In May of 2015, I graduated from college with $27,000 in loans — not terrible, but much more than I would have liked. When I stepped into the “real world,” paying off the loans was the last thing on my mind. In fact, it didn’t hit me until I got a friendly reminder in November of 2015 that my “grace period” was about to end.
A grace period is the period of time (usually six months) after your graduation, when you are not required to make payments on your student loans.
Luckily, I was offered a job right out of college, so I was able to make monthly payments beginning January of 2016.
By December 2018, I was able to part ways with student loans forever.
So, how was it (or is it) possible to pay off $27,000 + interest in three years, all while still enjoying overpriced meals in New York City, occasional splurges, and did I mention — independence (from the parents)?
READ ON TO FIND OUT — below are three tips I offer to all who have loans to pay back.
1. Take advantage of your grace period
Almost every college graduate is given a six-month “grace period,” during which the lender graciously sits back and waits for the no-longer-students to get their real-life-game-plan on.
During the grace period, THERE IS NO INTEREST. (Now that’s what I call GRACE.)
Had I known what I know today, I would have definitely taken advantage of the grace period (back then, I didn’t).
Here’s a simple, yet often untold PRO TIP for all recent college graduates: PAY OFF AS MUCH AS YOU CAN before interest piggybacks on your loan.
2. Understand your loans
As someone who has been out of college for over four-and-a-half years now, the below statements are no-brainers, but for recent college grads, these may not be so obvious … hence I spell them out:
- The higher the interest rate on a loan, the faster you want to pay it off.
- The longer the repayment period (say 10 years vs. 5 years), the higher the net amount you are paying (because interest accrues over time).
While it might be tempting to select the standard 10-year repayment plan and then just sit back and relax, doing so will put you in a vicious cycle, where a big chunk of your payments go to pay off your interest and not your principal balance (the amount you actually borrowed).
Here is a golden rule: pay off the loans with the high interest rates first, NOT the loans with the smallest amount (remaining). This is what they call the avalanche method.
- Make minimum monthly payments as required by the lender.
- Put extra money toward the loan with the highest interest rate until it is paid off, and then move on to the loan with the next highest interest rate.
- The avalanche method has practical benefits — it will save you the most money on interest over time.
If, however, you have two loans with the same interest rate but different amounts, target the loan with the LOWER amount first. This is what they call the snowball method.
- Make minimum monthly payments as required by the lender.
- Put extra money toward the loan with the lowest balance until it is completely paid off, and then move on to the loan with the next lowest balance.
- The snowball method has psychological benefits — the sense of achievement you feel when you pay off one loan will motivate you to pay off the debt faster!
3. Be strategic and smart about financing options!
Many automatic payment systems are sneaky, and will distribute your monthly payments unevenly to your disadvantage (student loans are a business too, you know!).
Here are ways you can outsmart them:
- Pay only the minimum amount for the automatic monthly payments (not the amount they suggest or recommend).
- Whenever you can, make additional, targeted payments towards loans with the highest interest rate (or, when interest rate is the same, towards the one with the lower balance).
- Simply put, apply the avalanche method + the snowball method towards your extra, targeted payments.
The bottom line
When it comes to paying off your loans, there is no magic formula. You just need to be consistently diligent and diligently consistent. While you shouldn’t pull your hair out trying to get rid of your loans (they will be there for a while), make sure to do all of the above! Put extra income or holiday bonuses toward your loans, and you will be out and about in no time.
