As of two weeks ago, LD and I paid off the last of his private student loans and I cannot be happier! When we graduated college, these loans had hit about $18,000 with a interest rate of about 8.25%. Can you say burden? That interest rate is more than twice our mortgage’s interest rate!
If we had paid the minimum amount over the course of the loan, we would have paid about an extra $9000 in interest. I don’t know about other people, but for me, that is just not worth it and I wanted these particular loans gone ASAP. So, how did we do it? We made sure to be paying at least twice the minimum payments on these loans each month. We are also money hoarders. When we pay money toward a loan, we seem to always save about the same amount, which is often good, but in our case, our money buffer got a lot larger than we needed it to be. So, we were able to reduce our savings down by about $7000.
Yes, we are still paying off other loans and we started with about $50,000 worth of debt around the same time we graduated. (Ok, we bought my car with a $11.5k loan about 3 months after graduating, so I can’t blame it all on LD. Lesson learned.) Today, not including our mortgage, we have about $35,000 in debt. You have to love interest rates. There are definitely some things I have learned along the way though.
1. Always pay above the minimum on your highest interest loan. Even if that is $25 a month more, it will save you money in the long run.
2. Pay extra to your highest interest loans first and then snowball your debt. Once you pay off the top interest loan, move on to the next one and use the money you were paying to your top loan to pay even higher over minimum.
3. Don’t buy a new car with a loan. Instead, buy one you can afford from savings. If you have a reliable car now, run that sucker into the ground. An older car will have lower insurance premiums. For example, our 1999 Corolla only costs us about half the amount that our 2008 Prius does. That’s a savings of about $300 a year, not even including the lack of car payments.
4. Keep your savings account at a reasonable level. You want to have enough that if you were to lose your job tomorrow you can live for the next 3-6 months, but not more than that. Over that, you are just a hoarder if you are trying to get out of debt.
5. Save where you can. Don’t buy items just to buy items. Keep all purchases in perspective and wait at least 2-3 days before buying anything small and about 2 weeks to a month before buying anything larger. Most of the time you don’t really want that item anyway.
6. Celebrate the wins! We celebrated every time our debt dropped by $3000. Ok, sometimes it was every $1000, but when you celebrate, you are more eager to keep going instead of it feeling like a burden.
What are your loan payoff stories? What lessons have you learned? What big debt milestones have you celebrated?