We all remember our first time … reaching a big financial goal. The planning! The stress! The self-doubt! And then, finally, that massive sense of accomplishment (and relief). In our “My First Time … ” series, LearnVest asks people who’ve reached huge money milestones how they did it — and for lessons they learned along the way.
Today, one man shares his journey from nearly defaulting on his student debt to paying off his first student loan, and how it’s given him the momentum to pay off the rest of his debt ahead of schedule.
Counting down the months to my final student loan payment has become a sort of obsession for me. I’m always looking for new ways to get to that final payment faster and, right now, I’ve got my payoff strategy down. But I wasn’t always on top of my game. In fact, I was pretty bad at it my first year out of college.
Case in point: After graduating, I had no idea how I was going to pay back my student loans. I didn’t even know how many different loans I had, who my servicers were or how much I owed in total. All I knew back in 2011 was that I couldn’t find a job, so there was no way I could be expected to pay back my loans, right?
I was so overwhelmed that, after my grace period ended and I started getting past-due notices in the mail, I just shut down. I did nothing. Literally nothing. An envelope from Sallie Mae would come in the mail with the words “Important Information About Your Student Loans” stamped on the front in red ink — and I would promptly rip it in half and throw it away.
Eventually, though, I bit the bullet and opened one of those letters, and I learned that I was about to default on all $65,000 that I had borrowed from the government. I didn’t know exactly what that meant, but I knew it was bad, so I called my servicers to find out what I should do.
They told me I could defer my loans, which sounded great, considering I didn’t have a job. I also couldn’t ask my parents for help, as my father had just lost his job to layoffs and they were already letting me live with them rent-free. So I deferred my loan payments for a full year. What I didn’t realize was that by doing so, I would add thousands of dollars to what I owed in the form of capitalized interest — accrued interest that would be tacked onto my loan principal.
That was a bitter pill to swallow, but I didn’t have much of a choice. Then finally, after that year-long deferment, I landed a job that offered a decent paycheck — which meant I could start getting serious about those student loans. I was determined to pay more than the minimum; otherwise, I would be paying off my debt for at least 10 years, a prospect I wasn’t willing to accept. It was time to buckle down and get serious. Here’s how I got back on track.
The author graduating in 2011, and giving the thumbs up to his first "Paid in Full" loan notice from 2014.
1. I picked a pay-down method
When it comes to paying off debt, there are a ton of strategies that you can use, but two of the most popular are the snowball method and the avalanche method. In the snowball method, you focus your payoff efforts on the loan with the smallest balance first, while paying the minimums on the rest. Once the smallest loan is paid off, you move onto the next-smallest debt, eventually working your way up to the loan with the largest balance. The avalanche method is similar except that you start with the loan with the highest interest rate first, which means you’ll ultimately pay less in interest once all is said and done.
I would have gotten more bang for my buck using the avalanche method, but that meant I would have to start with an $18,000 loan at an 8% interest rate. Psychologically, I needed the quick win so I could see the progress I was making and keep my momentum going. So I opted for the snowball method, which meant I was going to target the loan with a $2,500 balance.
2. I signed up for autopay.
Signing up for autopay helped me accomplish two things. First, it meant that I would never miss a payment ever again, which would save me money in the form of late fees. And second, it actually saved me .25% off all my loans, which my servicers offered as an incentive to sign up for autopay. It was a no-brainer.
3. I came up with an extra amount I could put toward my loan each month.
Without exception, I knew that every month I had about an extra $50 in my budget. So to keep myself from spending that on other things, I increased my automatic payment for the loan that I was targeting first by an extra $50 (which I made sure would be applied to the principal and not interest). It wasn’t a ton, but even if I did nothing else, that one step would help me pay off my $2,500 loan in about two and a half years instead of the scheduled 10 years.
4. I began saving for a lump-sum payment.
About six months into my pay-off plan I really wanted — no, needed — to pay off the loan for a quick psychological boost. I needed to see all my hard work paying off. So I got serious about saving money. I cut back on my social life and eating out, and refused to buy a single new piece of clothing, despite having recently lost 60 pounds. That helped me put away enough to pay off my remaining balance in a single lump sum. On June 8, 2014, I called my student loan servicer and made a $1,681.64 payment. With that, I had paid off my very first student loan.
The Trickle-Down Effect
Paying off that loan was one of the most fulfilling moments in my financial life. Sure, it wasn’t a huge amount, but I immediately felt a weight lifted off my shoulders. It meant I would have one less loan payment to worry about if I ever lost my job or faced a financial emergency.
Beyond that, it also made paying off my other loans so much easier. How? Because I had a debt-payoff game plan I could follow, and that seemingly small accomplishment gave me the confidence that I could tackle the rest of my balances — not to mention it freed up a bit of extra money each month that I could apply to my next loan. I became so committed to paying off my debt that I even started a website all about paying down student loans to help others.
Since then, I’ve paid off five of my eight student loans, and hope to have the rest paid off by the end of 2018 — a full four years ahead of schedule. Not bad, considering I nearly defaulted on those loans just a few short years ago. I’m counting that as a win.