This post was written by my friend Eric Rosenberg, a full-time freelancer and blogger at Personal Profitability. He’s going to show you how to pay off 90,000 in student loans and how to pay for your MBA. Eric writes about personal finance and entrepreneurship at InvestmentZen, his own blog, and other sites around the web.
College is expensive. Looking at the headlines, you can read about millions of people struggling with the cost of college and student debt. When I signed up for the MBA program, I had a bit of sticker shock myself. The $90,000 price tag was steep, but I knew that if I went into it with a plan, I could get a great education, increase my income, and get out of debt faster than the ten years it takes many other borrowers.
My plan worked! 736 days after I received my degree, I was debt free. Here’s how I did it and a blueprint you can follow to pay of your student debt, credit cards, or any other debt that is cramping your style.
Pay as Much as You Can Each Semester
I graduated from undergrad debt free thanks to a generous scholarship program from the Boy Scouts of America. I worked at the local Denver area Boy Scout camp for seven summers, and in doing so earned a full-ride scholarship to the University of Colorado. I had some college savings put away for undergrad that never went to use, so I had some savings to use when starting my MBA.
I also worked full-time for the year leading up to my MBA program. I lived at home with my parents that year and was able to save up a nice emergency fund while adding to my college savings.
My MBA program was on the quarter system, so I had to pay three times per year (four including summer quarter classes). Each time I got a tuition bill, I paid a big portion with student loans, but also paid a portion from my college savings. Doing so kept my student loan balances from going out of control while paying $67,000 in private school tuition.
Over the course of the program, I racked up $40,000 in student loans and paid the remaining $27,000 from savings. Keeping my borrowing to $40,000 meant I only had Federal Stafford loan and no private student loan debt to worry about. This kept my interest costs low and meant that a portion of my loans did not accrue any interest while in school. Knowing how each loan works is key to getting out of debt. Never sign a form you don’t understand!
Start Making Loan Payments Before Graduation
I worked full-time while going to school full-time. Some people thought I was crazy, but if I could go back and change things I wouldn’t. I didn’t have an amazing social life for that year and a half, and skipped out on many of the activities my fellow students were involved with. However, I was a full-time Financial Analyst (promoted to Senior General Accountant while still in school), and that salary covered my living expenses and then some.
Because I read my promissory note and statements each month, I knew that a portion of my loans were charging me interest every month. I didn’t want my loan balance to grow while in school, and I had enough income left over each month to pay at least the interest that was accruing.
I had a lot of other expenses that came along with a college education including books, fees, and the thousands of dollars in tuition that came due every quarter. I wanted to keep my money situation stable and didn’t have to make the payments until after graduation, so I paid about $100 each month to cover interest and a little more.
In my last quarter, when I had made my final tuition payment, I started to steadily increase my payment, but more on that in a minute.
Auto Pay Every Payday
Student loans, auto loans, and credit cards offer a feature that mortgages don’t. You can make a payment at any time for any amount. As long as you pay the minimum payment each month, it doesn’t matter if it comes in one lump, two biweekly payments, or a weekly payment.
My loan was due monthly, but I was paid biweekly. To match my income and my expenses, I setup an automatic payment to pay half of my student loan minimum payment each payday. Doing that had an extra bonus as well. Being paid every other week instead of twice each month, two months each year I got a third paycheck. With 26 payments each year, it was like making a full extra monthly payment each year, and because it was automatic on payday, I never felt a cash crunch because of it.
Use Bonuses and Tax Refunds for Debt Payoff
Working in a finance position at a large company, and the company I moved to shortly after graduation, I received an annual bonus most years. I also estimated low on my tax forms to ensure I would get a refund in April and not owe taxes. Because of that, I got two big lump income payments each year.
Every time I received lump income, I put it 100% into my student loans. Watching my loans go down by thousands of dollars at a time was pretty cool. While I would have had more fun using the money for a vacation, a new car, or a Movado watch, I knew that putting the money into my loans was the right thing to do.
Crank Up Your Payments Regularly
At the same time, I was living on a shoestring, college kid budget. Even though I had an income over $40,000 per year, I kept my rent low, monitored my spending, and even tried some crazy budgeting technique like hypermiling to save on gas. That gave me plenty of cash leftover each month to make extra student loan
I slowly started ratcheting up my autopay every payday until I reached a point that I was making a full student loan payment or more multiple times each month. And at the end of the month if I still had unused cash in my checking account, it went into my loans.
I was saving for retirement in my 401(k) at the same time, so not all of my money went to my loans. I also had a social life after graduation and did spend money going to bars, nightclubs, and making an occasional wardrobe update. But I was living on a budget and focused on my loans, so it was felt like a struggle
Watch Your Balances Fall and Enjoy Debt Freedom
Eventually, my loan balances lost a zero. Once I reached the $10,000 mark, I knew that my big payoff was in sight. Thanks to some side hustle income, good budgeting practices, autopay, and putting every extra dollar I had into my loans, the end was in sight.
In early 2012, my bonus came in from work and I watched my balance drop to $3,690.52. I had enough cash in the bank to pay most of the loan, but not quite enough until my next payday, which was coming up less than a week after the two year mark from graduation.
My paycheck arrived on schedule on March 23, 2012 and I opened up the Great Lakes student loan website. I paid the entire $3,690.52 remaining. My balance went to zero.
There were no fireworks. No sirens or bells and whistles went off. I felt like an F-16 should flyover to commemorate the moment, but it was overall an anticlimactic moment. What wasn’t anticlimactic was saving the $700+ each month I had been paying into my student loans. What wasn’t anticlimactic was knowing that I was debt free (aside from the mortgage I had recently taken out to buy a condo), and I had a great financial future ahead.
I have been living the debt free lifestyle (aside from mortgages) for nearly five years now, and it is wonderful. No expensive interest charges. No loan bills to worry about. Just a bright future ahead!