Got massive student loan debt? Let me start out by saying you aren’t alone! We graduated from law school (me) and dental school (hubby) with $650,000 in student loans. (You can read our student loan debt story here). At the time we felt completely alone, but we quickly realized that we weren’t. In fact, lots of people have six figure student loan debt. And they are managing it. And yes, it sucks, and it can be completely overwhelming trying to figure out how to start paying it off (and then how to keep up with paying it off). But by taking these first steps to paying off massive student loans, you can cast your fears and worries aside.
FIRST STEPS TO PAYING OFF MASSIVE STUDENT LOANS
STEP 1 IN PAYING OFF MASSIVE STUDENT LOANS: CHOOSE A REPAYMENT PLAN.
The first step you should take to pay off massive student loans is to choose a repayment plan. Once upon a time, there were only a couple of choices for repaying student loans. These days, there are dozens of scenarios you could choose, each more complicated and uncertain than the last.
I’m not exaggerating when I say I spent my entire summer after law school researching each of the repayment plans when we were trying to choose which one was best for us. They’re messy. And complicated.
But that is not to say they aren’t figureoutable! (Have your read “Everything is Figureoutable“? Highly recommend). I created a student loans simplified series where you can read about each of the repayment plans so you can make an educated decision. Here are some of the more popular ones, and they all link to others so you can find whatever repayment plan you want to learn about:
As a general rule of thumb though, if your student loans are more than twice as much as your annual salary, you might consider seeking one of the forgiveness programs. Otherwise, I highly recommend just paying them off as quickly as you can and refinancing them for a lower interest rate.
If I’m being honest, I didn’t even follow my own rule when we decided to just pay ours off. We definitely did not earn half as much as we owed when we were starting out. We earned far less. We were simply uncomfortable with student loan forgiveness and felt like we could work really hard to increase our income to make it possible. We refinanced with Commonbond to cut our interest rates in half and just went for it.
What I don’t like about any of the student loan forgiveness programs are the unilateral terms associated with them. What I mean is, the terms can change on you really at any point. So you might get several years into the program, and then Congress could change it’s mind and decided to do away with the program (that’s what all the paperwork says that you signed when you took out your loans) and screw you out of forgiveness. Will that actually happen to you if you sign up and start working towards it? Probably not. But it could. I don’t like that.
I also don’t like that on each of the student loan forgiveness plans (besides PSLF) you are taxed on the amount of your loans that is forgiven as if that was part of your income the year they’re forgiven. So say you earn $75,000 a year and have $300,000 of student loans. Pretend that $250,000 are forgiven– you are taxed as if you made $325,000 that year. Seems messy and if you go this route, make sure you are saving up for that tax bomb. People are predicting that this tax bomb will go away. It could. But that’s not how it stands at the moment.
Anyway, if doing all the research on your own feels completely overwhelming, or if you just want an expert to bounce your ideas off of, I highly recommend the Student Loan Planner. Our consult with him saved us $200,000 over the life of our student loans. Literally.
[Related: How to Get Started Paying Off Debt]
STEP 2: SAVE FOR EMERGENCIES.
No matter what repayment plan you choose, the next step to paying off massive student loans is to start saving up for an emergency fund. You will save up this amount before you actually start paying off debt.
It doesn’t have to be anything too crazy, a good rule of thumb to aim for is anywhere between $500-$1000. I’m going to have you save even more money in a later step, so for now, just focus on saving enough that if something crazy were to happen, you’ve got a little cash on hand should you need it.
STEP 3 IN PAYING OFF MASSIVE STUDENT LOANS: START MAKING STUDENT LOAN PAYMENTS.
After you’ve got an emergency fund, it’s time to start making payments on your loans! If you are on the path to student loan forgiveness, you’ll make your minimum payments. You will hyper focus on savings, rather than on debt repayment. You’ll start building up your funds for the tax bomb (unless you are on PSLF) and you should start saving for retirement.
If you are trying to pay off your loans as quickly as you can, you’ll need to make sure that you know how much you can afford to pay and start paying. You won’t focus as much on savings (more on that in the next step).
On either path, this is a good time to focus on increasing your income, creating a budget, and getting serious about debt repayment. Trust me when I say it feels SO good to take control of your finances this way. [Related: How to Earn Money Without a Job].
STEP 4: BUILD UP YOUR SAVINGS TO 3 MONTHS OF LIVING EXPENSES.
The biggest way debt repayment for massive student loans differs from other debt is that it’s going to take longer, and the simple truth is, you have a higher chance of facing more financial obstacles for the simple fact alone that you’ll be paying off debt for a longer period of time. That’s why you’ll need to start building up your savings WHILE you are paying off debt, unlike other people with less consequential debt who will save up their emergency fund, knock out their debt, and then start more substantial savings. I recommend putting a little towards savings each month until you have built up 3 months of living expenses in your savings.
You will obviously need to continue making your debt payments during this time. You might have to make minimum payments or smaller payments in order to simultaneously fund your 3 months of savings.
If you are seeking student loan forgiveness, you’ll make your minimum payments while building up your 3 months of living expenses. Once you have those, you’ll start saving up for your tax bomb and retirement savings, which I recommend doing simultaneously.
STEP 5: KEEP MAKING PAYMENTS.
After you’ve chosen your repayment plan, built up your emergency fund, started making payments, and built up 3 months of living expenses, it’s time to keep trucking along. I wouldn’t include this in the list of first steps to paying off massive student loans except that the truth is, this is the hardest part.
It’s easy in the beginning when you are excited about getting rid of your debt. It’s harder when that novelty wears off, especially if you are seeing classmates living much different quality lifestyles than you might be. You’ll likely need to give yourself one or two or ten pep talks throughout your journey.
STEP 6: KEEP UP ON YOUR PAPERWORK/RENEWAL OR RE-REFINANCE YOUR STUDENT LOANS.
The last among the steps to paying off massive student loans is to make sure you are keeping up on your paperwork (including making sure everything in the past was done correctly!) and renewing everything on time. This is especially true if you are on PSLF– you have to fill everything out 100% perfectly or your loans aren’t going to be forgiven (if you haven’t heard any horror stories about PSLF, just google it). So double check everything and make sure you are filling out everything on time on any of the student loan forgiveness programs.
If you’ve chosen to refinance your student loans, once you’ve paid off a good chunk of our loans, or if your income ever substantially increases, check and see whether you qualify for better interest rates by re-refinancing your student loans.
Paying off student loans can feel completely overwhelming at first. But I promise as you choose your plan and stick to it, it does get better. You’ll see that you can manage it after all, simply by following the steps we’ve outlined for you here.
What questions do you have about student loans? Drop a comment below!
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Here at Deeply in Debt, we offer tons of personal finance advice based on our own journey paying off $650k of student loan debt. If you have student loan debt and aren’t sure where to start or what to do, I highly recommend the CFA’s over at Student Loan Planner to help you put together a solid financial plan for your student loan debt. We personally used them and it literally saved us over $200,000 on our student loans. You can check out the Student Loan Planner here.