This is a guest post from Eric Rosenberg, a finance writer at Personal Profitability, InvestmentZen, and other personal finance, technology, and travel publications.
$50,000 is a lot more than I earned in my first year of work after college, but that was the debt load I faced over the three years following my graduation. Thanks to a broken-down car and an MBA, I grappled with a $10,000 car loan and $40,000 student loans in my mid-twenties. But I didn’t look at that debt as a crippling, life destroying cloud hanging over me. Instead, I turned it into a goal and a personal challenge.
The end result was paying off every dollar of debt in less than half the scheduled time.
How I Took on $50,000 in Debt
As with most young people who find themselves owing five figures, my debt came from more than one source. While I avoided the most expensive forms of debt, credit cards and consumer debt, I was not able to avoid debt altogether.
My first major encounter with loans happened shortly after graduating from college. Less than a month into my first job as a bank manager, my hand-me-down car suffered a broken water pump. The repair bill would have been more than the value of the car, so a few days later I signed on the dotted line for a $10,995 loan on a brand new 2008 Toyota Corolla. I don’t regret the decision and still drive the same car today, about ten years later, but that did leave me with a $213 monthly payment and more than 25% of my annual salary in debt.
Less than a year after that, I decided it was time to move to the next step of my education and get an MBA. I picked a great university, but with $67,000 in private school tuition alone for the program, the total estimated cost of attendance was around $90,000. I worked full-time while going to school full-time and ended up taking on about $40,000 in student loans over my time in the program.
Add that up and I had taken on just shy of $51,000 in debt in two years. I needed a car to get to work and school and I knew my education would likely pay for itself multiple times over in the course of my career, but at the time I was staring up at a massive wall of debt. I needed a plan and a route to debt freedom.
Creating a Custom Debt Payment Plan
Mathematically, the best way to get out of debt is to pay off the highest interest loan first while making minimum payments on the others. Every extra dollar goes to the highest interest loan, and as each loan is paid the “extra payment” snowballs and moves on to the next loan. Eventually, all debts are paid. This debt payment method is sometimes called a debt avalanche, a slightly customized version of the popular debt snowball that suggests paying off loans from smallest to largest.
Based on balances and interest rates, I saw that I could pay off my car loan first and be done with that completely, then focus on my student loans. All of my loans charged the same interest rate, so I focused on the two unsubsidized loans first and the subsidized balances last. This is the exact plan I followed to pay off my big pile of debt.
While my car loan required a $213 monthly payment, I didn’t want to spend five years paying for my car. I doubled my payment and put an average of at least $400 per month into my car loan. Eventually I setup an automatic payment to draw $213 from my checking every payday, which meant I was paying double every month and an extra two payments per year, with 26 payments going in per year. On my 25th birthday, I logged into my bank’s website and paid off the entire balance exactly two and a half years early. It felt great having my car paid off in half the time, but I wasn’t out of the woods yet.
Paying off $40,000 in Student Loans in Two Years
Now that my car was paid off, I had an extra $400+ every month to use for anything I’d like. Rather than spending it on gadgets, vacations, and other wants, I focused the cash right into my student loans.
While my required monthly payment was just under $300, I got into a habit of paying $700 per month into my loans. Continuing with my custom debt snowball, I paid off the first unsubsidized loan, then the second, and so on. To make my payoff even faster, every time I received lump income from a tax refund or bonus at work, I put 100% of that money into the loans. Because I was already used to living on a budget that didn’t include those windfalls, it didn’t hurt to put them into my loans.
They fell one after another until I reached March 2012. At that point, I was down to my last student loan with a $3,690.52 balance. I raided my savings and checking to come up with enough cash to pay off the final balance in one swift blow. I logged onto the Great Lakes student loan website, clicked the button to make a payment, and selected the full payoff amount. Just like that, I was debt free.
I paid off my student loans two years and six days after graduating from my MBA program. Had I not made aggressive payments, I would still be paying off my student loans today and would have another three years to go. Thanks to my aggressive payment planning, I have not made a payment in more than five years.
Was my debt worth it?
We could argue the merits of new cars versus used cars all day, but in my case I am still happy with the decision I made in July 2010 to buy that new Toyota. I picked a fuel efficient, reliable, compact car with money in mind, and I still drive that car today. Knowing I would likely still have the car when I had kids, I sprung for the version with side curtain airbags and every possible safety feature. While there are fancier in-dash computers since I bought my car, it’s safety features still hold up to new cars today. And I have not made a payment on the car in seven years. #winning
My MBA was even easier to measure. Just a couple years after finishing my MBA, I moved to a new company with a 40% raise. That raise alone was enough to payoff my MBA in less than five years. I can confidently say I am beyond break-even on my education, and it continues to pay dividends every day.
To me, debt is just another financial tool. If used poorly, it can lead to crushing debt, horrible stress, and years of financial agony. But when used the right way, it can open doors to amazing things. I’m happy to say I landed in the second camp.
If you are in debt today, it doesn’t matter so much how it happened. You can’t go back in time and undo your debt, so your best option is to create a plan to pay it off for good. Thanks to the debt snowball method, creating a plan isn’t that hard. The hardest part is budgeting and sticking to it, but if you do, you’ll be setting yourself up for a lifetime of personal finance success.
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