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Student Loans – Getting to "Paid in Full"
In 1969, Elizabeth Kubler-Ross presented five stages of grief in her book “On Death and Dying”: denial, anger, bargaining, depression, and acceptance. If you have a large student loan balance, you’ve likely experienced some “grief” and are no stranger to the five steps. If you are in the “acceptance” stage, this article is for you!
Being in the acceptance phase is a good place to be. This means that: you have discovered that delays and tolerances do not last forever (denial stage), you have stopped blaming others for getting what you consider a “free ride” (anger stage), you can’t discharge yourself have learned Debt through bankruptcy (bargaining stage), you’ve stopped drinking too much and watching reruns of Gilmore Girls (depression stage), and you now accept your financial responsibility and are ready to do something about it. You won’t find any “magic bullets” in this article, but you will find an effective strategy to pay off your debt in no time.
Step 1 – Organize the loan in a spreadsheet
To best manage your student loans, you need to fully understand what you’re up against. Creating a spreadsheet will give you insight into how your loan works and show you the positive results of making extra principal payments. To create a functional spreadsheet, you need to understand the terms of your loan and know how to organize this information into a spreadsheet. If you’re not a spreadsheet user, you’ll find that learning the basics is easy.
To begin building your spreadsheet, you’ll need the following information about your loan: current balance, interest rate, payment amount, and how interest is calculated. This will allow you to create an interactive spreadsheet that will calculate how much interest accrues daily and provide you with a daily balance.
How interest is calculated may require some digging. You can find this information by reviewing your loan documents, visiting the lender’s website or calling your lender’s customer service number. The number of days used to calculate the interest on the loan is called Aadhaar. For example, a mortgage is usually calculated using “30/360”, which means a year is assumed to be 360 days and a month is 30 days. Thus, when you make a mortgage payment, your interest will be based on 30 days. Student loans typically use an actual number of days in a month and a year with 365 days (actual/365). Some loans may use the actual/365.25 convention; Every loan is different. On a real/365 basis loan, you will pay less interest in a short month (fewer than 31 days) than in a month with 31 days.
Still feeling lost? Don’t worry, because once we put it all together it will make sense. I’ll also explain how to test your spreadsheet to make sure it’s working properly. The initial setup of the spreadsheet is the most challenging step.
At the top of your spreadsheet, insert key pieces of information about your loan, such as: beginning balance, interest rate, monthly payment, payment due date, and interest rate factor. The interest rate factor is the interest rate divided by the number of days in the year. Again, each lender and loan type varies in terms of how many days a year they are used. The informational part of the spreadsheet is important because you want to clearly see the variables that affect your loan.
After you input the key pieces of information, you can begin building your interactive spreadsheet. Your goal is to create a spreadsheet that shows when each payment is posted, how much of each payment is applied to principal and interest, and what the ending (or current) balance is. The column names you will create are (from left to right): Payment Date, Principal, Interest, and New Balance. Below is a more detailed explanation of these columns:
• Payment Date – This is the date your payment is actually posted to your account. This is important because the interest on your student loan is based on the actual number of payments between payments.
• Principal – This will be a formula that equals your payment amount less the interest portion of your monthly payment. This is the portion of your payment that will be applied to reduce your balance.
• Interest – You need to know how your lender calculates interest on your loan. Generally, it is based on the actual number of days the previous month’s balance is multiplied by the interest rate factor. Your Excel formula will be: (current payment date minus previous payment date) x previous month’s balance x interest rate factor.
• New Balance – This is equal to your previous month’s balance less the principal portion of your current payment.
If your lender has a website that allows you to view information about your loan and/or make payments, establish online access immediately. Print your loan balance history and begin building your spreadsheet using your first payment as a starting point. The balance history should show how much of each payment was applied to principal and interest. Here’s how you can test your spreadsheet to make sure it’s working properly. Check if your formula results match the website’s history. If they don’t match you need to troubleshoot to find out why. It could be that the lender made an error, but more likely the error is in your spreadsheet. If you have a friend or family member who is an Excel user, see if they can give you some help. The web is also a great resource.
The real power of spreadsheets is that you can easily simulate scenarios. For example, let’s say you receive a large cash windfall. You can input this figure into your spreadsheet and easily see what the result of such a large pay-down would be. You may learn that your loan will be paid off in ten years instead of 15 if you make this additional principal reduction payment. You may find it very motivating. However, if you don’t have a tool like a spreadsheet to generate this kind of information, you may choose to do something else with your money.
Step 2) – Strategies to accelerate the payoff
Congratulations on building a spreadsheet that can track your student loan balances and payments. Tracking debt in this way gives you control over debt. Getting a statement in the mail each month and not really understanding why your balance has moved so little is unmotivating and adds to the feeling of frustration (and you really don’t want to go back to cheap beer and Gilmore Girls re-runs). Here are some specific strategies to help you pay off your debt faster:
Pay a little extra each month – We’ve heard this one before, especially when talking about mortgages. Well, the same goes for student loans. When you make a monthly payment, part of that payment is applied to interest, and the rest is applied to principal. My suggestion: Pay off the extra principal amount that will reduce your ending loan balance to two zeros. For example, if your balance will be $37,845.21 after you make your next payment, pay an additional $45.21 to make your principal balance $37,800. Getting your loan to a hundred dollar figure is a strategy to encourage you to pay more each month.
To facilitate this strategy, I suggest you pay your loans electronically. You have no control over when your payment is posted when you mail it. When you pay online, you usually select a payment post date. Additionally, there will be a section to input the additional amount of principal you wish to pay.
The benefit of paying more than your minimum payment is that when you make your next loan payment, a larger portion will be applied toward principal and less interest (compared to if you didn’t pay extra the previous month). If you continue to pay more than the minimum due, this effect will add up every month. The result is that you will pay off your loan much faster than if you only made the minimum payment. That’s because as your balance goes down, the amount of interest you pay goes down. Each additional payment will be applied to reduce the principal. It’s easier to see the effect when you track it in a spreadsheet, so doing so is an effective strategy.
Plan to pay the “lot extra” regularly – if you get a tax refund each year, apply it to your student loan balance. This will have a big impact on how quickly your loan is paid off. If you get a bonus every year, apply that too. Any inconvenience, or instance of “found money” should be used to reduce your balance. It’s not uncommon for people to treat “found money” differently. “Found money” is often wasted on “splurge” items. Resist this urge! Use any extra money, no matter where or how you got it, to pay off your student loan balance!
In summary, the steps you need to take to help you pay off your debt faster are:
1) Use a spreadsheet to track your debt so you can see how much of each payment goes toward principal and interest. Play out what-if scenarios so you can see the impact of paying off your debt and create a strategy for doing so.
2) Pay a little extra every month. One strategy is to pay an additional amount that increases your balance by $100.
3) Commit to paying big when there’s a cash windfall like an income tax refund or bonus. Although it may not provide an immediate reward, the long-term results will be huge. Time really flies, and right now seems like a huge balance that can be reduced to zero in much less time than you think, but only if you make it a priority and a goal.
Paying off a student loan can seem overwhelming. However, if you use the strategies provided here, you will learn that you can be successful faster than you think. You can apply these same ideas to your mortgage and other debts. Empowered to gain control over your finances. And by the way, I started this article by referring to the five stages of grief. If you die, please know that in most cases your debt will die with you – unless you are consolidated with a spouse. In that case, unfortunately, the debt will survive!
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