I’ve long felt that paying off any considerable amount of debt is a marathon and not a sprint. Because of this, I’ve found the key to paying off debt is to have a plan you can stick with for the long haul. It’s part of the reason I think budgeting for fun is critical. Rewarding yourself for reaching certain milestones can go a long way towards giving you the motivation you need to stay on track.

What is a milestone?

According to Merrian-Webster, a milestone is a “significant point in development.” When it comes to paying off debt, a milestone can be any point in the process that holds some significance to you. If you have many student loans, it could be getting that first loan paid off. It could be the day that you make your first payment that pays more principal than interest. It could be when you finally reach some round number, like $10,000. The key is to find a goal that motivates you to keep moving forward.

When you are planning your milestones, it is essential to pick attainable goals. While it would be great to pay off our student loans in 6 months, the reality for most of us is that such a goal is simply unfeasible. Look at your calendar and review your finances. In the next few months to a year, what is a realistic goal? Once you have found that realistic goal, you have found your milestone.

Why have a milestone?

A milestone is a shorter-term goal to aim for. Reaching it provides a sense of accomplishment and positive encouragement. If you only have negative associations with your debt repayment journey, your debt can eat away at you. The last thing you want is to feel like you’re in a perpetual state of failure. Set a reasonable goal and meet it. Get the momentum going in your favor.

How do I celebrate a milestone?

This is the part where you get to be creative. Just don’t get carried away. Paying off $1,000 in credit card debt does not justify the purchase of a new car.

Instead, come up with something that is a relatively inexpensive treat. When I was job hunting, I kept a bottle of champagne in the refrigerator, waiting for the day I got the job I was after. Seeing it every time I opened that fridge door motivated me. Being so close to my reward made me feel close to my goal.

My Favorite Approaches

The best debt tracking/milestone system I’ve ever seen is the door of student debt. This couple used a closet to track their progress and reward themselves. Their system was brilliant.

You can also incorporate your friends, family, or significant other in your milestone celebrations. For example, if you pay off a big chunk of debt, perhaps you can celebrate by dressing up and going on a nice date. Not only is it a fun reward for achieving your goal, but it’s a great way to get a loved one engaged in your goals and progress.

Readers:  What goals are you working towards?  How do you plan on celebrating once you achieve your next milestone?

The post The Importance of Budget Milestones appeared first on The Student Loan Sherpa.

Budgeting is critical for us to understand our spending habits. A budget helps us target unnecessary spending. If you are trying to pay off your student loans, creating a budget is essential.

The first step in any financial planning is to look at what money is coming in and what money is going out. When you look at what you earn and spend each month, patterns begin to emerge. For example, you may think spending five dollars on the occasional cup of coffee isn’t a lot of money. Those purchases can add up, though.

In light of my strict budgeting views, it may seem surprising that I think budgeting for fun is a necessity. However, fun is a critical component in any well-thought-out plan.

Budgeting Goals Must Be Attainable

At the beginning of the month, you create a bare-bones budget to limit your spending to just the necessities. You plan to use the remainder of your money to pay down your debt. This plan has you feeling pretty good about yourself. You may stick with this budget for the first week or two. If you are disciplined, you may even stick with this plan for a month or two.

Eventually, however, it catches up to you. Maybe you are sick of Ramen Noodles, perhaps you miss your social life, or maybe you want to run the AC a little cooler in the summer months. These weaknesses are a part of human nature. If you don’t incorporate them into your budget, your budget will fail.

The key is to cut yourself some slack. This slack comes in the form of money that can be spent guilt-free. At the beginning of the month, decide how much money you are comfortable budgeting for guilt-free spending. It could be as little as $20. I use $50. As the month progresses, that extra money can pay for a take-out meal when cooking at home sounds exhausting. It can be a bottle of wine or a movie. That money can be spent on any luxury or impulse purchase. It is the opportunity to have the fun that a strict budget would never allow.

If you try to maintain a super strict budget, odds are you will fail. You may keep it going for a while, but it will eventually fail. The question then becomes, do you go back to your unsustainable budget or just give up on budgeting altogether? A not quite bare-bones budget is way better than an abandoned budget. Having some money set aside for fun allows our goals to be more attainable and helps us sustain our budget long-term.

Budget Guilt

If you are like me, you feel guilty about your spending from time to time. On the one hand, this can be a positive sign. It means the budget is important to us, and we are mindful of it in our daily lives. It means that we are working hard towards freedom from our debt. On the other hand, this can be a negative. We can’t feel bad about enjoying life. Prioritizing financial responsibility is important, but so is not being miserable.

If you set aside some money each month to spend on whatever you want, you won’t have to feel guilty when you spend it. Make your budget a healthy habit, not a source of self-loathing.

Reward Yourself for Keeping Your Budget

My favorite part of the fun budget is successfully reaching the end of the month without spending it. At that point, I feel like I am playing with house money. I can roll it over to next month, or I can splurge on something I don’t need. It is the treat I give myself for sticking to my budget.

That little carrot at the end of the stick can be a great motivator. If we stay motivated, we stick to the budget. If we stick to the budget, our bills get paid, and debt becomes part of the past.

The Final Thought

I have always seen financial planning as a means to an end. I get one life, and I want to enjoy every moment of it.

If you cannot afford the things you genuinely need or creditors are constantly calling you, your finances are ruling your life. This is what you want to avoid.

If you go too far to the other extreme, however, you have the same problem. Pinching every single penny may get you a nice number in your bank account, but its no way to live your life.

Find your happy medium. Budget for some fun and create a budget that works for you.

Do you budget for fun?  How do you treat yourself each month for sticking to your budget?

The post Budgeting for Fun appeared first on The Student Loan Sherpa.

How?

No matter how small, erasing a single student loan is a huge step forward. From an accounting perspective, it makes attacking other loans significantly easier. Going beyond the numbers, eliminating a loan makes it easier to follow your plan and stick to a budget.

Monthly Flexibility Makes Repayment Easier

Many borrowers find themselves on the minimum payment treadmill. They exhaust themselves paying the bills as they come in, but they aren’t going anywhere.

Paying only the minimum on student loans usually means two things. First, it means you will probably be making payments for decades. Second, it means you are maximizing lender profits on the loans.

If you can knock out one loan, you free up that monthly payment to attack your other loans. It may not seem like much, but an extra $10 per month can save thousands of dollars in repayment and payoff loans years earlier. Seriously. Click on that last link and look at the charts. Ten bucks can make a huge difference.

If you eliminate an entire loan, you move the needle in a big way. If your student loan payment was $50 per month, it means you have an extra $50 per month to attack your other loans. You could also reward yourself. Pocket $20 as a reward for your success and use the remaining $30 to attack another loan.

Many borrowers can only afford to make minimum payments on their student loans. If you manage to pay off a student loan, it means breathing room. It means that life with student loans just got easier.

Eliminating a Loan Means Lower Balance

The significance of a lower balance should be pretty obvious, but it is worth pointing out an important detail: If you have a smaller balance, you are spending less on interest.

If you are spending less on interest, it means a higher portion of your monthly payment lowers the principal balance. In other words, your regular student loan payment does more damage to your balance.

As payments shift from mostly interest to mostly principal, balances start to drop faster, and borrowers build momentum.

Momentum In Student Loan Repayment (and Physics)

Paying off a single student loan may not seem like much, especially if it is a small loan compared to your other debts.

However, this tiny bit of success can build. If you can pay off a $1,500 loan, knocking out a $3,000 might seem more attainable.

Your building success might look something like this:

Each win builds on the last win. When one loan gets paid off, there is more money to attack the next loan. Each taste of success makes it easier to stick to the plan.

The First Loan is the Hardest to Pay Off

Some might argue that the loan with the largest balance or the highest interest rate is the hardest to pay off. Those loans might be the most expensive, but in terms of difficulty, that first loan is probably the hardest.

As students, we build up large student debt balances. These balances grow because we take out new loans and because the existing loans generate interest. Upon finishing school, we get a “grace period.” During that time, the loans continue to grow.

For some borrowers, loan balances continue to grow even though they are making payments.

At the point you pay off that first student loan, the trend reverses. Instead of growing, your balance starts shrinking. With each passing month, things get a little bit easier. Knocking out that first student loan is a huge milestone and a clear sign that things are getting better.

The post How Paying Off One Student Loan Changes Everything appeared first on The Student Loan Sherpa.

The sad reality is the most student loan borrowers are still making payments well into their 40’s. However, student debt freedom 10 or 15 years after college is possible.

There are several strategies that borrowers can use to reach this goal.

Student Loan Forgiveness Help is Limited

While there are a variety of federal student loan forgiveness programs, the only one that can eliminate all federal loans by the age of 40 is Public Service Loan Forgiveness (PSLF).

PSLF requires borrowers to make ten years worth of certified payments while working for a public service employer. Those who start working for the government or a non-profit shortly after college can get their federal loans forgiven with plenty of time to spare.

Outside of the PSLF program, the other federal programs will take too long for forgiveness. Income-Driven Repayment plans all provide a route to forgiveness, but this path takes 20 or 25 years. Unless you graduated college as a teenager, IDR forgiveness wouldn’t happen before you hit 40.

Federal Student Loan Repayment Strategy

Paying off federal loans by a specific date presents several challenges. The standard 10-year plan will eliminate federal loans before 40, but the payments are often too high for many borrowers.

From an accounting perspective, the most efficient route might be to refinance the loans at a lower interest rate with a 15-year repayment length (this strategy will be discussed in more detail in the next section). However, this option comes with significant risks. Refinancing federal loans means eliminating income-driven repayment plans and student loan forgiveness options. Giving up the federal loan perks is a major risk unless eventual repayment in full is a certainty.

For borrowers that want to keep the federal protections, the best bet is likely to select an income-driven repayment plan and sign up for the plan with the lowest monthly payments. The student loan repayment simulator is a great tool from the Department of Education that can help identify the best option.

Getting the lowest monthly payment might seem counter-intuitive if your goal is to eliminate debt quickly. However, going this route allows borrowers to focus on the high-interest debt first. Once the high-interest private loans have been addressed, borrowers can revisit their federal elimination strategy.

Managing Private Debt in an Affordable Way

The fastest way to eliminate private student loans would be to follow an aggressive repayment strategy. While aggressive repayment might work for borrowers with smaller balances or larger incomes, it isn’t realistic for all.

If you are 24 and the goal is to eliminate student loans by 40, refinancing your private loans on a 15-year fixed-rate repayment plan is an excellent option. Payments won’t change for the duration of repayment, and you will have the smallest monthly payment that still meets your goal.

At present, the following lenders offer the lowest interest rates on a 15-year fixed-rate loan:

Rank	Lender	Lowest Rate	Sherpa Review
1		5.91%*	Splash Financial Review
2		NA	SoFi Review
3		6.39%	ELFI Review

One limitation of this approach is that borrowers will need a steady income and solid credit score to qualify for refinancing. Another issue is that most refi lenders only offer 5, 7, 10, 15, or 20-year repayment lengths. Borrowers targeting a specific date may need to work with a lender that lets borrowers specify a custom repayment length. The only lender currently offering this option is Earnest.

Mixing Approaches: If aggressive repayment isn’t feasible or refinancing isn’t an option, borrowers may need to explore other options. Targeting a single loan using the snowball or avalanche method may open up new choices. Each time your finances change, such as eliminating a loan or getting a raise, it is good to revisit your elimination strategy.

Other Factors to Consider

Student Debt elimination isn’t the only financial issue for people in their 20’s and 30’s. Other life goals should be considered.

Saving for Retirement – If you don’t start saving for retirement until your 40’s, it will be very hard to retire. Fortunately, it is possible to build a retirement and eliminate student loans at the same time.

Buying a House – From an accounting perspective, homeownership can be a mixed bag. The upfront costs are high, but staying in the same house for a long time can be beneficial. Additionally, many people prefer to own a home for reasons that go beyond dollars and cents. It is definitely possible to buy a house and pay down student loans, but handling this combination presents some challenges.

Emergency Fund – One of the most critical details in any financial plan is having an emergency fund. If you don’t think you will have any financial emergency between now and your 40’s, you may be very disappointed. For parents, having extra money set aside for a rainy day is especially important. Learn how much student loan borrowers should leave in an emergency fund.

The First Steps are the Hardest

If you are just getting started in student loan repayment, things may seem bleak.

The good news is that most borrowers find circumstances get better as time passes. As you advance in your career, your salary will hopefully increase. Additionally, each month you make a student loan payment, your balance gets slightly smaller and generates a little less interest going forward.

Even if you can only spare an extra $10 this month to attack your loans, it can make a difference in the long run.

The post How to Pay Off Student Loans by Age 40 appeared first on The Student Loan Sherpa.

Whether you are approaching the midway point, exactly there, or recently passed it, a quick revisit of your student loan plan is a good idea.

Your student loan success and progress opens up new doors and new opportunities.

The Good News: Repaying the Second Half of Your Student Debt is Usually Easier

When you start student loan repayment, things are overwhelming. Most people are either looking for or starting their first real job and facing many financial unknowns.

At the point you have eliminated half of your student debt, you are likely in a much more secure financial situation. You may be earning more money, and you have figured out how to manage your finances so that you can reduce student debt levels.

Most importantly, in the second half of student loan repayment, interest hurts less. The smaller principal balance generates less interest. Less interest means a larger portion of your monthly payment is actually paying down the principal balance.

Don’t Let off the Gas

It might be tempting to start coasting now that you see a lower balance. This attitude could be a huge mistake.

If you have been working hard to aggressively pay off your student loans, your sacrifices have made your finances significantly better. New doors may be opened, but not all of them would be good ideas.

For example, now that you have eliminated a large portion of your student loan debt, it might be easier to buy a new car. Financially speaking, this would be a mistake. If you divert money from student loans towards a car payment, you are prolonging life with student loans to buy an asset that will only drop in value.

However, there are times where shifting focus might make sense.

Should I Save More for Retirement?

Having less student debt may make it easier to put money in a retirement account, but balancing retirement savings and student debt elimination is more about interest rates.

Whether you owe $500 or $500,000 on student loans, if you have a ridiculously high interest rate, you will want to pay down the student debt.

However, there are times when it makes more sense to divert money from student loan goals and shift it towards retirement goals. For example, if your employer offers a generous matching contribution policy, you likely will want to maximize this benefit.

This article covers in more detail the times it makes sense to get more aggressive on retirement savings. At the point you have eliminated a big chunk of your student loans, you may have only lower interest loans left, which makes saving for retirement an easier choice.

Turn Your Progress Into Lower Payments

In finance, risk has a huge influence on interest rates. If you have a poor credit score or a limited credit history, lenders will be reluctant to loan you money. If they do, they will charge a higher interest rate because they expect the chances of default to be higher.

As someone who has made steady progress on their student loans, you probably fall into a low-risk category. You have less debt and a proven track record of making payments. This opens the door to student loan refinancing.

In a student loan refinance, a refi lender pays off your older high-interest student loans and creates a new lower-interest loan. These lenders can get away with charging lower interest rates because they identify borrowers who are very likely to repay their loans.

At present, the best refinance rates are available with the following lenders:

Rank	Lender	Lowest Rate	Sherpa Review
T-1		4.86%	ELFI Review
T-1		4.86%*	Splash Financial Review
3		5.29%	Laurel Road Review

The big consideration for borrowers is whether or not it makes sense to refinance. The type of loan you currently have will drive the decision.

Federal Government Student Loans – Refinancing federal government loans may be a risky choice. Federal loans have important borrower protections like income-driven repayment and student loan forgiveness. They may also come with unexpected perks like the 0% interest rate during the Covid-19 Pandemic. Refinancing permanently eliminates these benefits. Borrowers need to weigh the potential savings against the lost benefits carefully.

Private Student Loans – Refinancing private student loans is significantly less risky. Borrowers are merely shifting from one private lender to the next private lender. As long as loan terms like interest rates are improved, the refinance is a smart move.

Be Wary of the Risks of Auto-Pilot

If you have paid off the majority of your student loans, you likely have a routine that is working for you.

A positive routine is excellent.

However, it is also essential to keep in mind that the rules regarding student loans do occasionally change. Over the last five years, multiple new repayment plans have been created, and the government responded to an economic crisis by suspending student loan payments and interest.

If you spend a bit of time every year or so, you might be able to find better repayment options or tax breaks. Those that never think about their student loans may miss valuable opportunities.

To keep things easy, I write a monthly article on the latest developments and changes in the world of student loans.

The post So You Paid Off Half Your Student Loan Balance… Now What? appeared first on The Student Loan Sherpa.

In reality, overcoming procrastination on student debt can be a huge challenge. Managing student loans can be overwhelming and frustrating. Add rude or unhelpful loan servicers to the equation, and it is easy to understand why many borrowers delay addressing their debt.

The good news is that you can break the cycle.

Recognize the Student Loan Procrastination Excuses

Putting an end to student loan procrastination is hard. There are a ton of excuses to justify a delay.

•  I can just do it tomorrow.
• They call daily, I’ll pick up the phone next time they call.
• I need to wait until I’m in a better mood/frame of mind to deal with this.
• Nothing changes if I just make the call tomorrow.
• It’s not like my student loans are going anywhere.
• It will be years, maybe decades, before this mess is resolved… there is no reason to be in a hurry.

Easy excuses can lead to more complicated roadblocks. Delays can cause accumulation of interest, late fees, and increasingly hostile collection calls.

To end student loan procrastination, borrowers must first identify the excuses they use.

Bribe Yourself Into Taking Action

Whether it be a milkshake, craft beer, or a trip to the movies; everyone has treats in their life that they enjoy. Pick one of your favorites and make it conditional upon getting your student loans addressed.

Better yet, get others involved. Tell your coworkers, roommate, or significant other that you won’t be enjoying any ice cream until you take care of your student loans. By getting others involved, the reward becomes more real, and they can keep you accountable. If the only way to satisfy your sweet tooth is to get your student loans fixed, you will find the urgency you need to get it done.

Rewarding yourself for something as simple as making a phone call might seem like overkill. However, this attitude underestimates the crippling nature of student debt for many borrowers. If procrastination is a genuine challenge to repaying student loans, end it by giving yourself a real reward.

The Snail Approach

If you are not ready to make the call to your lender, take small steps each day towards your goal.

Tell yourself, “I won’t be calling today, or even tomorrow, but I will do something productive, each day, until I call.”

Even the slightest bit of prep can count as a step forward. Perhaps one day you review your budget in anticipation of asking for a need-based rate reduction. If you are looking to refinance your loans at better rates, you can spend a day researching student loan refinance companies. If you are feeling really lazy you can look up the phone number for the company you need to call and store it someplace handy.

The key is to break the process into tiny tasks that are easy to do. At a certain point, you will be sick of doing little stuff daily and just want to be done with it. The big advantage is that you are making procrastination productive. By the time you call, you will have a ton of prep work taken care of and things will go better for you.

Do the math

You may realize that each day you wait does technically cost you money, but you may also realize that daily figure could be no more than a dollar or two. If waiting a day costs you $1.32, you might think that skipping a day for less than the price of a double cheeseburger is an acceptable alternative.

While that may be true, the numbers do add up after even a week or two. If you are looking to motivate yourself, just keep a running tab on the cost of your procrastination. A couple of bucks may not seem like a big deal, but soon enough you will be saying, “I can’t believe I wasted all of that money procrastinating… it ends today.”

Educate Yourself

The unknown is scary.

For the vast majority of borrowers, student debt is manageable. This includes hourly workers who struggle to get by, and it is also true for people who are unemployed.

A classic mistake made by many borrowers is assuming they are screwed because they can’t pay the first bill. In the case of federal loans, the first bill is based upon the most aggressive repayment plan. Borrowers have multiple options for much lower payments.

The more you learn about student debt, the more options you will realize you have.

Once your mountain of student debt starts to feel more manageable, it will be easier to end the student loan procrastination.

Simple Steps to End Student Loan Procrastination

• Learn about the benefits of federal student loans. Most student loans are federal, and these loans have the best borrower protections.
• Take a look at the options for lower monthly payments. Borrowers can preview monthly payments on a variety of repayment plans using the Department of Education’s Loan Simulator.
• Think about the many ways to make repayment easier. Borrowers with federal and private loans have over a dozen different ways to get lower interest rates on their debt.
• Don’t be so hard on yourself. Paying back student loans is already difficult. Beating yourself up over mistakes you might have made won’t help anything.

The post Tips to Put an End to Student Loan Procrastination appeared first on The Student Loan Sherpa.

There are also plenty of strategies that can be employed by those making 100k plus per year and looking to eliminate debt. Unfortunately, these resources and strategies are not always of much use to someone who is making 50k per year and trying to pay off 90k in student loan debt.

At times it seems like the extremely poor get help, and the ones who have great credit scores and income get student loan refinancing while the ones stuck in the middle get screwed. This is obviously a major oversimplification of student debt. Still, with this thought in mind, we will focus on the ways to eliminate student loans that don’t revolve around student loan forgiveness or refinancing.

Smart Repayment Starts with Budgeting

Creating and sticking to a monthly budget isn’t a sexy or clever way to pay off student loans… but it can be extremely effective.

The problem with making minimum payments on any type of debt is that much of that monthly payment goes towards interest. Put another way, much of what is paid each month goes towards lender profits rather than reducing what is owed. Many borrowers wonder how they can make every payment for five years and hardly see their balance drop.  Student loan interest eats up minimum payments.

Budgeting isn’t sexy or fun, but it gets results. Creating a budget helps you free up some money each month for student loans. The “extra” payments that are made pay down the principal balance. That means pure debt elimination. As balances drop, the monthly interest that the loan generates also drops. Extra contributions have a snowball effect. The success of one month builds into the next month.

Budgeting is the key to making extra payments. If you think you are only spending your money on essentials or that there is nothing to be cut, make a budget anyway. When you see all your monthly finances accounted for, it will shed light on new opportunities. Many people are surprised at how many miscellaneous or seemingly minor expenses can add up by the end of the month. If you are new to budgeting, mint.com is a great way to get started.

You Don’t Get Raises

If reducing monthly expenses is one pillar of paying off student loans, the other pillar is finding ways to utilize additional income.

Suppose you get a raise at work and earn an extra $100 per pay period. Don’t spend that raise. Don’t think, now I can afford to ______. You don’t get raises when you have student loans.

This approach may sound harsh, but it is the easiest way to get aggressive on student loan payments. We can’t miss what we never had. Raise or not, your monthly budget stays the same. It isn’t a sacrifice; it is just continuing the status quo.

Budget Consistently

Yes… more talk of budgets… it really is that important.

Budgeting for one or two months is a start, but not where we find the real value. Sticking to a budget long term is the key to success.

For a budget to work long-term, it has to be something you can stick with. Don’t make a budget so aggressive that you are miserable. Leave some room for some discretionary spending or find a way to reward yourself for sticking to the budget.

Don’t Compare to the Joneses

Friends from college may get new cars. Coworkers might take exciting vacations. Don’t fall into the trap of comparing what you have to others. Not only is this a bad idea from a financial perspective, but it is also a recipe for unhappiness. Others are always going to have bigger, better, nicer, and newer things.

Find a way to internalize your goals and get satisfaction from achieving the things that matter to you.

Comparison is the thief of joy.

Be Smart About Repayment

Paying extra is good, but being smart about paying extra is even better.

We have previously done the math to show how targeted attacks on loans is much better than just paying extra here and there. If you don’t want to read the full explanation of how attacking one loan is for the best, the short version is that it allows you to eliminate the highest interest rate loans first and save the most money in the long run.

Once you are done, you will feel wealthy.

When your student loans are paid off, your monthly budget will look amazing. All that extra money that you were spending on student loans is now free. Instead of getting a few raises over the years, you get them all at once. The biggest drain on your finances will be gone.

It doesn’t hurt to start thinking about your student loan freedom celebration. Even if you are years removed, having a light at the end of the tunnel and something to work for can be motivating. The door of student debt is one of the coolest ways we have seen to track progress and celebrate milestones.

What about retirement?

Knocking out student loans and saving for retirement at the same time is possible.

Deciding between a 401(k) contribution and a student loan payment can be tricky. We have previously examined this topic in more detail, but the short version is that you can work towards both goals at the same time. The key is evaluating where your money goes the furthest.

Attacking your student loans should be about building a stronger financial future, and that doesn’t mean skipping retirement.

Bottom Line

Having an average income and trying to manage a mountain of student debt is a tough situation faced by millions of Americans.

There isn’t an easy road to freedom, and there are not many shortcuts along the way. However, with some smart planning, your goals can become a reality sooner than you ever thought possible.

The post Paying Off Student Loans on an Average Income – The Mindset to Survive appeared first on The Student Loan Sherpa.

The Door of Student Debt is one couple’s way of tracking student loan repayment and providing motivation. It is both simple and brilliant.

On the inside of a closet door this couple has squares of paper representing their debt. Each square represents $1,000 in student loans. As they pay off the debt, the squares come off the closet door. For certain milestones, such as paying off a high interest loan, there are rewards. One square means they will be able to get a LASIK procedure, and another square means it is time to start a family. Pictures of the Door of Student Debt can be found here.

While this might be one of the most creative ways of tracking student repayment and providing motivation I have ever seen, I also know that this exact method may not be for everyone.

The most important part of any motivation strategy is to find what works best for you personally. Today we will look at some of the aspects of the Door of Student Debt that make it so clever.

Constant Reminder

A key component of student debt elimination is to stick to the task at hand. If you splurge on unnecessary expenses, it sets back your progress.

Providing yourself a constant reminder of your student debt is helpful in avoiding the daily temptations that we all face.

The advertising industry has one goal, to get you to part with your hard earned money, and they are very good at what they do. Seeing the Door of Student Debt reminds one couple what they are working on, shows their progress, and reminds them of the rewards they are working towards.

Not Obnoxious

Some people get too carried away with debt repayment and it becomes something they cannot sustain in the long run.

Daily Facebook status updates on your progress might seem clever at first, but keeping it going could be difficult. You don’t need to tattoo your debt balance to your forehead.

The trick is to find a way to remind yourself without making it depressing or irritating. Going into the closet door is something that is done once or twice a day. It happens just enough to serve as a reminder but the reminder is subtle enough to not be a constant source of stress.

Tactile

Watching a balance drop incrementally on some webpage provides little satisfaction.

Ripping a piece of paper off the Door of Student Debt, crumbling it up, and throwing it in the trash seems like it is something that would be far more satisfying.

The difference between a balance on a login screen and a piece of paper is that it is something tangible, something you can actually hold. It may sound silly, but that difference can help your accomplishments feel more real.

Achievable

Paying off their student loans is the big goal, but it isn’t the only goal.

Each one of those sheets of paper is a goal. Each one that comes down is a success. Winning breeds more winning.

This is a battle that cannot be won overnight, but by breaking it into many winnable battles, long-term success becomes much more realistic.

Team Effort

This is something that they are working on as a couple.

The odds of success go way up when everyone is on the same page and working towards the same goals.

Rewarding

Each sheet of paper that comes down is a little reward.

Reaching the predefined goals on certain pieces of paper is a reward. Seeing a door full of paper gradually become empty is a reward.

Every time they open that door, they will see what is still in front of them, but they will also see all the progress that they have made. The genius of this plan is that it is rewarding in different ways on many different levels.

Clear Goals

Finally, the goals here are crystal clear.

This couple has certain milestones in mind, and student debt stands in the way. The door of student debt clearly defines the repayment schedule, rewards for hitting certain goals, and how to achieve them.

This is better than telling yourself that “once I make some progress” or “once things are under control” you will do something or earn something. Having clear goals means accountability and it eliminates excuses.

Bottom Line

Many people can benefit from making their own door of student debt.

Even if this particular strategy isn’t for you, there are lessons that can be applied to your own personal motivation plan.

The post Finding Motivation: The Door of Student Debt appeared first on The Student Loan Sherpa.

If you have both mortgage debt and student loan debt, there is not an easy approach that should be used 100% of the time.

Circumstances differ from person to person, so it is important to understand the key considerations in making this decision.

Tax Implications

Both student loans and mortgages come with an interest deduction that can be used on your taxes. However, these deductions work very differently.

The biggest difference is that there are significantly more limitations on the student loan interest deduction. For starters, a maximum of $2,500 can be deducted. Additionally, if you make too much money, you cannot claim the student loan interest deduction. If you are single, the maximum modified adjusted gross income is $80,000. For couples, that number is $160,000. Individuals in the 65k to 80k range and couples in the 130k to 160k range are subject to a phase-out, which reduces the benefit. The IRS has a very detailed explanation of the student loan interest deduction rules.

The rules for mortgage interest are far more generous than the student loan interest deduction. There is no income cap and the full deduction can be claimed so long as your house costs less than a million dollars.

One other distinction worth noting is that the student loan interest deduction is above the line, meaning it can be claimed on any return, while the mortgage interest deduction can only be claimed if you itemize.

Finally, state tax programs as it pertains to mortgages can vary greatly. Be sure to understand how your mortgage can affect your property taxes and state income taxes.

Most borrowers will probably find that the mortgage interest deduction is a much bigger benefit and that having it reduces the effective interest rate of the home loan. Put another way, the cost of the interest on your home loan is usually lower because you get a deduction.

Forgiveness Programs

While there are programs to assist borrowers who fall behind on their home payments, the student loan forgiveness programs with the federal government are far more generous.

If you are on an income-driven plan for 20 to 25 years, the remaining balance on your loan could be forgiven. Similarly, if you are employed in public service and make 120 certified eligible payments, your loan balance can be forgiven as part of the Public Service Loan Forgiveness Program.

If there is a possibility that you will be benefiting from either of these programs, putting your extra money towards your mortgage might make more sense.

Consequences of Default

While you have extra cash now, it is still worth considering what might happen if you were to fall on harder times.

If you default on your student loans, it is definitely a bad thing. Your credit will be trashed, and you could end up in court or have your wages garnished.

However, defaulting on your mortgage may be worse. If you can’t pay your mortgage, you risk eviction, in addition to all the negative credit consequences.

The Deciding Factor

For most people, debt is debt. The sooner you can get rid of it, the better.

The fastest way to eliminate debt is to pay off the high-interest debt first. If you are looking to aggressively eliminate all of your debt, paying off whatever carries the highest interest rate (after factoring in taxes) is the smart play.

If you are in this situation it doesn’t really matter what the debt is called. The bad debt is the high-interest debt.

Changing Interest Rates Can Change Your Plan

One other factor that should be considered is the possibility of lowering interest rates on your existing debt. This changes the math and can save thousands each year.

Mortgage interest rates are no longer at historic lows, but they are still very low. Refinancing your home could potentially save a ton of money over the life of the loan. The downside is that there are costs associated with this process, so any savings would have to offset the cost.

Similarly, student loan interest rates can be greatly reduced by student loan refinancing. Unlike mortgage refinancing, this process does not have any transaction costs. In fact, many companies will offer new borrowers cash up front to consolidate their loans. As a result, even a slight decrease in interest rates can be a smart financial move.

Bottom Line

Student loan debt and a mortgage are two very different types of debt, with key differences in tax advantages, programs, and refinancing.

These key differences should all be considered as you put together your plan for debt elimination.

The post Should I pay extra on my student loans or my mortgage? appeared first on The Student Loan Sherpa.

Suppose you owe $15,000 to a student loan lender. If you are in a position to pay $14,000 right now, would your lender consider the loan paid in full? You might even think you are deserving of some sort of benefit for paying the loan off sooner than required.

Unfortunately, most lenders do not offer any bonus for paying extra. They usually prefer that you pay the minimum in order to maximize their profits on interest. However, there is at least one strategy that allows borrowers to use their relatively strong financial position to come out ahead.

The Reality of the Situation

Unfortunately, lenders offer no direct bonus to people who pay off their loans early. The reality of the situation is that they don’t want you to pay off your loans early.

Lenders do not make money by principal balance being repaid. They make money on interest. A small loan that takes years to repay can be much more profitable to a lender than a large loan that is repaid very quickly.

It is also worth noting that for many student loans, there is minimal risk to the lender. Student loan debt is a special category of debt that has almost no bankruptcy protection. With a mortgage or credit card debt, the lender faces the possibility that the borrower may declare bankruptcy and never pay the debt. With student loans, there is minimal risk that the lender gets nothing. Additionally, many student loans have cosigners attached to the loan. All of these lender protections mean that the lender has every incentive to encourage you to drag out the repayment on your loan.

The longer you owe a balance, the more money they make. For this reason, lenders are normally unwilling to settle for anything less than the full balance.

What is the point of paying off loans early?

If there is no bonus to eliminating a student loan quickly, why should I pay all that money now?

The answer is simple: paying off the loan now can save you a ton of money on future interest payments.

You are paying interest on your student loan daily. With every day that passes, you owe a little bit more money on your student loan. As a result, when you make your monthly payment, much of that payment can be applied towards interest, and only the part that is applied towards the principal balance reduces what you owe.

If you pay your loan off in full, it eliminates years of payments towards interest. Even if you can’t pay the loan off entirely, extra payments knock down the principal balance and save money in the long run. The less you spend on interest; the less the debt actually costs you out of pocket.

Using a strong financial position to your benefit

Borrowers who are successfully repaying their student loans are often able to get lower interest rates through refinancing.

Another benefit to refinancing is that many of the refinance companies will pay a new customer bonus to recruit new borrowers.

Locking in a lower interest rate can often free up money for borrowers to focus on other financial goals, such as buying a house or saving for retirement.

At present, borrowers can get the following rates through refinancing:

Rank	Lender	Lowest Rate	Sherpa Review
T-1		4.86%	ELFI Review
T-1		4.86%*	Splash Financial Review
3		5.29%	Laurel Road Review

The largest benefit to early repayment

Lenders want you to drag your feet on repayment. It maximizes their profits. Your goal should be to minimize their profits. The less they make on the loan, the better you are doing.

As a result, lenders certainly won’t be offering you an incentive to pay off your loan early… but the lack of incentive shouldn’t matter. Eliminating debt and the interest that comes with it should be all the incentive you need.

The post Is there a bonus or benefit I can get by paying my loans off early? appeared first on The Student Loan Sherpa.