Middle Path Finance

Strategies for paying off student loans

It's snowing today. Flakes that look like disheveled Q-tips have covered the neighborhood with a six-inch white blanket. It's got me thinking about my student loan.

I am a very debt averse person. I used to believe in good and bad debt. No more. I think the only good debt is no debt. I have eliminated all debt from my life, except one. My student loan. Those pesky things are just impossible to get rid of. Maybe because when we are all deciding which debt to pay off, we usually put student loans at the bottom of the list.

It's the low, fixed interest rate (unless you have private loans, which are predatory in my book), the allure of the tax deduction. Something more pressing always seems to win out over paying those loans.

But, looking back, college has had a significant impact on my finances since 1999 and mostly in a not positive way.  College is supposed to help you make more and have a higher standard of living, but that isn't always true unfortunately. At least not for me.

I graduated from college with $40,000 in student loan debt.That's more than twice the average loan debt students graduate with these days. My dad was disabled and my mother a Catholic school teacher with no money to help me pay for school. And, despite graduating first in my department, my college did not give me a scholarship.

To compound the pain, I took a 50 percent pay cut to work a professional job in my field once I had graduated.Who knew journalism paid so little?

The sad part is my debt could have been worse. I paid part of my tuition in cash every month, using a university payment program. About $200 a month to the bursar, and I paid cash for all of my books and supplies all while paying for an apartment and all the accoutrements of an adult life. I was an adult, non-traditional student.  I worked full-time in college, averaging 60 hours a week as a Bourbon Street bartender in New Orleans. It was very trying.

Graduation gave me no more relief because I then had to pay all of my existing bills, plus a new $300 a month student loan payment, all on half the salary.

But I managed, and I even managed to pay a little bit extra every month.

I now owe $11,000 on my student loans.That's still a lot, considering I have been paying them faithfully since 2002, but I would still owe whole lot more if I hadn't dedicated some time and energy to paying them down. 

I want to share my strategies for paying down student loan debt.

• Consolidate into a low-interest federal loan, and consolidate directly with the U.S. Department of Education. I was lucky enough to do this right before my repayment began, and I locked in a 4.25 percent interest rate.
• Enroll in automatic payments. I received a .25 percent interest rate deduction for having my payments automatically deducted from my checking account.
• For several years, I did as much freelance work as I could handle in addition to my full-time professional day job. I put every penny I earned in extra money toward the student loan. Some months, I managed to pay an extra $700 toward my loan, over and above my regular payment. I am still using a similar method to pay off the remaining balance.
• Use the Debt snowball method. Write down how much you owe, the interest rate, and to whom you make the payment. Order this list from smallest loan balance to largest. Send only the minimum payment to all loans except the smallest. Pay extra-- as much as you can afford-- on the smallest loan, until it is paid off. Then, add all of the money you used to send to the first loan, to the second loan's minimum payment. When the second loan is paid off, send the total you sent to loans one and two to the third loan. Do this until all of your loans are paid off. The idea is that the payments grow, like a snowball rolling down hill. Once you eliminate the smaller debts, you have more resources to pay off your larger debts.
• Use the Debt snowflake method. This is similar to the $20 challenge. Make an effort to earn as much extra money as you can. Every little bit-- even if it's $10 you made selling something on eBay or Craigslist-- can be used to make a dent in your debt. This month, I have sent $40 extra to my loan, from money I earned through Etsy.com.
• Pay biweekly. This can save you money two ways. It cuts the amount of interest you pay on the loan, as most loans calculate and add interest to your balance daily. Second, you will unwittingly make an extra payment by the end of the year.
• Don't be afraid to send small amounts. Extra payments don't have to be huge. Even sending $5 or $10 at a time adds up. I've done it. And so have many others.
• Take advantage of rewards programs. What do rewards programs have to do with existing debt? Plenty. For example, you can use money you earn through UPromise to pay off your student loans. (Upromise is the college savings rewards program that gives you money back when you buy the products of participating companies.) Also, CitiBank's Thank You Rewards program allows you to use your credit card rewards points to pay down your loans. 10,000 points can be turned into a $100 student loan payment. This is only good option, of course, if you carry no balance and don't go hog wild spending on your card just for points.

I'm sure there are more ways to tackle student loans, but this is a short list of what has worked for me. Of course, I am still plugging away at my balance. My goal is to send $3,600 in extra payments this year. The long term goal is to have the loan paid off, somehow, within three years.

Biweekly debt repayment: Pros and cons

If you have debt, whether it's a mortgage, a car loan, a credit card balance, or a student loan, chances are you have a minimum monthly payment. If you pay half of your minimum monthly payment amount every two weeks instead of sending the entire payment once a month, you may be able to get out of debt more quickly and save on interest charges. 

This is easy to set up if you use online banking. Just arrange to have half of your minimum debt payments sent each payday.

This simple change can make a big dent in debt.

Paying every two weeks helps you in two ways:

First, most companies charge interest on your debt daily. That means the credit card company is calculating the interest on the amount you owe them every single day and adding that to your total. If you make a payment every two weeks, you don't have to pay as much interest because your first payment reduces the balance that's used to calculate your daily interest for the second half of the month.

Second, when you pay every two weeks, you will unwittingly be making 13 payments each year instead of 12. This shouldn't scrimp your budget because folks who get paid every week or two weeks get an "extra" third paycheck four months every year.

According to CardRatings.com, here is an example of how much difference a biweekly payment can make:

If you have a credit card with a $5,000 balance at 17% interest and you send in a minimum payment of $150 once a month, you'll pay $4,119 in interest and it will take 14 years to pay off the debt. But if you send in $75 every two weeks, you'll only pay $2,521 in interest and the card will be paid off in 3 years and 18 weeks.

All this without really increasing the amount you are used to paying.

Let's say you have a $10,000 student loan at 7 percent interest. For the standard 10-year term, your monthly payment would be about $116.11 a month. If you sent a payment of $58.06 twice a month, you'd pay $435 less in interest over the life of the loan and you would pay off the loan one year earlier than if you'd sent one payment a month.

Let's say you have a 30-year fixed rate mortgage for $100,000, with an interest rate of 6.5 percent. Your payment would be about $632 each month. If you paid biweekly, you would save $28,587 and would make 69 fewer mortgage payments, in essence shaving almost 6 years off of the life of your loan.

These savings are nothing to sneeze at, but there are some drawbacks.

When just starting out, you have to check your accounts to make sure your payments are credited correctly. You may need to call or write them and make sure they know the payments are to be applied to the principal of your loan. You may also have to ask them to credit the payment the day they receive it, rather than waiting until your due date.

By law, credit card companies must credit payments the day they are received.

Mortgage lenders are not required to post payments the day they are received, and some will even charge you an enrollment fee of up to $400 and a monthly fee of about $9 just for the honor of sending them two checks a month instead of one.   If that's the case at your lender, send one check.If you feel strongly about paying off your mortgage early, there are other strategies.

Some banks will allow you to send two half-mortgage payments a month without enrolling in an official program, while others don't allow partial payments. You'll just have to call and ask. For more mortgage payment pros and cons, check out this Bankrate.com article.

Student loans can be paid biweekly, but you need to specifically state that the money should be applied to the principal. Otherwise, the company may just keep postponing your due date, rather than using the money to reduce your current balance.

Despite some of the roadblocks lenders have thrown in front of you, the financial rewards can be substantial. If debt is a black cloud hanging over you, or you aren't good at making sure you have enough in your account to pay big monthly bills, this is an option that may work for you.