My wife likes to joke about the ‘dowry’ that she brought to our marriage in the form of her college debt. I was one of the lucky few in the millennial generation that graduated from college completely debt free. I spent the first half of my degree program in community college for dirt cheap, and my two years of university were covered under my father’s Post 9/11 GI Bill. Needless to say, I was very blessed. My wife was not so lucky and had to take out loans for her college degree. Additionally, her program required her to get a Master’s Degree to practice in her field, so there were additional loans that went with that. As a result, even though I came out of college with no debt to my name, we still had two pay off the costs of two degrees. The grand total (when you count all of the interest that accumulated before we paid it off) was just over $69,000.
This was an absolutely staggering amount and I was in complete shock when I saw the numbers for the first time on my wife’s online account. This was almost double the average recent graduate’s student debt of $37,000, and it was hard for me to imagine us ever paying it off anywhere close to the near future. Having debt can be a tremendous burden on someone. It prevents you from saving towards your financial goals, hurts your ability to get credit and can be a big weight on you psychologically. For two newlyweds who were just starting their careers and had the desire to start a family, this was a huge obstacle for us to overcome. We made the decision to do everything we could to pay off this debt as soon as possible. I could not be prouder to tell you that a short 22 months later, we succeeded. If you read below, I’ll outline for you the five steps we followed to quickly get rid of that mountain of debt.
Step One: We lived entirely off of one income.
My wife and I both worked average paying jobs that anybody could live off of. The temptation for most people is to live off the total income that they make. In other words, if each person makes $40,000 a year, they live the lifestyle of a family making $80,000 annually. This is a completely natural thing, people work hard for their money and naturally want to enjoy the fruits of their labor. Unfortunately, this is not a good approach to the family finances if your objective is to pay off debt as quickly as possible.
The first major financial decision that my wife and I made was to only live off one income. Since I made slightly more in my job, we concluded that our monthly expenses would be budgeted solely from my paycheck, as if my wife’s income never existed. This was not the easiest thing to do. When you’re coming up to your budgeted limit for food, fun or something else you enjoy, it’s easy to think about all of this ‘extra’ money that you haven’t budgeted and not worry about going over your budget a little bit. It takes significant discipline and self control to resist this temptation in the name of something as unexciting as making a slightly larger loan payment. I won’t lie and say that we never gave in to this temptation, it certainly happened to us a few times. However, for the most part we stayed within budget and our monthly expenses didn’t come from my wife’s salary.
Living off of one average-sized income required us to live a minimalist lifestyle. We did not dine out, and lived off of cost-effective slow cooker meals. We never took a big vacation, choosing instead to spend time with family on the rare occasion that we did travel. Additionally, we did everything we could to reduce our monthly bills. For example, to this day we have never had cable, opting for cheaper Netflix and HBO Go subscriptions for entertainment. We also bought used, living off of Facebook Marketplace and Craigslist when we needed to make a big purchase for the best value. These things were hard, but in the end it was all worth it. Nothing felt better than making that one final debt payment, and it was only for 22 months that we had to live that significantly below our means.
Living off of one income isn’t just a good debt payment strategy, it’s a smart thing to do as a general rule for your family finances. While my wife and I do go on a monthly date night to a nice restaurant and are currently saving for our first big family vacation, we still budget monthly from my income alone. This gives us a lot of flexibility and peace of mind, since it makes it less of a financial burden when unexpected expenses come up and we are able to quickly save money to meet our other goals. I recommend this approach for any family with more than once source of income.
Step Two: Paying off the debt always came first.
When we first started making our student loan payments the debt was not our only financial priority. We also wanted to build a medium-sized emergency fund and start our retirement savings. Therefore, my wife’s paychecks were split between the three: debt, savings and retirement. We kept up this system for about 4 months. The debt was not being paid off as quickly as it could have been, but each payment was still well above the minimum due each month. That all changed for us when we found out that our baby was on the way.
We became pregnant with our daughter shortly after Christmas, and since the new year was on the way we needed to decide on our budget for the first half of 2016 (we always budget six months in advance). One thing we knew was that we did not want to raise our first child in a household that was drowning in debt, especially considering the costs of childbirth and raising a kid. We made the decision right there and then to focus all of our financial resources towards paying off the debt, and immediately stopped all saving for retirement and emergencies (by then we had an acceptable emergency fund). From that point on paying off the debt was the only expense outside of our typical monthly bills. The only time this changed was after our kid was born, and we adjusted my wife’s income to go solely towards daycare costs and student loans.
Step Three: We immediately surrendered tax refunds and bonuses.
Many people get excited during tax season in anticipation of their state and federal refunds. My excitement only grew after I started working post-college, since I was earning more and my tax refund was subsequently larger. Additionally, my employer distributes an annual bonus as part of the retirement plan for its associates. For the one year that occurred between starting work and getting married I used these funds for various financial goals such as saving for the wedding and buying furniture for my new apartment. However, after we started paying off the student loans we realized that we had to make an adjustment.
Instead of using our tax refunds and bonuses for large purchases and other various fun activities, we made the painful decision to use every cent we got to pay off the student loans. These payments represented the largest single gains that we made at shrinking that outstanding loan balance. Combined, they cut away five figures of debt all on their own, and nothing felt better than to see our debt shrink that much. While there is nothing fun about basically facilitating a transfer of funds from the I.R.S. to the Department of Education, it ultimately paid off in the long run and my wife and I can’t wait to keep every cent of our tax refund next year!
Step Four: We targeted the larger and higher interest loans first.
When my wife and I first started to pay off our debt we did a lot of reading about the best debt payment strategies. We soon came across Dave Ramsay’s website and podcast. For those of you who don’t know, Dave Ramsay is a big voice in the financial adviser community. On his website he lists out his strategy for paying off debt: The Snowball Method. The theory is that you pay off the smallest loans first, and seeing those loans disappear will keep you motivated to pay off the rest of your debt. Additionally, paying off those small loans first frees up their minimum payments to apply to the bigger loans. It made perfect sense.
We initially followed the snowball effect strategy for paying off the college loans. Our student loans consisted of five loans in total, with two of them being more than $20,000 apiece and the rest being between $1,500 and $10,000. After a few months of targeting the smaller loans first we began to notice something: our total outstanding loan balance wasn’t going down nearly as quickly as we were making payments. It didn’t take long to find out why. Even though those two largest loans didn’t have the highest interest rates, the smaller interest rates were applying to much larger sums of money. In other words, they were collecting so much in interest that it compensated for what we were paying off.
Upon discovering this, we made the immediate decision to dispense with the snowball method and target the largest loans first. Our thought process was that we were completely committed to paying off the loans, so we didn’t need a psychological tool to keep us in the game. What was most important to us was paying off the loans while generating the smallest amount of interest possible. After we got the two $20,000 loans as small as the others, we switched back to the method of targeting the higher interest loans first. We found that this strategy was the best in terms of savings, and of the $69,000 that we paid off only about $6,000 was applied to interest.
Step Five: We stuck with it until the very end.
Believe it or not, sticking with your debt payments until the loans are completely gone is harder than you might think. One would assume that if you’ve been paying off loans for a long time the final stretch would be the easiest and the most exciting. We found that the opposite was the case. I mentioned earlier in this article how we avoided big expenses like vacations, dining out and other various luxuries. This only got harder once our debt went below the $10,000 mark. It’s easy to start telling yourself that your money will be better spent someplace else, and it’s harder to think otherwise when the amount of interest being generated is minimal at best. In fact, I know several people who have stopped paying off their debt (if they ever started at all) because they don’t see a significant financial cost to paying the minimum due.
I could not encourage you more to avoid this line of thinking. The fact is that there is no such thing as good debt, and any balance no matter how small is costing you even if it’s not in the form of interest. Part of your credit score is measured by the amount of debt you have verses the amount of credit available to you, and the more debt you have, the more adversely it may be affecting your credit. This could be costing you long-term in the form of higher interest rates for your car loans, mortgage, etc. In other words, you should simply finish paying off the debt and never have to worry about it again for the rest of your life.
These steps were not easy for us to follow. It required us to live well below our means, surrender our tax refunds and see only incremental progress in our outstanding balance. However, 22 months was a very short amount of time when you look at the big picture, and now that our student loans are all gone we look back and realize that it felt like no time at all. We made our final student loan payment at the very end of August 2017, and we had our baby daughter press the button (with a little help from her mother) on the computer to submit the final payment.
Paying off student loans feels like a huge weight being lifted off of your chest. Sometimes it is so hard to believe that I log into the student loan account just to verify the $0 balance. I even double checked my wife’s credit report to make sure there were no rogue student loans out there that we somehow lost track of. Today I can honestly say that paying off these loans instead of sticking with the default payment plan was one of the best decisions my wife and I ever made. Debt is such an ingrained part of our culture (student loans, credit card debt, house debt, etc) that it seems almost natural to have it. However, all debt really does is close doors for you and make it harder for you to one day achieve financial independence. Since the students loans vanished my wife and I have had the flexibility to immediately tackle our goals. The week after that last loan payment we bought our first car (read about that experience here). We had to take out a small loan for it, but by following the steps outlined above we will be paying off that loan no more than six months from the date of this writing.
I hope you enjoyed reading about our student loan repayment, and that it inspires you to pay off any debt you might have lingering around. It may seem daunting right now, especially when you look at that huge outstanding balance. However, if you commit yourself and follow the same steps we did, one day it will be gone!