How would you feel if you found out that almost without any effort on your part, you could save hundreds of dollars? What about thousands of dollars? How would it make you feel to learn that you could save hundreds of thousands of dollars? Well, that is exactly what happened to us. We are literally saving hundreds of thousands of dollars on our student loans under our student loan repayment plan. And it is actually easier than you might think. And if you are a high debt, high income earner, there is a good chance that our student loan repayment plan will likewise save you the most money.
OUR STUDENT LOAN REPAYMENT PLAN:
STEP 1: Forego grace period and sign up for REPAYE.
STEP 2: Start making student loan payments immediately.
STEP 3: Refinance with a private lender
STEP 4: Live frugally to make aggressive payments until student loans are history.
STEP 5: Keep living frugally and invest extra income.
Not long ago we were contacted by Travis at Student Loan Planner. He offered to crunch our student loan debt numbers so that we could make sure that we were choosing the right student loan repayment plan for us. We agreed because we had talked to just about everyone and researched just about everything regarding our student loan situation. This included but was not limited to: talking to school counselors and financial advisers, many discussions with similarly situated peers, seeking out our loan servicers, and spending HOURS reading books, searching forums, and googling the subject. We left no stone unturned.
While the school counselors and the folks at the lending company were probably well meaning, none of them seemed to know as much as we knew. And we didn’t really know that much. That was concerning. Some of their advice was frankly inconsistent with what we learned on our own. That did not make us feel confident since they should be the “experts.”
In fact, we received a lot of inconsistent advice. Several people advised us to fully take advantage of income driven repayment and to invest extra income since the market could possibly offer interest higher than what is accruing on our loans. But one thing that made us leery of income driven repayment is the fact that you are taxed on the amount of the loan that is forgiven the year that it is forgiven. For us, that means the year that our loans would be forgiven we would be paying somewhere between $100,000-$325,000 in actual taxes, in addition to the taxes on whatever we earned that year. (see chart below). I’m not smart enough to figure out how to get out of paying that big of a tax burden. And taxes seem to change with whoever is elected in the White House. That reason alone was enough for us to pass up income driven repayment. Way too much uncertainty.
Anyway, enter Travis, he asked us some personal questions and ran our numbers and found the exact same thing we found. If we hustle and pay this thing off on our own, as quickly as we can, it will save us the most money, by far. You can view the details of his analysis HERE, but for the quick version, here is a chart of his findings: (these were our actual numbers in 2016)
As you can see, paying off our loans on our own, especially if we refinance with a private lender to lower our interest rate, will literally save us hundreds of thousands of dollars. This is clearly the best financial choice for us. We were stoked that his analysis was fairly consistent with what we had come up with on our own (spending a million hours googling it and chatting with similarly situated friends).
So, with that framework, these are the steps we are taking to pay off our loans and the reasons why.
STEP 1: Forego our grace period and sign up for REPAYE.
Why sign up for REPAYE? First, all of our loans are graduate loans so we do not qualify for the interest subsidy offered under PAYE. Under REPAYE, however, we get a 50% interest subsidy for any period of time that our REPAYE monthly payment due is not sufficient to pay the monthly interest. This is appealing as we are just starting our careers and may need a couple of years to build up our clientele (aka, start earning significant money). If we are not immediately able to start making big payments on our loans, this gives us a little bit of a safety net and effectively cut sour interest rate in half until we can refinance and get things going with our payoff plan.
To be clear, we have no intention of staying on the REPAYE plan. As you can see from the chart, that would be our most expensive option. This is only a good idea for us during this start up period where we aren’t able to make hefty payments on our loans.
STEP 2: Start making student loan payments immediately.
Even if we can only make small payments right now while we are still in our grace period, we are going to make them. Interest is accruing on the daily and anything we can do to minimize its effects will be of consequence to our overall repayment schedule.
To earn money, my husband and I both have day jobs (he’s a dentist, I’m a lawyer). I also draft, review, and negotiate contracts for people and businesses on the side and obviously, run this blog. We also have a plethora of side hustles. We save money on groceries by using apps like IBOTTA. We also meal plan and freeze our meals ahead of time.
We mystery shop. We run a small photography business. We sell stuff around the house. These side hustles allow us to make extra payments on our loans and still be able to eat and pay our bills.
STEP 3: Refinance with a private lender.
As soon as we have a good feel for how much income we will be earning and after we have made some payments under REPAYE, we will refinance our loans with a private lender.
There are some cons to refinancing student loans. The most obvious is that we will be giving up some of the protections that we have under federal programs. Once you refinance, you can never go back so you have to make sure it is something that makes sense (cents) for you.
The good news is that many private lenders do offer some protections, for example, SoFi offers unemployment protection which will allow you to defer payments for up to a year. You just won’t ever be able to switch over to an income based repayment plan.
This doesn’t bother us at all. If we had to switch back over to income based repayment, it would practically be financial suicide, we would be losing so much money. Once we have refinanced our student loans, there is no going back.
STEP 4: Live frugally and make aggressive student loan payments until our loans are history.
We are doing tons of things to live frugally as discussed above. The most important thing we are doing, is living on a budget. It is currently set at $3000 per month. This includes everything except our student loan payments and tithing to our church. If you want to learn more about our monthly budget you can subscribe to our newsletter where we share all of our budget details.
STEP 5: Live frugally and make smart investments to catch up for the decade that we missed making investments.
A lot of people forget to plan what they will do with their money after their debts have been repaid. We plan to invest in real estate, among other things, after our student loans are paid off. We have a goal of purchasing 10 rental income properties.We will of course fully fund a 401(k) if it is an option, and whatever IRA options are available to us. We will make some safe investments (like mutual funds) and some risky ones (like investing directly in start ups), if our financial situation allows.
So there you have our student loan repayment plan in five easy steps. If you are similarly situated, you are free to borrow it. If you are unsure what student loan repayment plan is right for you, see THIS POST so that you can make an informed decision!
What about YOU? Do you have a student loan debt repayment plan? What are you doing and why? We’d love to know!
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