Friday, November 12, 2010

finance friday - student loans

I am starting a new weekly post titled Finance Friday.  My hope is that every Friday I will write about some finance topic that we practice or hope to practice in the future.

Today's post is about student loans.  If you hold a four-year degree or higher, chances are that you and/or your spouse have some student loan debt.  For my household, we have prioritized on paying student loans for the last four years and have reduced that debt by half.  How did we do this?

Set up a payback schedule
We use a spreadsheet with all of the loan detail, so we can adjust the numbers and see how the payoff time frame and interest amount changes.  This allowed us to layout the total amount we owed, how much interest we would pay, and how long we would be paying.

The turning point for us was a variable interest rate on one of our loans.  At one point, it had reached over 7%.  This is low compared to credit cards, but was 4% higher than some of our other student loans.

Here's how we set up our spreadsheet:
  • Each of our loans has a separate tab.
  • The columns are: Payment Date, Payment Amount, Monthly Interest, Principal Payment, Remaining Balance, and Interest Rate (if you have a changing interest rate).
  • We set up formulas to calculate the total amount paid, interest paid, and principal paid.
This first step was the key to understanding our debt.  Prior to this, we made payments and knew that eventually we would get a letter stating that the loans had a zero balance.  Now, we make payments, know how much interest we paid, and know the exact date that our debt will be paid off.

Prioritize loans
Before we started looking at our student loans, we paid off our other higher interest debt.  This allowed us to focus on student loans with any additional money we had left over every month.  If you have other debt, prioritize these loans first, using the methods in a similar way.  When you realize how much money you are spending on interest (especially interest that isn't tax deductible - did someone say credit card debt), it is easy to make the loans more of a priority.

Even after we paid off the variable rate loans, we prioritized loans based on the amount of principal remaining.  This allows us to have a short-term goal, which is attainable.  So for 2011, our goal is to pay off one more student loan and only have one remaining.  If we paid these loans equally, it would take a couple of years before either of the loans were paid off, but by having a short-term goal, it keeps us focused on eliminating the debt.

Paying more than the minimum
This may seem obvious, but it really works.  Has anyone noticed the new breakdowns on credit card statements?  It is amazing how paying a little extra than the minimum can save time and interest.  If you aren't able to afford more than the minimum, start by trying to round to the nearest dollar, adjust your spreadsheet to see how much of a difference that makes - it might not be much, but every little bit helps.  Since we have been paying more than the minimum for some time, our statements currently show that we owe $0, but because we have our spreadsheet, we are able to see that if we paid nothing, we would add about $30/month in interest to our principal payment.

Another factor into paying more than the minimum, if you are deferring your student loans for whatever reason, try to make some payment.  Depending on the loan and deferment type, the loan may or may not accumulate interest.  If interest accumulates, try to make payments that at least match the interest amount to not add to the principal amount.  If interest is also deferred and you are able to make some small payments, these payments will help reduce your debt quicker, since your payments are going directly to the principal amount.

Hope this helps you cut the crust off your debt...

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