The Sherpa Plan for Easing into Aggressive Repayment

Michael Lux Blog, Student Loans 1 Comment

Interest rates on student loans are brutal.  When most student loans enter repayment only a small fraction of your monthly payment reduces the principal balance.  Most of the money pays down interest… which is how the lenders make their money.

What most borrowers don’t realize is that is that a little bit extra can go really far.  In fact, if you are willing to spend a few extra bucks each month, you can pay your loans off in about half the time.  The process is pretty simple.  When you think about paying off your student loans in half the time, it seems like you should have to make double payments.  In reality, it isn’t necessary.

An Example

Suppose you have a $30,000 loan at 9% interest.  Your lender may give you 25 years to pay off that loan.  Using these numbers you will have a monthly payment of $252.

When our example loan enters repayment, our payments will pay $225 towards interest and only $27 of the payment will lower the principal balance.  That means $225 dollars of income towards your lender and you are only $27 closer to having the loan paid off.

By using the Sherpa Plan, you can pay off this $30,000 loan in about 12.5 years, instead of the 25 that your lender would prefer.  This repayment strategy calls for you to pay only a few extra dollars each month, but it saves thousands in the long run.

The Sherpa Plan

When you make your monthly payment on your student loans, you pay double the amount going towards principal.  That is it.  No calculator necessary, just simple addition.

Using our example loan, instead of paying $252 towards your student loan, you would pay $252 plus an extra $27 (because that is the amount being applied towards principal), for a total of $279.

The numbers for your actual student loan are very easy to find.  You likely already know the minimum payment, and the amount being applied towards principal on each payment should be easy to find on your statement.  Keep an eye on your statements and as the amount being applied towards principal goes up, you likewise increase your extra payment.

It may not seem like a lot, but as long as you pay double the amount going towards principal, you will pay the loan much quicker.

Easing into Aggressive Repayment

Early on, our repayment strategy is really easy and really effective.  Rather than making a monthly payment of $252, we are paying $279; yet we are doubling the monthly dent in the principal balance.

As we start to reduce the balance of the loan, the amount going towards principal increases.  Each month we will have to pay a little extra (a dollar or two more) to keep up with our plan to double the principal balance.

When we have successfully paid off half of the loan, our statement will show that our monthly payment will apply approximately $114 dollars towards interest while $138 is applied to the principal balance.  Using the Sherpa Plan the check to the lender will be for $390.  This number is the $252 required for the minimum payment plus the extra $138 to double the dent in the principal balance.

While $390 a month sounds way more expensive than $252 per month, it is important to remember how we got here.  We started at a $277 payment.  There wasn’t a single month where the payment to the lender jumped by more than $2.  Using this plan for this loan literally costs no more than an extra dollar or two each month.  This allows you to gradually adjust your spending, so you do not have to adjust to a sudden increase in payment.

Paying off the loan

By the time your principal balance is under $1,000 you will be on the brink of having the debt eliminated.  Reaching this point means the monthly interest on the loan is now around $10… the rest is paying down the principal balance.  This means our monthly payments will now be nearing double the minimum amount due.

Paying double seems like a lot, but lets remember how we got here: small increases each month.  After 12 years you are paying nearly $500 per month on the loan, but it is also on the brink of being paid off.  Had you just paid the minimum, you would still have 13 years remaining on the loan, and your loan balance would still be over $23,000.

It is from this perspective that the benefit is truly seen.  You pay a little extra each month.  It isn’t easy, but it is manageable.  After 12 years, it may be getting hard, but you are nearly done.  You have successfully paid off almost $30,000 in high interest student debt.  The easy alternative is to just pay the minimum.  After 12 years of just making the minimum payment, you still have a balance of over $23,000!

The Perk of the Sherpa Plan

Repaying student loans using this strategy is easy.  At the beginning you are paying only a little bit above your minimum payment.  As you move along, you are only paying a little extra each month.  It is the slow and steady way to pay off your loan extremely fast.

Even if you think you won’t be able to make the extra payment years down the line when it has increased, you can still start right now with the slightly larger payments.  Keep doing it until you cannot keep up.  As the years pass you may surprise yourself as you gradually adjust to the larger payments.  Even if you don’t go the distance, you will still have done some serious work on your student loan and your efforts will have gotten you much closer to your goal of debt freedom.

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