Let’s Talk Money: How To Pay Off Your Student Loans

It’s no secret that many people graduate from law school with significant debt.  Tuition can run $30,000 or more per year, and many students take out extra loans to cover books, rent, and personal expenses during school. After graduation, they may take on more debt to cover living expenses while studying for the bar exam and before starting work. Some firms offer a salary advance or even a signing bonus to help students bridge the gap between school and work, but even with that extra help, you may end up owing more than six figures in debt by the time you graduate.

At least, I did.  And less than five years after graduation, I had paid it all off.

There are many ways to think about paying off your loans. How quickly you are able to do it depends in large part on your salary, but even if you’re not making biglaw bank, you can create a plan to pay down your loans quickly by setting your priorities and managing expenses.

Paying my loans off quickly was a priority for me because while I was fortunate to have a biglaw job after law school, I had no idea how long it would last. I also didn’t want to have to make all my career choices based on money while my loans were hanging over my head.

So here are the five steps I took.

1. I set my priorities.

  • Obviously you want to pay down your student loan debt. But what else do you want to prioritize? Retirement? General savings? A downpayment for house? A wedding fund?
  • Here’s what I did:
    • My priority was to get out of debt quickly while creating an emergency fund and saving for retirement.
    • Retirement savings were important to me not only because one day I would actually like to retire but also because funneling money into my 401k got me some tax savings.
    • An emergency fund was important to me because I essentially had no savings after moving to NYC after law school. Also, the economy had tanked, which didn’t exactly make me feel very good about my job security. The thought of getting laid off without any money in savings to tide me over was terrifying. I wanted to take advantage of the biglaw salary while I had it.
    • I am also generally averse to debt so I was willing to prioritize paying off my loans even if it meant adding years to the timeline to buy a house or make other large expenditures.

2. I figured out my monthly budget.

  • In order to figure out how much you can afford to pay each month on your loans, you need to understand how much money you have coming in every month and how much you have going out.
  • There are lots of different tools you can use from websites like Mint.com, software like You Need a Budget, or old fashioned pen and paper.
  • Once you get a sense for your monthly cash outlay, figure out where you can cut back on expenses or ways to make more money, even if it’s as simple as taking advantage of windfalls like yearly bonuses or credit card reward points.
  • When cutting expenses, think big and small. We’ve all read the articles promising a debt-free life by cutting out your morning latte and putting that money toward your debt. Over time, that will certainly help you reach your goal. But making a one-time decision to rent a cheaper apartment is also a simple solution with big rewards. You may find that keeping your fixed expenses low will do more for your bottom line than lots of little changes.
  • Here’s what I did:
    • I am not a great line-item budgeter. I would rather focus on big-picture items.
    • So first, I rented an apartment in a cheaper neighborhood with a roommate.
    • Then I gave myself a set amount of spending money per month, across all “categories” (entertainment, restaurants, groceries, clothing, etc.) and I kept that money in a separate amount from the account where my paychecks were deposited.
    • Using a separate account helped with the temptation to overspend. I used the debit card tied to this account for all of my monthly expenses.
    • Another easy way for me to avoid over-spending was to shop online for groceries and household items. I don’t know what it is about walking into a CVS or a Duane Reade, but I will wander in for one item and walk out with a full bag. Considering that there’s one on every corner in NYC, those little trips add up.
    • A bonus of this plan was that I could take advantage of online shopping programs like Ebates.com* to get money back over time. It does not add up to a lot, but every little bit counts when you’re staring down $200k of debt.

3. I set a goal.

  • Once you understand where your money is going and where you can cut expenses, set a goal. This is the amount of money you are planning to pay each month to your loans, beyond the minimum payment.
  • How much can you afford to pay on your loans per month? Be realistic but aggressive.
  • Think about the speed and manner in which you want to pay off your loans. Do you want to focus on your smallest loan first? Or pay them off in order of highest interest to lowest interest in order to save more over time?
  • Here’s what I did:
    • I picked an amount of money that I thought I could actually save each month extra toward my loans. Keeping it realistic helped me stay motivated when I met my goal each month, but it was still a number I had to work to achieve. So if after accounting for my bills and discretionary spending each month I discovered that I easily had $100 left over without even trying, I set a goal of paying $150 extra for a bit of a challenge.
    • I put this extra money toward my oldest loans first, which also happened to have the higher interest rates.
    • In addition to a monthly goal, I set a long-term goal. I decided I wanted to pay off my loans before I hit 5 years out from law school. This was a tough but not a crazy goal. Remember: be realistic but aggressive.
    • Also: whenever I paid off a loan or got a raise, I funneled ALL that extra money to the remaining loans. This helped me avoid the “golden handcuffs” and inflated lifestyle of a higher salary and allowed me to pay off my loans even faster.

4. I put my plan into action.

  • Once you figure out what to prioritize, what your budget is like and how much you want to pay on your loans, it’s time to put your plan into action.
  • This is the hard part. You know what you need to do, now you just need to do it. Staying motivated while you knock out thousands (or in my case, a couple hundred thousand) dollars in debt can be difficult. That’s why it is important to set realistic goals for yourself based on your actual spending habits and life priorities. If your plan makes sense, it will be easier to follow.
  • Here’s what I did:
    • Because I did not want to have to track every day-to-day purchase (see above – line-item budgeting is not really my thing), I worked on a higher level.
    • First, I set up all of my accounts to auto-pay: rent, cell phone, utilities, retirement contributions, regular savings for my emergency fund, and the monthly minimums on my student loans.
    • Next, as I explained above, I transferred my monthly discretionary spending amount to the separate checking account on the first of each month. All of my fun money came out of this account, as did necessities like groceries. It saved me from having to keep a super specific budget of these categories, and I can check my account balance online whenever I want to keep an eye on things. And when the money is gone, the money is gone until the first of the next month.
      • Note that in order for this system to work, you cannot cheat by say, paying your credit card out of your other bank account. BUT if you want to take advantage of a credit card rewards program, you could use your credit card for daily expenses instead of a separate checking account. Just make sure you can trust yourself not to overspend and add to your money woes with credit card debt.
    • On a set date each month, I wrote a check to the loan companies. I directed them to use the extra payment toward the principal so that my monthly balance stayed the same. (That step is important! You may have to call the loan companies directly to have them apply the money properly. Even though I sent correspondence and even made a note on my checks that the money was for the principal, I had to make a call almost every month asking the loan company to correct it when they instead just applied the money as an early payment for next month.)

5. I tracked my progress.

  • Tracking your progress is crucial to staying motivated while you work through your plan.
  • Here’s what I did:
    • I set up a spreadsheet listing all of my bank accounts and loan balances in a column down the left side of the spreadsheet and placed the months across the top row. I listed all my bank accounts in black and my loan balances in red font. I then added up the account column to total my net worth, using red font again to indicate when it was negative.
    • Every month I updated the numbers under that month’s column. It was so motivating to see more rows turn from red to black over time as my net worth went from a hugely negative number to zero, and finally to positive.

Readers: Are you working on paying down loans? Have any tips? Success stories? Discuss in the comments.

Pic Credit: Oliver Thomas Klein (via Unsplash)

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