Prepping, homesteading and living the simple, green, independent life.

Monday, March 15, 2010

A Reader Asks How to Pay Off Student Loans

A reader posted this in the comments of my last post which I think deserves a post of it's own as a reply:

"I borrowed 12,250 for my college education to become a Registered Nurse. I took out these loans in the early 90s and after three deferments and consolidation I owe 30,000. I want to go back to school but because my loans are now over 23000 I am not eligible of student loans. I need help paying my student loans down fast. Does anybody have any ideas."

 First off: are you being denied because of debt, or is it specifically because it's student loans?

If it's just due to the student loans then it sounds like all you have to do is get it to under $23K from $30K; a $7K difference which makes it more manageable.  One quick way to do this would be to switch $7K worth of the loan to another form of loan, like a line of credit maybe.

Are you in Canada? If so I'd check the provincial and federal websites for any help that might be available, though it sounds like you may have exhausted most of what they offer already.

The only advice I have to give are the basics that everybody else gives (which is because they work and because there are no easy quick fixes):

Stay in School and this too could be you!

1) Use Savings

If you have any savings I'd consider liquidating them to pay off the debt.  Most likely the interest you're paying on the debts is more than you're making by saving.  If so it would make sense to use them to pay off debt.

2) Liquidate Assets

Any assets, things you own, that you can sell to pay off debt? I'm thinking anything from a car to a CD/DVD/Videogame collection that you don't use anymore.  You could go the quick way and bring the stuff to a store that sells used games and movies / pawn shop, or you can put more effort into it and try ebay where you could probably get more money.

You could even collect all the junk around your home and hold a garage sale.  I've got dozens of boxes of stuff that we've never opened since our last house move and I'm sure I could get a couple hundred if I had a garage sale.

3) Do a Budget

It may sound boring but make a budget .  I do mine like a personal balance sheet with expenses on one side, income on the other and then a plus or minus balance of the difference between them.  I use a spreadsheet through Google docs to do this.  In fact, Google Docs also has pretty good budget and personal finance templates that you can use.

Once you have all your expenses written down go through them one by one and brainstorm what you can do to reduce them.  Do you really need a cell phone and a landline phone?  Can you cut back on the number of TV channels you subscribe to? Can you go down to high-speed light instead of the ultra unlimited internet service?  Can you shop at a less expensive grocery store and use coupons?  Can you reduce electricity use, turn down the furnace and water heater?

Every little bit counts and I bet they can add up to a couple hundred bucks a month.  Take those savings and plow them into your debts.

4) Cut up credit cards

At the very least don't carry them on you.  Put them in a block of ice in your freezer or at a relatives home if you want to keep them in case of an emergency.  This way you either have to thaw it out or drive across town if you want to use them which makes impulse buys less likely.

5)   Increase Income

Is it possible to get a second part-time job or maybe a small business on the side?  Summer is coming and you can offer to mow lawns for 10-20 bucks for example.

At the very least there's nothing wrong with working places like McDonalds.  Nothing makes me madder than people who put down "McJobs"; a man doing what he has to so he can provide for himself and his family shouldn't be looked down on.

6) Automate Your Finances

Do you do online banking?  If you're in Canada I'd recommend looking into President's Choice Financial.  I love PC Financial and I've set up my account so that as soon as my pay is automatically deposited all my bills and debts are automatically paid.  I get paid every two weeks so I break down my monthly payment in half (though I try to throw at least an extra $10 more than the minimum).  This also has the effect of cutting down your interest faster meaning you pay off the debt quicker.

I know if I keep the money in my account I'll be tempted to spend it on other things so I do the opposite of the old "pay yourself first" rule.  I pay my debts first and thanks to my budget I know what ever is left in my account after the debts are paid, is enough to live on until the next pay.

8) Debt Snowball

Lastly, as I mentioned in the last post you can use the snowball method for paying off debt, where you pay your smallest debt off first and then you apply the amount that you paid to the next smallest debt.  For example, if you pay $50 to debt A and $100 to debt B, after you've paid off A, you'll start paying $150 to B, and on and on until debt free.

Personally, I'm using a variation on this plan where rather than paying off the smallest first I'm deciding to pay off the debts in the order of their financial impact VS balance.  I'm more interested in freeing up cash flow and increasing my net balance so I'm looking at which debt will give me the most "bang for my buck".

For example, I have a small $1000 debt that I could pay off in month or so however, my minimum monthly payment on that is only $20 and the interest is only 6% so I'm leaving it for now.  I'd rather use that $1000 to pay off the $2000 credit card debt which is costing me $200 a month and is at 15%.

Everybody's situation is different though so without knowing more details (married, kids, unemployed?) it's hard to get into specifics.

Good luck though; it will be a tough few years but it will be worth it!

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