If there is one thing that we can all agree on, it is that paying back student loans is not fun. In 2018, a reported 80 percent of new grads are burdened by student debt for whom formulating a proper repayment plan is a necessary evil. However, if approached methodically, this debt can be manageable and teach you many important financial lessons, like they taught me. What follows is a short narrative of my journey to owning my education as well as a breakdown of the three main repayment options, focusing on income based repayment. Ultimately, each repayment plan is specific to the borrower and their individual goals. My hope is that my story helps you take a good, honest look at your repayment methods and question whether or not you are doing the very best to support your future self.
When I graduated optometry school in 2016, I had accumulated approximately 153,000 dollars in student loans. That's a six-figure optometry student loan! A little over 10,000 dollars was respectively due to the interest that had accumulated while I was in school. As a graduation gift from my parents, I received a monetary present which I had decided to put toward the loan. The money did not touch the principal, but I was glad to be off to a start on my repayment. At that time, I did not expect the process of repayment to be easy, but never did I think that I would learn so much about personal finances, government policy, and taxes in the process.
During optometry school, I commuted from home in the suburbs for about three years and lived with my older brother for the fourth. When I started school, my intention was to commute for only one year and then start renting an apartment. After one year of suffering through rush hour traffic, I started learning how to avoid the afternoon and morning crowd by waking up early and working out before class, and staying after to study in the school library. Once I was able to avoid traffic, the commute would average about 30-45 minutes. In the car, I would listen to audiobooks at times, and recorded lectures at others. Once I learned how to make my travel more productive, I decided to continue commuting. During my third year of school, my older brother purchased a two-bedroom condo in Chicago and offered up his guest bedroom to me to further shorten the commute. It was not ideal to be living between two places but I was able to bypass paying money toward the cost of living. As a short estimate, I was able to save over 12,000 dollars per year for four years.
After commencement, I continued with my living situation and with my new corgi Stanley in tow, we lived between my brother and my parent’s for another 24 months. To be completely honest, I did not have a proper student loan payoff plan by means of excel spreadsheet or projected payoff dates. All of which I was certain was that I wanted to aggressively pay down my loan in attempt to lower it as quickly as possible when the principal was high. I think that this is the most important time to make a plan with any loan, but especially higher principal loans. If you put off taking any sort of action, especially when the principal is high and the interest rate is likewise, high, you will solely be paying off interest for a long time. It definitely felt like I was running through mud at first but I was consistent in putting any additional income towards the debt, and ended up saving tens of thousands of dollars as a result. This is how I was able to do it in twenty one months.
Make a Plan and Consider Compound Interest
I worked for a while before I really started to formulate a proper plan for repayment. At first, I thought it would be best to make large, lump sum payments. Then I learned about a little something called compound interest. The interest was compounding daily, so I attempted to make payments whenever possible. At the time, I was being paid weekly and that is how often I was making my payments. I had always been advised to keep a “rainy day fund” but to be honest, I did not have one. However I never held any sort of credit card balance, invested some money into mutual funds, and had insurance in case of injury or illness.
Live Within Your Means and Work Hard
During repayment, I drove a 2014 Honda Civic without a note and did not have any other major fixed payments. At that time, I had two part time positions but took on extra fill- in work at other offices. I worked many seven-day work weeks and sometimes, I would leave one office on a Saturday to go work an extra few hours at another. I was so motivated to eliminate my loans that I was willing to do whatever I could. This made it an easy decision to consistently pay over 80 percent of my income toward my loans.
Reevaluate Your Living Situation
Not long into repayment, I decided to start considering my housing options. I always knew that I wanted to buy versus rent so I had decided to see what kind of mortgage I could be approved for. This was my first big student loan wakeup call. My debt to income ratio was way too high due to the shorter repayment term, and on top of that, I had no substantial tax history. Needless to say, I was ineligible for any type of mortgage without a cosigner. I had never before realized what an impact my student loans could have on all aspects of my financial life. I committed to not let my educational decisions limit me in other areas. My feelings had always been that education should open any and all doors of opportunity. I decided to wait it out a little longer until I paid off some more of my loan to receive a fair mortgage quote.
Attain the Lowest Interest Rate
My first obstacle was to refinance my loans at a lower interest rate. At first, I was rejected by most lenders because of my lack of credit history but persistence paid off and I was eventually approved by Laurel Road. I locked in the best interest rate by selecting the shortest term with a variable rate and signing up for electronic fund transfers. These options can add up to substantial reductions depending on the loan amount.
Maximize Your Tax Deductions Use Returns Wisely
Additionally, my accountant was a big contributing factor in allowing me to make a larger student loan payment. Since I was partially self-employed, I was able to itemize my deductions from optometry school including some equipment, licensing examinations, and fees associated. Eventually, I incorporated myself and was able to likewise put more of my income toward my loans. Periodically, I would check in with interest rates, and after a little more than a year I refinanced again but decided to extend the term for mortgage approval purposes. After my second year’s tax return was filed, I was approved for a mortgage I could be satisfied with.
Budget Your Money Like Your Future Depends on It
On June 8, 2018 I submitted my final loan payment. I was still able to invest, travel, and put a down payment on a condo. It was not easy, but it can definitely be done. Budgeting was key. I understand that this route is not for everyone or even an option for some but it is what worked best for me. I would not want to go back and do it all over again but the lessons that I learned were invaluable. Today I feel more confident to make important monetary decisions regarding my personal finances based on my future goals. For me personally, that included business ownership and personal financial freedom without the burden of student debt hanging over my head.
While this modality of aggressive repayment is not for everyone, it is good to know that there are other options out there. Currently, there are four income- driven repayment plans offered by Federal Student Aid. These include Revised Pay as You Earn, Pay as You Earn, and Income- Contingent Repayment Plans. 2 The monthly payment under these plans generally averages at about ten percent of your discretionary income. The repayment period will range from 20-25 years with the opportunity for forgiveness of the remaining balance after this time. Likewise, the Public Service Loan Forgiveness Program similarly forgives federal student loans for borrowers who are employed full time (more than 30 hours/week) in an eligible federal, state, or local public service job of 501 (c)(3) non-profit job who make 120 eligible on-time payments over ten years. The balance remaining is not taxed as income under this program, which is an additional benefit. For those struggling to making payments, an income based plan could provide the relief needed to avoid defaulting on loan payments.
Ultimately, the decision to apply for any of the income based repayment plans will largely be driven by your future goals and personal finances. Unfortunately, there is no easy way out when it comes to debt repayment but if one absolutely cannot afford their student loan payments, then the benefits of income based repayment could outweigh its disadvantages. Income based plans may help you in paying less toward student loans in the short term, but you will spend a lot more overall. Other disadvantages include the fact that you will be in debt for much longer, interest rates themselves are typically higher, payments will be adjusted accordingly if you start making more money, and you will have to re-certify your plan every year. As for Public Service Loan Forgiveness, a bill from the House of Representatives could, if passed, eliminate this program all together. 1 This could be potentially devastating to the more that 600,000 borrowers who have already enrolled in the program, and as with any government program, is never guaranteed.
Unfortunately, there is no easy solution to eliminating student debt. Every individual’s financial situation is different as is their repayment plan. It is best to carefully consider your options and do not be short sighted in your approach. What you do today could potentially be the difference between a successful career or one filled with resentment. The key to student loan repayment, as with any good commitment, is to be persistent. As for the rest, it will all fall into place with time.
1. Friedman, T. House Republicans May End Student Loan Forgiveness. Forbes website. December 7,2017. Accessed June 12, 2018.
2. Income Driven Plans. Federal Student Aid website. Accessed June 12, 2018.