Today, I paid off more student loans than ever before: $4,000, to be exact. This hefty deposit was made directly to my loan servicer, which will pay off federal aid debts. In May 2013, I had nearly $40,000 in debt. I was careening out of control, and my only solution was to take out more student loans. Instead, I started Frugaling and changed my entire financial future.
Even though I’m making more money than ever, it’s important to safely and smartly pay off debts. While it’s best to prevent excess debt via proactive budgeting, paying it off can be dangerous, too. In my situation, I paid off this huge chunk of debt by following the proceeding five essentials. Hopefully these will help you to safely pay off more student loans than ever!
1. Pay Off Active, High Interest Student Loans
Okay, I’m going to get a little technical here. I have two types of federal aid: A and B. My “A” loans are subsidized (no interest gaining) until I graduate from school. Unfortunately, my “B” loans are a running taxicab of interest and piling debt.
The first goal needs to be paying off high interest student loans that are active. My “A” loans are not active, and as such, do not need to be the focal point. Meanwhile, my “B” loans are ticking along at about 6.7% APR. All my energy and funds are going towards these second, active interest loans right now.
2. Pay Off As Much As Your Budget Can Bear
It’s tempting to start taking some of my newfound money and buy things. Somewhere between things I don’t need and things I’ve long wanted – oh, how wonderful that would be to buy the unnecessary but awesome!
To prevent this human reaction, I’m digging deep and paying off an uncomfortable amount of student loans every month. It hurts to pay this much because I feel uncomfortable having this little in my savings/checking accounts. Conversely, it helps me pay off more each month, and prevents needless purchases while my budget is being corrected. The less access to money you have, the less you’ll spend!
3. Subsidized Loans Are Free Money While In School
The “B” portion of my loans are my enemy, while “A” is a friendly sort. My student loans started out as a subsidized group, when the country cared about educating the masses affordably and fairly. That’s sort of changed.
I have $8,500 in subsidized loans that are protected from gaining interest until I graduate. Phew! This mass is scary and will be a priority at some point. While I’m in graduate school, I’ll aim to stock up my bank account, build an investment portfolio, and diligently follow my budget. Later, after I graduate and the interest becomes active, I’ll redirect this built up liquidity to quickly pay off the rest of my loans.
4. Keep Some Handy For Emergencies/Tax Season
This might seem contradictory, but part 2 says pay as much as you can possibly bear. Does that mean you should scrap any emergency funds to pay off student loans immediately? Well, it depends on your liabilities.
As a car owner, with certain financial obligations, I need to have some money on hand in case something goes awry. Likewise, this is the first tax season where I’ll be paying Uncle Sam. While I’m happy to do it, I need to prepare for significant budget buster in mid-April (when my payment is scheduled). The key here is to pay as much as you can, while insuring yourself against totally tragedy.
5. Recognize Your Accomplishments
Bring in the reinforcements! Good habits are largely built from strong, positive reinforcement behaviors. Pavlov and Skinner are the two psychologists credited with founding the field of classical and operant conditioning. If you’ve ever taken a psychology course, you’ve likely learned about them.
Those two stodgy, crotchety scientists were pioneers in the field of education and behavior management. Skinner’s operant conditioning reinforcement schedules are as important as ever. Simply put, when you’re done paying off a significant chunk of student loans, reward yourself! Today, mine will be an extra coffee before work. What’s yours?