I have over $150,000 in student loans. What is the best way to tackle this debt, on a $50,000 salary?
The rule of thumb is do not take out more in student loan debt for an education than you expect to earn as an annual salary.
However, none of this matters to you now so I won’t go on with scolding and judgements; that’s not my place nor do I judge others for their decisions to receive an education. You may regret the amount you have taken out for this education, but never regret having received a quality education. I’m not sure if Tom realizes the cost of private school– a good private school could cost $50,000 a year without a scholarship just for undergrad. That can happen without graduate school… So you can be relieved at the very least that you have a good graduate degree that will help you pay this all off. Moving on.
Here are some of the things you should and need to do if at all possible. Yes, if possible- and I don’t mean if you feel like it or would prefer to. Your life will be depressing if you don’t get this under control ASAP. It won’t be fun for now, but you don’t want to be 50 with student loans and no chance of a house or supporting children in the interim.
These recommendations are on the basis of not being married or having children in the near future. If those are in the near future, I suggest you seriously consider your decisions, or adjust your situation to these as much as possible. My fiance has loans and we are doing all we can to tackle loans, so much of this is from experience. I’m very tight when it comes to money because I have no faith in the government or any pension to bail me out when I’m old.
Assuming about 25% out for deductions (health, retirement at 5% income, etc.) and taxes, then taking out “just over” 150k in monthly loan payments. You should be on the 25 year plan for the loans, and if not then find a way to switch because there is an option for that. Ideally you would be able to consolidate to a 15 year plan, but I’ll use my example based on the 25 year.
Now, you are going to pay these off in less than 25yr but it’s safer to have a lower payment just-in-case you have other obligations. Let’s say your monthly loan payment is $525 at the minimum payment on this plan.
After taxes, deductions, and loan payments, you have $2,600.
Make a monthly budget based on this- rent, electricity, additional healthcare costs, other utilities, internet, transit pass or gas, maintenance if you have a car, cell phone, etc… and whatever you can toward emergency fund until you have enough to cover 2-3 months of necessary expenses.
For you, an emergency fund would be at the minimum $1100, but more likely should be upwards of $3,000 to be safe.
Not all of this will apply to you, so take what you need and the rest of the advice will be for the community.
Make a ten-year timeline of what you want to do and where you want to be. I’m not talking specifics, but just generally. Tell yourself you can overcome this debt within ten years. Know that you can and that you will. The first step is having faith in yourself.
Consider your spending habits and how you could change them easily, before getting into the harder parts.
Move back home. Stop paying rent, fees, etc. If you can do so, move home. Even if parents/grandparents/etc. charge you rent, it’ll probably be less than what you’re paying now or would be on your own.
If you cannot move home, find roommates. Live in a room in a house in an average neighborhood where the cost will be much lower.
Don’t have more than one credit card. You won’t need it and it’s unnecessary temptation. Credit card interest is worse than student loan interest. You can’t save money if you’re paying off credit cards because of the rates. Also, make that credit card one with good cash back. Given that you’re not making a ton of money, a good bet is the DiscoverIt card. It also gives you your credit score every month, which is a cool feature and really good to have. As I searched for the best credit card, this one stuck out and still does as a good option for younger people. Just avoid the ones with monthly fees.
Don’t pay any banking fees. Google your way to many examples of how to make this happen.
Consolidate your loans for the lowest rate if you haven’t already. Shop around, get rate quotes from several banks, big and small.
Make sure you are putting 5% or so into your 401k every week through automatic deductions at work**
Invest in index funds and ride out the recessions/booms. Anyone under 35 is in a great position to do this. It’s really just invest and forget with index funds, until you need to switch it up in later years. Investing is an entire separate lesson however- plenty of good advice on Quora for that. In short, S&P is usually solid, however I’ve had success with the NASDAQ 🙂 Just make sure you choose a good fund/index when you invest! Check out fees.
Stop drinking. Stop recreational drugs. Stop smoking. Stop Starbucks. Stop going to the casino. Stop all of these things that eat away at your paycheck every week, whatever your vice is.
If you need to go out with co-workers to fit in and network to get that promotion, order cheap drinks. Or, order one expensive drink and sip it slowly with water on the side. Trust me, they won’t notice. If they do, change the subject. It’s not a big deal.
If your friends ask why you aren’t going out as much, you don’t have to even mention debt. Say something like, I’m saving for a down payment on a house… No one should argue with that goal, or whatever you come up with.
Realize how regular spending and addictions can affect your ability to achieve financial freedom and get out of debt. Spending money is NOT the right way to cope with not having enough money.
Eat at home more and go out to eat less. Eat leftovers. If you make good food that is better for you, it’s helpful long-term too!
Also, pack lunch…a sandwich and an apple from home is cheaper than Panera Bread or McDonald’s (for an actual meal).
Set up direct deposit to your checking from work, then set up an automatic transfer to your savings to happen at the same time. Out of sight, out of mind. With student loans, automated payments can sometimes get you a rebate on the interest rate of .25%, which can add up.
Automate everything to go where it needs to go- savings, retirement, credit card, rent if you have it. I have more than one savings myself so I can separate rent/utilities in one, general savings in another, and anything I will spend in less than 30 days in my checking. Organizing your finances is crucial. You don’t want to forget about your cell phone bill and blow your cash on a night out.
Also, utilize Google Calendar for recurring due dates that it will automatically fill. Then add everything else you have to pay…but also add in fun things like holidays and days off. Pay-day is also good to add if you’re on a bi-weekly/irregular schedule. Stay organized.
If you can get a health savings account and you need prescriptions regularly, take advantage of that tax-free account as well with deductions. Prescriptions are expensive enough as it is.
You can choose which loans to pay off first, go with the highest interest rates. Make sure you keep up with this each time you pay off a loan.
Downgrade your phone to something basic unless you absolutely need it for work. Minimize your data. Try to get on your parents’ plan for collective savings if possible.
Avoid financial advisors. They are a waste of money.
After establishing your 2-3 month emergency fund over a few months (to cover necessities at the minimum- 1 to 3k), start aggressively paying down your debt. Throw as much at the principal as you possibly can without tapping into your savings. Start with high interest- credit cards should be gone by now- in fact these should be paid down as you establish your emergency funds.
If you were able to consolidate all of your loans to one low interest rate, congratz- just tackle that. More likely you will have several loans, even if some are consolidated, at different rates. Make the minimum payments on the low rates and pay down the principal on the high rate loans.
If you make a serious effort to pay down the principal every month, you will save up to tens of thousands in interest depending on your loans’ structures. Either way you are saving thousands.
Put all of your loans in a spreadsheet with the total, amount paid to date, amount owed, interest rate, and the minimum payment on it per month. If you’re good with excel, set up a calculator to determine the interest in dollars to be owed on each loan and how much you have saved by paying X amount so far. However you set it up, update it monthly and track your progress. It may not be the same every month, things come up, but watching your progress is crucial and can be motivating after you get a few months going.
Cut down your TV subscription to basic cable- or cancel it completely if you don’t find it necessary. Also downgrade your internet to something very cheap unless you’re in an industry/position/department that requires you to work from home with high-speed internet.
I will admit I still subscribe to TIME magazine, but I’m paying $0.17 per issue, and I read all of them cover to cover! Cut subscriptions as much as possible, whatever they may be. Don’t get more magazines that you actually read. Don’t pay Netflix or Hulu (the worst) if you don’t use their services regularly.
Don’t go five years without being promoted. If you aren’t moving up or getting raises, look elsewhere- even if casually. Opportunities are always popping up when you don’t need them.
Use public transit. Walk to work if you’re close enough, or bike. Commuting by car is almost always more expensive when you consider maintenance, gas, the need to replace as it gets old, paying for parking… and if you have to get stuck in traffic, it isn’t terrible to be sitting on a bus or train reading. Commuting by public transit is increasingly the way of the future anyway, so get used to it because that’s where the investments are going. Consider this with future job and living opportunities.
However if you have no access to public transit, obviously you don’t have the same luxury of choice. Take care of your car though- it’s one of those expenses that is easy to forget about…oh, and there goes your radiator.
Take care of your health. Exercise and eat well. As I’ve said, prescriptions are expensive. So are specialist doctors and life-long diseases that could have been prevented. Take advantage of the preventative care options your health plan offers you.
Choose an amazing life partner. This is crucial. A bad partner can really suck the life out of you when it goes downhill. Use good judgment. Getting married to someone else also in a lot of debt would be a poor decision, especially if they have poor financial plans to deal with it. Make sure whoever you end up, if anyone, they are supportive. I’m serious here- it can make or break you financially or emotionally if you are reckless in this decision. That said, you can’t really plan for this one 🙂
Stay realistic with your financial goals, but also keep your sanity. Take your paid vacation days, don’t cash them out, don’t burn out. Set aside money to do something you love at least a month- whether that is going out to a bar/party, affordable concert, a few trips to the movies, day trip, spa day, whatever. I would cap this spending at $100-150.
Pick up cheap/free hobbies (hiking, programming, reading, yoga (no gym memberships!!), etc.) but don’t feel like you can’t treat yourself because you’re in debt. It’s just about moderation. You may find that you enjoy the simpler lifestyle, or at least get used to it.
Don’t listen to everything I’ve told you or think that I’m trying to push you. Just soak it all in and do what you can that will best fit your needs and specific situation. Just realize that whatever you do, it will likely require a lifestyle change if you’re serious about achieving financial freedom. You’ll be very happy that you did.
Again, and finally, take care of yourself! Good luck!
**Now don’t tell me this is no time to put toward retirement. Now is always the time, at least in a small amount. While I fully advocate 10% of income, with debt like this 5% makes more sense so you still have the resources to pay it down. Our generation and many of our parents are finding that holding off on retirement savings till mid 30s or even 40s is just too late. If you have a 401k from your work, use it. If you have a Roth IRA, take advantage of it. Both of these are tax-free. Don’t punish yourself both now and later for having debt. Retire comfortably.
I know you’re an MBA and know all about finance, but it’s always good to have a refresher of how savings and interest apply to your own life.
Example from CNN Money:
“Here’s an example of what a big difference starting young can make. Say you start at age 25, and put aside $3,000 a year in a tax-deferred retirement account for 10 years – and then you stop saving – completely. By the time you reach 65, your $30,000 investment will have grown to more than $472,000, (assuming an 8% annual return), even though you didn’t contribute a dime beyond age 35.
Now let’s say you put off saving until you turn 35, and then save $3,000 a year for 30 years. By the time you reach 65, you will have set aside $90,000 of your own money, but it will grow to only about $367,000, assuming the same 8% annual return. That’s a huge difference.”