweekly income go straight towards my loan provider account online,” Lee says. Allocating payments to her loan first made it easier to make budget choices with the leftovers.
Lee says it was helpful and necessary for her to make a substantial loan payment first and leave herself just enough money for the basics “to easily shoo away thoughts of a Caribbean vacation or my next online shopping spree.” That way, she was able to enjoy being loan-free a year later.
Her advice: “It’s important to understand [how much] what you already owe can grow in a given amount of time,” Lee says. She recommends setting up an online account with your loan provider to easily keep track of your loan balance and interest.
“It may not be the most fun task at the end of the work day or over the weekend to see how much you owe after a month’s time, but it definitely brings the motivation to pay off what may now have grown,” Lee continues. “A lot of times, recent graduates underestimate interest rates and neglect to fully grasp the tangible losses of delaying their loan payments for years at a time. The online account will help keep track of what you can divide and conquer, and you’ll soon realize it’s in your best interest to pay off as much as you can for each sectioned group.”
Sam Lustgarten, 25, Iowa City, IA
Sam Lustgarten actively paid off his unsubsidized loan of $25,000 over the course of nine months. Still in graduate school, Lustgarten expected he would need to take out more student loans. So even though his loan was not due yet, he worried about interest adding up and “worked tirelessly to pay them off.”
Lustgarten started by revolutionizing his budget. He says the financial aid office at his college didn't provide a comprehensive explanation of how student loans worked, so he “was blind to the blowback that occurs when you take out tens of thousands of dollars at 6.8 percent interest,” he says. When he decided to take action, he created a spreadsheet in Google Docs, added every regular expense and began sticking to a budget for the first time. He also started a website, Frugaling.org, where he wrote about his journey back to zero debt. When the site caught the attention of advertisers, Lustgarten used the money to boost his payments, paying back $25,000 in record time.
His advice: Making a difference with debt starts with a good budget, Lustgarten says. “Plug the holes in your budget and hustle to make more,” he says. “I know a lot of people who work really hard but are barely making a dent in their debt. If you don't fix your budget first, you're just going to be struggling even more.”
Stacy Harp, 45, Spring Hill, TN
Harp’s husband had a 10-year student loan for about $20,000, and together, they paid it off in about seven years. She made extra payments and added extra onto the normal payment whenever possible to pay down the principle. “I used to use an envelope system where I would set aside $20 per paycheck into each outstanding debt that I had,” she says. “Once one debt was paid off, I'd take that extra $20 and add it to my next envelope to pay down that debt.”
Her advice: “Make it a priority,” Harp says. “Even if you add $25 more a month on to your payment, or pay one extra full payment a year, that will decrease your loan significantly.” Whenever you get extra income, Harp recommends applying some of it to pay down your debt.
Zina Kumok, 25, Indianapolis, IN
When she started paying off her loans in November 2011, Zina Kumok owed about $28,000. While she still has $6,200 left to pay, she is scheduled to have them paid off by this November.
In an effort to pay off her student loans as quickly as possible, Kumok began putting 50 percent of her take-home pay toward her loans in 2011. She has been able to do this by trimming her monthly expenses as much as possible. “My rent is only 14 percent of my take-home pay, I don't go out to eat or drink very often and I own my car,” she says. Because she shares a place with two roommates, her utility bills are low. And she earns extra money to put toward her loans by taking on freelance work and churning, or changing banks frequently, to get extra bank bonuses.
Her advice: “It helps to cut out small expenses that can add up quickly, like coffee, eating out and alcohol,” Kumok says. “But it's more helpful to consider the effect that your living expenses have on your budget. Because my rent is so cheap, I can afford to put so much toward my loans. I know living with roommates can be a drag compared to having your own downtown apartment, but it's been the biggest factor for me being able to pay off my loans so quickly. I really hate having this debt hanging over my head, and I want to pay it off soon so I can remove this emotional burden.”