Student Loan Payback

If you are in full time graduate school there is a good chance you have some student loans. Some students are counting on their future income to be high enough that they aren't worried about payback and are content to borrow enough to maintain their former lifestyle. Others are borrowing the bare minimum for tuition only and using savings or part time work to supplement living expenses. Either way, these loans will have to be paid back so what is your payback strategy? Have you begun to think about it yet?

Here is the strategy I used to accelerate my undergrad loan payback and a good strategy for debt reduction in general.

Step 1. Avoid unnecessarily adding to the problem now. The old adage that when you find yourself in a hole you should stop digging holds true here as well. Develop a budget and stick to it. This is a great habit to establish now when you have to that will insure that you can easily accomplish step 2 upon graduation when you may not be forced to be as careful with money.

Step 2. Fight lifestyle inflation. Just because you have an excellent chance of getting a great job offer after graduation doesn't mean you will find it easy to pay back your loan balance. There is a reason that some doctors and lawyers who make mid six-figure salaries live paycheck to paycheck like many people living at the median family income level. Lifestyle inflation is a hard thing to overcome and the temptation to increase your spending in direct relation to your increased income will be a factor you will have to purposefully try to avoid.

Step 3. Pick a strategy. Your long term strategy should kick into place after graduation when you are again bringing in a regular income. There are two main methods of debt repayment strategies but I favor one over the other.

Strategy A is to list all of your consumer debt from highest interest rate to smallest and attack it in that order. By looking at your budget you've maintained since Step 1 you should have an idea of how much additional money you can put toward paying off the highest interest rate first. Work to pay that debt off and then continue to work down the list. Again, while this is mathematically the best method there are psychological factors involved that cause me to prefer the next method.

Strategy B is to organize your debts from smallest to largest balance without regard to interest rates. This sounds counter intuitive at first but in my opinion is a better debt repayment method for reasons I'll discuss below. This strategy is basically the Debt Snowball method popularized by financial guru Dave Ramsey. Here's how it works. After looking at your budget, you pay the minimum payment on all of your other debts and dedicate your excess money solely to your smallest balance. For example, you have a $500 debt with a $25 monthly minimum payment and $225 monthly extra above your budget. You would devote the entire $250 ($25 minimum plus $225 extra) to that debt each month. After 2 short months you have paid off that debt and now instead of $225 extra in your budget you now have $250 to apply to the next lowest balance. If that debt is $900 with a $50 minimum payment you now have $300 ($250 extra plus the $50 monthly you were already making) to apply to that debt each month and you will have it paid off in just 3 months, which frees up a total of $300 to apply to your next debt and so on and so on. The benefit of this debt reduction strategy is that it provides you with the quick reward of eliminating some smaller debts and allows you to contribute more and more money each month to your debt payback strategy. This method has worked for thousands of people and is nothing more than a psychological strategy to help you stay committed to your debt repayment plans. If you are a model of self control and make decisions solely based on the logic or analytical assessment of an option then Strategy A is for you, but for most people I believe the Debt Snowball is the most effect method for actually sticking to the goal of getting out of debt.

There are a few instances where I wouldn't recommend this method such as having one large loan with a really high interest rate far above the other debts but for the most part the debt snowball is the method that most people will actually stick to because of the immediate gratification and feedback you get by following it.

Debt repayment is never a fun topic but keep this thought in mind. You are willing to sacrifice now to pursue an investment in your education that will have a significant long term payoff. Debt reduction is the exact same concept where you are making some sacrifices now for a better long term outcome. So, what are your strategies for student loan payoff?