Financial Freedom Junkie

The Ultimate Student Loan Payoff Guide (From Drowning to Debt-Free)

• Adam Fernandez • Episode 4

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#4 Feeling overwhelmed by student loans? Let’s dive into proven methods to rapidly reduce student debt. Some key strategies include: increasing the frequency and amount of your payments, including targeting high-interest loans using the debt avalanche method; freeing up cash with budgeting and supplemental income; and loan refinancing or consolidation (why it may or may not make sense for you). You’ll get real-life examples using loan calculators to show potential savings and gain insight into the significance of staying proactive with debt repayment. Tune in for actionable tips so that you can reclaim your financial future.

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Do you feel like you're drowning in student loans? Like you're doing all the right things, but you've got a mountain of debt that's put your future on hold and you'll be eating ramen noodles for the rest of your life? Maybe that's a little dramatic. Maybe not. Well, don't worry, this is your proven path to slash your debt as fast as possible and start getting ahead. This is episode number 4 of the podcast.

Adam:

Welcome to the Financial Freedom Junkie Podcast, where we help everyday people master their money and fulfill their financial purpose. You should never lose sleep over money, but together we can change that. I'm Adam Fernandez. Join me and let's get addicted to the pursuit of financial freedom together. It's time to become a financial freedom junkie. All right. So I won't go much into comparing and contrasting the types of student loans like federal versus private, but let me know if you want to learn about that by leaving a comment. So one of the first and simplest ways to destroy your student loans is by increasing your payments. Makes sense. You can increase the frequency of your payments or the amount of your payments. Frequency being how often you pay them. So maybe you pay them normally monthly, but if you actually pay your loans bi-weekly and you just cut your monthly payment in half and make that payment bi-weekly, you're basically going to be making an extra payment towards your loan every year. You most likely won't feel an impact and it will help you pay it down. And that can make a huge difference over the life of a 10 year loan, a 15 year loan, and so on. Of course, you could also increase the amount of your payment by making an extra payment every year, or When you get a bonus, making an extra payment every quarter, whatever works for you. and by the way, you can do this at any time you just sign into the account for that loan that you have, You could just make an extra payment and that payment, you might actually be able to designate it as, a principal payment. And the earlier you make those extra principal payments, the more they'll help you out because the earlier on in the loan, the more interest that's being accrued because it's a higher balance. and another point within this whole increasing payments section is prioritizing your high interest loans. This is what many people know as the debt avalanche method. You can focus on paying down. Your highest interest loans first. So you might have multiple student loans and one is at an 8 percent interest rate. And one is at a 7 percent interest rate. One is at a 5 percent interest rate. So kind of pay the minimum that you need to pay on everything. Cause you don't want to be charged any late fees. You definitely don't want to be penalized for anything, but pay what you need to pay on all your loans. But any extra payments that you can make, focus on paying those loans that have the highest interest first because, just mathematically speaking, That's going to be the best way to make your dollars work for you as best as possible and pay down the loans quicker. Oh, and one last thing, this doesn't really fall into the category of increasing payments, increasing your frequency, the amount that you pay. But if you do have unsubsidized or private student loans and you're still in school, you can lower the total amount that you're going to pay over the life of those loans while you are going to school. And let me just explain a little bit. So the way this works, last time I remember is you don't have to make payments on your loans until six months after you finish going to school. But that doesn't mean that interest is not accruing on those loans. The whole time, from the moment that you first take out a loan until that moment, six months after you finish school, that whole time interest is accruing on your loans. But if you don't make any payments on your loans until you are required to, that, like I said, six months after you finish going to school and you are now required to make payments. all the interest that has accrued on those loans is basically going to be added to the principal of your loan. So basically your loan balance, is actually going to be greater. So you can do one of two things to reduce the total amount that you pay on those loans. One thing is you can make little payments here and there while you're going to school, or you can do what I did, which is right before you're required to begin making payments on your loan, you can make a lump sum payment for all the interest that has accrued on your account. So that when day one starts where you have to begin to pay your loans, all that interest has not been added to the balance. Because once that interest gets added to your loan balance, it's treated pretty much as principal and now you are accruing interest on interest, which really sucks when you have debt. All right. So another thing you can do is increase your cashflow. That'd be pretty cool. Right? Just like, Oh, magically I increased my cashflow. Yeah. It's not that easy for all of us, but, one thing old Ben Franklin used to say, if I'm not mistaken, he said, if you fail to plan, you plan to fail. And. I think a lot of people go into this whole thing of just like sticking with the status quo and this is what I agree to, this is what I'm supposed to pay and I'm just going to leave it like that. you have to be cognizant of your ever changing needs as you get a different job or as your financial situation changes for other reasons. So that said, I feel like this might be one instance where the B word is appropriate. Budgeting. Yeah, that's, I thought that was funny. I'm sorry. But anyway, budgeting, okay. Budgeting helps you find opportunities to cut back and free up cashflow for your loan payments for any other ways to pay off your debt. So selfish plug, I've got a money management plan that will help you to get a good idea of what you are spending on. If you take it seriously, it really lays everything out really well for you. I'll include the link below, but you can go to financialfreedomjunkie.com/newsletter and You sign up for my newsletter, I'll send you an email that includes my money management plan, as well as my financial vision board for you to really map out your financial future and get your finances in order. another way you can pay down your loans quicker is by getting some supplemental income. Selling unused items that you have in the house that you really feel like you should be keeping for a rainy day but you know you're never going to use them. Things like that. Pet sitting. Lots of different freelancing. And by the way, don't tell me you don't have time. Do not say you don't have time. If you're like the average daily social media user, you spend over 2 hours and 20 minutes on socials. So, you can spare some time. I've learned in this journey of getting busier and busier with life and getting married and having kids and doing all these other things and all these other activities You will always make time for the things that are important to you. So you got to set your priorities. So another thing that can make a huge difference in terms of you paying down your debt are repayment plans. And I just want to make a quick note here, because I just, I feel like I really need to share this. So I once had a coworker who, hopefully jokingly, said he would carry his student loans until he died. I've heard a lot of people talk about not paying back their student loans. Don't, don't wait for someone else to just take care of your problems for you. Take control of what you can take control of, because if you're not repaying your loans and you default on them, There can be serious long term consequences like wrecking your credit score, which can disqualify you from receiving auto or home loans, or potentially even credit cards. Oh, and if you are interested in improving your credit score, you can go back to episode 3 of the podcast where I talk about free credit score hacks that can really help you catapult your credit score to the next level. All right. So in terms of repayment plans, you've got kind of two big categories. You can refinance or consolidate them. What's really great about refinancing or consolidating student loans is they usually have no upfront cost unlike refinancing other types of loans like an auto loan or a home loan. Usually you have to make an actual payment So cash out the door before you can actually convert This loan into a potentially better loan. So I think there are two main reasons to do a formal repayment plan, like consolidation or refinancing. So in terms of number one, if you're having trouble paying down your loans, if we're talking about federal loans on the federal side, consolidation involves combining one or more loans into a, what's called a direct consolidation loan. So most people will do this so they can lower their monthly payment. And then they only have to worry about one bill rather than multiple bills from different lenders. And that sounds great. It's cleaner. You can just worry about this one source. There's benefit there. There are other benefits to do a consolidation, but I think you'd ultimately be screwing yourself because you can be converting, let's say, like a 10 year loan into a 20 or even a 30 year loan, depending on the situation, and so you'll pay way more interest charges when you're doing a consolidation. Because it's not actually changing the interest rates. It's just blending all the loans you have and putting them into one little package, and then it takes like the average of it. The one real benefits of consolidation is you'll keep your federal borrower protections because your loans stay in the federal system. You just move them from one bucket into another, but it's all still federal. But I think I would only do that if I felt like I really needed to, just me personally, not, you know, maybe it makes sense for your situation. But if you can't afford your federal loans and you don't want to do a consolidation, you may qualify for income driven repayment plans. You may be able to provide support to your lender that your income is not enough to make the monthly payments that's currently set up for your loan or loans. So that would be an income driven repayment plan. You've also got deferment or forbearance programs, to basically delay repaying the loan. And there is possible loan forgiveness. Unless your loan is forgiven, which seems to be highly unlikely based on the latest stats I saw, I think it was August. 2024 forgiveness statistics. If you go with any of these options, again, except for forgiveness, what you're really doing is just delaying paying off your student loans. And if, if you really need to do that, that's fine. And you definitely shouldn't be shamed for it. But if you don't need to apply for one of these programs, the income driven repayment plan, deferment, forbearance programs, if you can make larger payments, additional payments, or even Potentially refinance for better loan terms, do that. So that would bring me to number two, reason two was saving on interest. If you do want to pay less on interest over the life of your loans, and I would think that you, do refinancing can be a great idea. And I know what you're thinking. But Adam, federal loans account for over 90 percent of all student loan debt. So if I have federal loans and that's the norm, then why would I even change that? I'm just kidding. You, you probably didn't know that statistic. And well, honestly I didn't either until I was researching, but that's true. Well, maybe that norm of carrying federal student loans, because it was a simple thing to do. Maybe that's why you're drowning in debt. So let's run through some examples. A few months ago, the Education Data Initiative noted that the average public university student borrows $31,960 to attain a bachelor's degree. All right, so let me bring up scenario A. That is where you have federal undergraduate loan that was dispersed on or after July 1st, 2024, and before July 1st, 2025. the interest rate is 6.53%. By the way, that's the highest it's been in a decade, which it kind of blows my mind, but also doesn't surprise me at the same time. So that's scenario A. Now scenario B, I'm going to take, for example, Earnest. Earnest is a private lender that you can refinance loans with. Earnest The APR that they showed on their refinance loans start at 3.94%, last time I checked, Maybe you're not qualified for the lowest possible rate. So 3.94%, let's just say it's 5%. that's about 1.5% lower than the federal undergraduate rate, And by the way, I'm going to stick with fixed interest rates because there are loans out there that have variable interest rates. But unless you're confident that interest rates are actually going to drop during the life of the loan, then by all means get a variable interest rate, but kind of a little bit of gambling, you'd have to be really confident about that. So otherwise, unless you're really confident that interest rates will drop during the life of the loan, stick with a fixed interest rate. So let's actually run through an example with those real numbers, scenario A, scenario B, and then we'll play with the numbers a little bit to see how significant refinancing, making extra payments, all these different things that you can possibly do with your loan can be pretty amazing.

Track 1:

So the stat I mentioned before is, the average public university student borrows $31, 960 to attain a bachelor's degree. So let's just, let's go with a nice flat $32,000 cause it's gonna make my life a lot easier and it doesn't really move the needle very much. And by the way, this is NerdWallet's loan calculator. I'm gonna go through a few different calculators from NerdWallet. Most federal loans are going to be 10 years. so 120 months. So if you have the average public university loan at the most recent unsubsidized interest rate of 6.53%, your monthly payment would be $363.84. Lovely. But what if we could get to that scenario B, refinancing those loans right away into an interest rate of 5%. What if you could still refinance for the same term, 10 years, let's compare as apples to apples as we possibly can, but we're going to get a 5% interest rate. Now, you might be thinking, well, I'm only going to save I'm only going to spend $25 less a month. That's, that's not a whole lot. No, but, over that 10 year period, you're saving about $3,000. That's pretty awesome, right? That'd be pretty cool. I'll take $3,000 for not having to do additional work. So that's one example, We also have the student loan payoff calculator. This is where I was talking about at the beginning, making extra payments. Even if you don't refinance, you say, okay, well, I have a $32,000 loan and my interest rate, or my annual percentage rate APR, is 6.53. My current payment again is$363. What if we could just make an extra payment of $100 a month? Let's run Calculate. So, instead of paying this loan off in 10 years, just by making an extra payment of $100 a month, you can pay off your loan 30 some months earlier. That's Nearly three years earlier. That's pretty awesome. You know, three years of being able to do something else with that money, invest it, whatever you wish. All right, you get the gist of it. I'm not going to go through every example under the sun. These are just some of the loan calculators that I found that I think are helpful. There are others out there, just like I mentioned earlier. You can say, what is my monthly payment? Divide that number by two, make that payment bi-weekly. And what would that look like? There's lots of calculators out there for free. I think Microsoft Excel can even create a loan amortization schedule for you that'll sum up what your total payments are, what your total interest over the life of the loan will be. This is just a way to show you even just little changes can go a long way and Make a big difference in the long run. Now, if you are interested in refinancing or consolidating your loans, I know I mentioned Earnest before, I definitely recommend you check out Earnest you can go to financialfreedomjunkie.com/earnest. Of course, I'll include the link in the description below. If you are thinking about refinancing your loans, it would really help support the channel. There's no cost. You can get a rate estimate in just a few minutes with no impact to your credit score. So it doesn't hurt to just try. and uh, just see what that might look like for you. Personally, I refinanced my student loans with them twice. I had federal loans and pretty much right when I was finishing up school, I said, well, can I lower my interest rate? And so I did a refinanced with Earnest and sometime shortly thereafter. Rates went down again. I'm like, Oh, cool. I can refinance my loans again, get a lower interest rate, not pay anything out-of-pocket, like I mentioned earlier. That was really easy. Customer service is always helpful whenever I reached out. So pretty great. And Oh, and one thing I noticed recently is they don't just do refinancing. You can actually apply for new student loans or personal loans. now with loans in general. If your credit isn't great, you may want to consider getting a co signer on the loan to lower your rate. Last I checked Ernest had advertised a fixed 3.47% APR for those with a cosigner versus 5.17 APR if you do it independently on your own. And they claim students are five times more likely to be approved with a cosigner. of course your cosigner, parent, guardian, they would have to feel comfortable with that as well. But it could really help you out if there is that level of trust and you both feel comfortable with that. Now, earlier I had mentioned the federal income driven repayment plans, the deferment plans, forbeareance. By the way, those options are not for federal loans only. So there are private lenders that have started implementing similar options for debt relief. So for example, I know, like I know with Earnest, just cause I used Earnest. I know they can, that you can skip a payment every 12 months. it's considered a one month forbearance And you may qualify forbearance in general if you experience financial hardship. They'd ask you for that information. So I'll include a link to the show notes to an Earnest article that goes over repayment options. But definitely make sure to do your research if this is a big concern for you, because if you have federal student loans and you were planning to refinance into private ones, You will lose federal student loan protections, like potential forgiveness, let's say like the public student loan forgiveness program. And I just want to be real with you. Even if you were to save a good amount of interest, refinancing might not be the right choice for you. for example, if you just have undergraduate loans and your employment has been unsteady or sporadic, refinancing can be risky. On the other hand, if you have Grad PLUS loans or you have Federal Parent PLUS loans for your kids education, let's say, it may make more sense since those are some of the most expensive loans, and they may come with fewer repayment options, fewer benefits. but I don't know your specific situation. I just want to help you be better informed, And just a quick suggestion, if you do want to refinance, probably only refinance if it'll help you save on interest, like getting a lower interest rate, or if it'll just help you pay your loans off sooner. Otherwise, I really hate the idea of someone refinancing their loans just so that they can lower their payment. But at the end of the day, they're just extending the life of their loans and ultimately paying more in interest. It's generally not the best solution. The last sort of subcategory within repayment plans that I want to bring up, it's less common, but definitely worth mentioning our employer student loan repayment programs. This is more likely to apply to you if you work at a larger organization. Some organizations out there say, hey, you know, you've gone to school we will support you by helping you pay down your student loans. Now, if you don't know whether they have that employer student loan repayment program in place, just ask, it doesn't hurt. Worst case, they say, no, sorry. I can't help you. Best case, You just got free money for them to help pay off your debt. That's a win in my book. And I just, I just can't understate how great it feels to pay off your loans and be debt free. I paid off my student loans about a year ago and we were able to use the money that we were paying towards my student loans to pay off my wife's car. And this shift just keeps compounding and compounding. It's just the most amazing feeling. So whether you're sticking to a plan making extra payments, whether you choose to refinance to save on interest and pay the loans off sooner, whatever it is you do try to remain consistent and not bite off more than you can chew. Even small extra payments each month can make a huge difference. So those small payments are small wins and those small wins can turn into huge results. If you have any questions or want a deeper dive into any of these strategies, feel free to text the show. I've got the number in the description. Be sure to follow us if you haven't already. And thanks so much for sticking around. I'll catch you in the next one.

Adam:

Oh, and one more thing, quick disclaimer. This content is for general informational, educational, and entertainment purposes only, and it is not financial, tax, investment, or legal advice. See full disclaimer at financialfreedomjunkie.com/disclaimer.

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