During the last few weeks of business school, every single person in my graduating class had to meet in our auditorium. No, this wasn’t a fun talk by Coach K (Duke’s famous basketball coach that gave talks often and always packed the house). It was a seminar on our student loans.
As we filed in we were each handed a folder that had a printout of how much we owed. And we were gently reminded that not even bankruptcy would relieve us of this loan payment obligation (student loans are tough, man). The cost of attending Duke was (is) astronomical and most people sitting in that room had six figures of debt waiting for them on the other side of graduation.
This is where things got real.
When I opened up my folder to see $120k staring back at me and the date I needed to start repayment, I didn’t feel panicked. I had a good job. That was going to pay a healthy salary. I could do this! Live my life with a $1,500/mo loan payment for the next 10 years.
A few months into the real world with my new job, my healthy salary (that was less than the total amount I owed on the loan, btw) seemed to not go as far as I needed it to. I was living in LA – a pretty expensive city – feeling a little panicked by my loans. I just didn’t know what my options were. I decided I could not live the next 10 years making that $1,500/mo payment. It was time to figure out plan B for loan repayment.
(note: I know that sometimes numbers like this can feel unrelatable. To give some context, this was over 25% of my monthly income and more than my rent payment each month. Yes, I was paid a lot, but I was also living with a heavy debt load and in a high cost of living city. And I’m not complaining! All of this was my choice and I’m lucky to have had this choice.)
Why did I prioritize my debt?
I have a lot of friends from business school that didn’t prioritize their debt. Their decision wasn’t wrong and my decision to pay it off wasn’t right. When deciding whether to pay off debt, invest, or save, there is the mathematical component (where can you earn more? Paying off debt or investing?) and there’s the psychological component (how much risk can you handle? How does this affect your life decisions and your future spending?).
For me, the psychological component was too high. I knew that mathematically it would likely be better to coast with that debt and throw as much as possible into investments. There were 3 reasons that personally outweighed the math:
- Career choices: While I was making enough for me to afford the debt payments each month and still squeak by (though it was by no means a glamorous lifestyle), I didn’t want to feel chained to a certain paycheck amount. I really wanted the freedom to pursue other career avenues that might pay less. Jordan and I ended up moving to London two years after graduation and salaries are lower than they were in LA, so having my loan under control made taking a lower salary easier to deal with financially.
- Pride (or guilt?): Right after graduation Jordan and I got married. He was still going through his MBA program at Duke, of which his employer was funding a majority. He used his savings to pay for the rest. Because he wasn’t going to have loans, I didn’t want to be the only one with a loan burden in our relationship. I just couldn’t handle knowing that my loans were going to keep him from the things he wanted to do.
- The best of both: I finally realized that paying off my debt quickly wasn’t an either/or approach. I didn’t have to choose between paying off my debt and saving. And I didn’t have to put off saving for retirement. Sure, if I had not saved for retirement for 4 years, my debt would have been paid off a year earlier. But I also wouldn’t have that nest egg sitting there waiting for me. It was a balancing act, but I could do both.
What I decided to do:
Once I got serious about my loan payments, I decided to sketch out a plan. I didn’t have the suggested 6 months in an emergency fund. And I hadn’t opened up an IRA (my employer didn’t offer retirement accounts). Where to start?
Here’s exactly what I did – though don’t take this as specific advice for your situation. I used this framework to help me decide where to focus my energy.
Step 1: Stabilize
I knew that on top of my student loan debt, I didn’t want credit card debt. No thanks. So I decided to keep an “emergency pillow” savings account. I didn’t have enough for 6 months of a cushion, but I decided to put away $3,000 for me to use in a dire emergency. I used it a couple of times over the years – most memorably when my tire was slashed by a lunatic in my LOCKED apartment building parking garage. Ugh.
Step 2: Foundation
My employer didn’t offer a match and I was tempted to forgo retirement savings all together so I could focus on extra loan payments. I eventually decided against that because I wanted to take advantage of the $5,500 I could put into an IRA each year. There are great tax benefits with an IRA (Roth or Traditional) and you can contribute a max of $5,500 per year to them. I didn’t want to lose out on that benefit. I only saved that amount for retirement each year and focused the rest of my cash – every last spare dollar – on my loan payment.
3 Tactics that helped me the most:
I’ve previously shared how I paid off my loans so quickly, but I wanted to dig get a little bit more specific with my numbers and tactics because it’s a question I get often.
The single best thing I did was negotiate. I did this twice. While I had arranged my lifestyle choices around paying off loans, you can only save so much. Sometimes you need to make more.
So that’s what I did. I didn’t negotiate because I had loans, though. I negotiated because I truly deserved to be paid more. Having the loans was an extra push that I needed in order to get me to speak up and ask for more. But I didn’t use that as my excuse.
I negotiated two signing bonuses and one raise, which cumulatively knocked out 20% of my debt. 20%! For two 10 minute conversations. My loan term was supposed to be 10 years and by putting this money toward it, I shaved off 2+ years of loan payments.
The first negotiation was for a cost of living adjustment as I was moving across the country to a city with a high cost of living. It was a one time bonus. Rather than use this money to rent a nicer apartment, I picked a cheap apartment and put this entire bonus toward my loan.
The second negotiation was as I was accepting a new position in London. We had just moved and the salary they were offering was OK, but not great. I tried to get them to budge on base salary, but they’d only move it up $2k. Frustrated, I then moved on to my backup ask, which was a signing bonus. They had a lot more flexibility with the signing bonus and were able to make up the difference with the bonus, which was around $10k. As soon as that bonus check hit my bank account, it went straight to my loan.
If you want to negotiate but you’re not sure where to start, you can pick up my free negotiation guide (videos included!) or enroll in Not Your Father’s Negotiation Course. Learning how to negotiate was the best investment in myself I ever made.
The second best thing I did was to refinance my loans. While there are pros and cons to refinancing, to me it was worth it to refinance to a lower rate.
When I graduated and had federal graduate student loans, my rate was horrible. I was paying a blended rate of just over 7.5%. I had a 10-year term on a loan of $120k, which meant that over 10 years I was going to pay $51k in interest. My monthly payment was roughly $1,500.
When I began looking at refinancing, there were some benefits I would be foregoing, but what I’d get in return made up for them. (Wondering if refinancing is right for you? I break it all down in the Student Loan Refinancing Guide)
I refinanced my loan with SoFi to be just under 5%. While the difference between 7.5% to 5% doesn’t sound that big, it ended up making a significant difference.
Had I stuck with a 10-year payoff, my monthly payment would have decreased to $1,272 and the total interest paid would have decreased to $33k. That would have saved me $228 a month and $18k over 10 years.
Had I refinanced but kept making the larger monthly loan payment of $1,500 a month (rather than the decreased amount of $1,272) I would have paid off my loan 22 months faster. Nearly 2 years sooner! And I would have only paid $26k in interest.
At the same time that I refinanced my loan down to 5%, I also received a raise at work that boosted my income by around $500/mo. So while my monthly payment was lowered, I ended up increasing what I paid each month to $2,000 ($1,500 that I was previously paying + $500 raise).
After refinancing and getting a raise I was making serious progress on the loan. At this pace, I would have had it paid off in 6 years.
Small Goals + Spend with the Happiness Habit
The third and final thing that I did was to create small goals for myself and spend on only the things that made me the absolute happiest (more on this here). I did this in the last year or so of my loan. At this point, I decided that while I was on a good track with my loan, I was completely miserable having it hang over my head. A switch was flipped in my head and I wanted it gone, quickly.
I started playing a mental game. Rather than think about how I could pay off the enormous balance (it was still overwhelming), I started to think about how I could double my payment. Still overwhelming but somehow not quite as bad. It was a smaller goal.
After I had that goal of paying $4,000 in a month, I started looking at every dollar I spent as a tradeoff. Did spending that money make me happier than paying off the loan? Honestly, sometimes yes. Taking a trip or going to a museum was still really important to me (though I looked for deals). But the box of freshly baked cookies from the bakery down the street? The spin class? I stopped spending on the things like that which made me less happy than paying off my loan.
To see immediate results from not buying that thing (whatever it was I decided to skip), I would log into my loan account immediately from my phone and make a payment. So if I decided to not go to a spin class, I’d transfer $25 immediately. If I skipped the bagel and coffee, I’d transfer another $5.
To be totally honest, I rarely made that double loan payment. But seeing all of those small little tradeoffs add up over the month gave me a huge sense of accomplishment.
With all of these tradeoffs and strategies, I ended up paying off my loan in 3.5 years. While not having the debt is amazing, the best part is that I gained some amazing skills (hi, negotiating) and adopted a really healthy money system that has helped both Jordan and I use our money to live to the fullest.
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