While a majority of students today graduate with some level of student loan debt, we happened to be well above the normal distribution with a sum of over $500,000 between the two of us following an eight year stretch from 2005 to 2013 in which my wife and I financed the majority of our educations. The bulk of this balance coming in the later years while my wife pursued a degree in dentistry.
While it came at a significant cost, we don’t curse or regret our debt.
Of course, all things being equal, we’d rather it not be hanging over our heads and we’re anxious for the day we put it behind us, but we chose this path and we knew what we were signing up for from the beginning.
Our debt is a temporary inconvenience and nothing more.
In exchange for the inconvenience, we each got something great. We wouldn’t have our current careers without financing our educations and we don’t sit around regretting the fact that we invested in ourselves.
My wife and I share our finances 100%. There’s no ‘my money’ or ‘her money’. We have common and shared goals and that has led us to having shared finances from the start. We understand that this doesn’t work for everyone, but it’s what works for us. Using this same logic, the loans we have aren’t separated either.
So how are we going about paying off $500,000+ of student loans? What follows are five steps we took after graduating to head down the path of debt reduction.
1) Getting organized
With many debts acquired over the years, we started by building a spreadsheet containing a list of all loans and lenders. This step was fairly easy as information for all of our federal loans was accessible at the National Student Loan Data System student access site at nslds.ed.gov.
2) Set up minimum payments for all loans to be withdrawn automatically.
Whether you have only a few loans or sixteen like we currently do, setting up automatic minimum payment withdrawals simplifies things and greatly reduces any desire to unnecessarily consolidate. An added benefit is that a few lenders offered us a 0.25% decrease in interest rate for signing up for automatic withdrawal.
3) Extend loan terms beyond standard repayment plan
It sounds counter-intuitive at first. Why would someone hoping to dig their way out of debt as quickly as possible be interested in extending the term of any loan? By extending the loan repayment terms on as many of our federal loans as possible, we were able to decrease the minimum payment required on our loans each month. This resulted in two benefits: decreasing our overall minimum payments allows us to make the maximum payment possible on the single loan that we’re focused on paying off and a second, not insignificant side benefit is that it also directly decreases the amount of money we have to spend in a given month in the event that our finances were tight for a period of time for one reason or another.
4) Refinance loans to lower interest rates
With the bulk of our student loan debt coming in the form of graduate school federal loans, the interest rates varied from 6.8 to as high as 8.5%. Fortunately, we were able to refinance a number of these loans with another lender for rates between 2.8-3.2%. By decreasing our interest rates on each loan by at least 3.6% (from a minimum of 6.8% to a maximum of 3.2%), we were able to save over $300 per month for every $100,000 financed on interest alone! Refinancing these loans came with some level of risk though, as we refinanced with variable rate loans, which we’ll discuss further in the near future.
5) Organize and prioritize loan repayment order
The two primary strategies for accelerating loan repayment are either to prioritize loans by their balance from smallest to largest or by interest rate from largest to smallest. The former being commonly referred to as the debt snowball and the latter the debt avalanche. Using either strategy, by focusing accelerated payments on a single debt until it is fully paid off, the amount previously being dedicated to that loan can then be rolled over to the next. Eventually this process has a ‘snowball’ or ‘avalanche’ effect as more and more money can be dedicated to a single loan as more and more are paid off.
While there have been many discussions in our home concerning which approach is better, we’re convinced that prioritizing by interest rate is best for us. That’s not to say that the debt snowball doesn’t have its advantages, especially if one is really strapped for cash month to month or is concerned about staying motivated. However, when considering all options, it makes the most financial sense for us to prioritize and pay down the highest interest loan first.
Progress to date
Following this approach since our peak debt of over $521,000 in early 2014, we’ve paid down our principle balance by over $130,000 as of December 2016. We have a long road to go, but we’re getting there. Payment by payment. Month by month. We’re getting there.