Friday, March 13, 2015

Is it Possible to Pay off Huge Student Loan Debt in Just Five Years?

Student loan debt in our country is about as out-of-control as it’s possible to get. Currently, there is about 1.2 trillion dollars in outstanding student debt floating around in America, and there are plenty of consumer advocates out there who say that it’s one of the worst, most crippling things to have happened in our country since the housing market crash a few years ago. Others weigh its lost opportunity cost against any of the historical stock market crashes, inflation events, and other situations that have brought about massive overhauls in our financial markets in the last 150 years. 

The problem has become so vast, in fact, that it has become clear to many, both in Washington and on Main street, that something has got to be done to correct the trend, or we may find ourselves forever entrenched in student loan debt, and potentially passing that debt and its corresponding loss in inheritable and retirement assets on into our old age and to our children. 

Could it be that a minor shift in thinking could correct this trend, though? It might, but it won’t be easy, particularly given our American penchant for getting exactly what we want, as quickly as possible. We’re just not very good at delaying gratification. The thing is, by delaying at least a few gratuitous gratifications, we could relatively quickly eliminate the debt in our lives that has been clearly determined to negatively affect our way of life as we begin to build families and put money away for retirement. 

A five year plan to pay off all your student loans really isn’t as far-fetched as some might have you think. You just have to be willing to put aside the purchase of that new car for a while, and maybe even shirk away from putting down a huge down payment on a house right away. You might have to forgo a big, fancy wedding, but the tradeoff is that you’ll be much more comfortable in just a few years’ time, so let’s take a look at the under-thirty student loan plan really quickly, and figure out just how it might be possible for you to make it work in your favor.

For the sake of simplicity, let’s just look at a basic $100,000 student loan debt that represents the sum total of all debts for the course of a 4-year college education. Further, let’s tack that interest rate at 4%, and make it a 20-year loan with no prepayment penalty or any of that other junk. Just the basics. Let’s also say you’re 25 years old when you graduate, and you make $35,000 per year to start, with a 5% pay increase every year. Barring the existence of heavy credit card debt or car loans, we can then take apart this loan a year at a time. Unfortunately, as it stands, you’ll be making about $600 per month loan payments, but paying them off shouldn’t be all that difficult. Just watch and see.


First, your income. At $35,000 per year, that means you pull in about $2,916.00 per month before taxes. You’ll pay about $437 in taxes on a 15% tax rate (for simplicity,) leaving you with $2,478.00. Now, doubling your student loan payment will move that from a 20-year loan to a 8-year loan (approximately,) and tripling it will get you a payoff in just a hair over five years. So, $1800 per month toward student loans from your $2478 will leave you with $678. It might be a bit tight, but what’s your living situation? Still crashing with mom and dad? That should leave you plenty. The trick is that this plan could potentially save you $35,300 over the life of the loan. If that’s a bit much for you, or you do have other expenses, though, there’s nothing wrong with kicking it down to a double payment, and saving yourself a cool $28,000!

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