How to pay off student loans without thinking about it

Student loans are a big kick in the face that the real world has arrived. In this post we’re going to tell you how to pay off student loans without even having to think about it.

The average graduate has $28,950 in student loan debt. (That number is even higher for students who went to private or for-profit colleges.)

If you’re looking ahead to college, you can save money and reduce debt with financial aid and scholarships.

For those of us who already have nearly $30,000+ of student loans hanging over our shoulders, we can create a plan to handle it — and not ignore investing and saving for retirement at the same time.

In the short video below, I answered this exact question:

“I’m 30, my student debt amount is just below the amount of my annual salary (5.375% interest). Should I be trying to eliminate this debt at all costs or continuing to save for retirement, emergency, living life, and pay off debt equally?”

There are three potential answers to Chris’s question about student loans:

  1. The mathematical answer is to put your money where it will have the biggest impact. If your student loan interest rate is lower than the interest rate you can expect from investing, pay the minimum on the debt each month and invest the rest.
  2. The emotional answer is that for many people, they hate having debt of any kind, so even if they’re paying off low-interest debt, it still makes sense for them.
  3. The hybrid approach is to split the difference: Pay off some of the debt and invest some. A nice compromise.

Many people scoff at the emotional or hybrid solutions, not understanding that personal finance is about more than simple math. But the blunt truth is, psychology and emotions play a huge role in money. If they didn’t, we’d all spend less than we earned and construct a perfect asset allocation.

If you feel strongly about the mathematical or emotional answer, your answer is clear. For everyone else — which turns out to be most of us — I suggest a hybrid approach.

Surprisingly, the most important step isn’t finding the optimal balance between paying off debt and investing. It’s automating your money so you don’t have to think about either. Six months from now, you’ll be shocked at how much you’ve paid off and invested.

How you can pay off debt with less pain

Because loans are usually large amounts of money spread out over many years, the savings can be significant by paying off a little extra each month. The longer the loan, the more you save.

Let’s say you have a $10,000 student loan at a 6.8% interest rate with a 10-year repayment period. If you go with the standard monthly payment, you’ll pay around $115 a month. But look at how much you’ll save in interest if you just pay $100 more each month:

Monthly payments
Total interest paid
You save

Remember, even $20 more per month can save you SIGNIFICANT amounts of money.

Previously I wrote “You have $100 extra per month. Should you pay off your mortgage early or invest?” and linked to two great articles for the answer. The point is, if you can contribute even a small amount per month — whether to investments or any loans — the benefits can be huge.

Now, we all “know” paying off debt is important. We say being financially responsible is a “value” of ours. So why don’t we do it?

Why it’s so hard to pay off student loans

How often have you heard (or said) this?

  • “If I just try harder, I should be able to pay off my student loans…”
  • “Yeah, I know I should pay more than the minimum each month…”
  • “I spent way too much last month. I’m not going out at all this month”

If you think personal finance is about trying harder, ask yourself: How has that worked for you in the last month? The last year? Have you really saved more? Invested more?

The idea that personal finance is about willpower is based around the heroic idea that our willpower is the most centrally important driver in our lives. But social psychologists know that the situation around us is at least as important as our personality.

In short, the structures around us matter. You can set up systems today that will take the emotional and psychological discomfort out of the equation.


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