Paying Off Student Loans on an Average Income

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  • For borrowers that are neither wealthy nor poor, eliminating student debt can be difficult.
  • Paying off student loans does not have to take decades.
  • There are many strategies for middle income borrowers to erase student debt.
  • The situation is difficult, but it can be managed.

There are excellent resources out there for people who are unemployed or living on minimum wage and dealing with student loans, such as federal student loan forgiveness programs.  There are also plenty of strategies that can be employed by those making 100k plus per year and looking to eliminate debt. Unfortunately, these resources and strategies are not always of much use to someone who is making 50k per year and trying to pay off 50k in student loan debt.

At times it seems like the people really struggling get student loan forgiveness and the ones who have great credit scores and income get student loan refinancing while the ones stuck in the middle get screwed.  This is obviously a major oversimplification of student debt, but with this thought in mind we will focus on the ways to eliminate student loans that don’t revolve around student loan forgiveness or refinancing.

Smart Repayment Starts with Budgeting

Creating and sticking to a monthly budget isn’t a sexy or clever way to pay off student loans… but it can be extremely effective.

The problem with making minimum payments on any type of debt is that much of that monthly payment goes towards interest.  Put another way, much of what is paid each month goes towards lender profits rather than reducing what is owed.  Many borrowers wonder how they can make every payment for 5 years and hardly see their balance drop.  Student loan interest eats up minimum payments.

Budgeting isn’t sexy or fun, but it gets results.
Creating a budget helps you free up some money each month for student loans.  The “extra” payments that are made pay down the principal balance.  That means pure debt elimination.  As balances drop, the monthly interest that the loan generates also drops.  Extra contributions have a snowball effect.  The success of one month builds into the next month.

Budgeting is the key to making extra payments.  If you think you are only spending your money on essentials or that there is nothing to be cut, make a budget anyway.  When you see all your monthly finances accounted for, it will shed light on new opportunities.  Many people are surprised at how many miscellaneous or seemingly minor expenses can really add up by the end of the month.  If you are new to budgeting, mint.com is a great way to get started.

You Don’t Get Raises

If reducing monthly expenses is one pillar of paying off student loans, the other pillar is finding ways to generate additional income.

Suppose you get a raise at work and earn an extra $100 per pay period.  Don’t spend that raise.  Don’t think, now I can afford to ______.  You don’t get raises when you have student loans.

This approach may sound harsh, but it is the easiest way to get really aggressive on student loan payments.  We can’t miss what we never had.  Raise or not, your monthly budget stays the same.  It isn’t a sacrifice, it is just continuing the status quo.

Budget Consistently

Yes… more talk of budgets… it really is that important.

Budgeting for one or two months is a start, but not where we find the real value.  Sticking to a budget long term is the key to success.

For a budget to work long-term, it has to be something you can stick with.  Don’t make a budget so aggressive that you are miserable.  Leave some room for some discretionary spending or find a way to reward yourself for sticking to the budget.

Don’t Compare to the Joneses

Friends from college may get new cars.  Coworkers might take exciting vacations.  Don’t fall into the trap of comparing what you have to others.  Not only is this a bad idea from a financial perspective, it is a recipe for unhappiness.  Others are always going to have bigger, better, nicer, and newer things.

Find a way to internalize your goals and get satisfaction from achieving the things that matter to you.

Be Smart About Repayment

Paying extra is good, but being smart about paying extra is even better.

We have previously done the math to show how targeted attacks on loans is much better than just paying extra here and there.  If you don’t want to read the full explanation on how attacking one loan is for the best, the short version is that it allows you to eliminate the highest interest rate loans first and save the most money in the long run.

Once you are done, you will feel wealthy.

When your student loans are paid off, your monthly budget will look amazing.  All that extra money that you were spending on student loans is now free.  Instead of getting a few raises over the years, you get them all at once.  The biggest drain on your finances will be gone.

It doesn’t hurt to start thinking about your student loan freedom celebration.  Even if you are years removed, having a light at the end of the tunnel and something to work for can be motivating.  The door of student debt is one of the coolest ways we have seen to track progress and celebrate milestones.

What about retirement?

Knocking out student loans and saving for retirement at the same time is possible.

Deciding between a 401(k) contribution and a student loan payment can be tricky.  We have previously examined this topic in more detail, but the short version is that you can work towards both goals at the same time.  The key is evaluating where your money goes the furthest.

Attacking your student loans should be about building a stronger financial future, and that doesn’t mean skipping retirement.

Bottom Line

Having an average income and trying to manage a mountain of student debt is a tough situation faced by millions of Americans.

There isn’t an easy road to freedom and there are not many shortcuts along the way.  However, with some smart planning, your goals can become a reality sooner than you ever thought possible.