How I Paid Off My Student Loans In Under 10 years

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein


Why I Needed Student Loans

At the point of writing this article, aggregate US student loan debt is $1.48 trillion. That is $260 billion higher than credit card debt. This year 19.9 million new students have started college or university in the US. Most of these students will take on student loans to pay for part or all of their education, housing, and transportation costs. Student loans and student loan debt are all too real for almost everyone.

I went to a private college. The tuition alone was $40k per year with another $5k in other fees (books, transportation, technology use, food…etc). At the time I was working a part-time job and had some college savings. I With this, I would be able to cover a portion of the costs but would still need to take out student loans to be able to pay for the rest of college.

At the end of college my situation was:

  • $50,000 across fix loans
    • Three Subsidized Loans @ 5.5% annual interest
    • Three Unsubsidized Loans @ 5.5% annual interest

Understanding Student Loans:

Before I discuss how to effectively pay off a student loan, it is important to understand the fundamentals of student debt.

1. What are the types (Subsidized and Unsubsidized)

There are two main types of student loans. Unsubsidized and Subsidized.

Subsidized Loans: Are loans which the U.S. Department of Education pays the interest while you are (at least part-time) in school and for the first six months after you graduate or leave. These loans also tend to have a lower interest rate (not always the case) out of the two.

Unsubsidized Loans: Are loans where the interest will start accruing and capitalizing as soon as the loan is issued.

2. What Is Principal

The principal is the original amount borrowed or the part of the amount borrowed which remains unpaid. Principal excludes interest but as interest accrues (and is unpaid) it gets added to the principal to create a new balance for the loan.

3. What Is Interest

Interest is the amount what the lender charges for loaning the money, must be repaid. Interest is typically expressed as a percentage of the borrowed amount. In most loans, interest also compounds each period of the loan. This is typically done monthly but can also be done yearly. Compounding interest is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Listed below is a simple chart that illustrates compounding interest each period

The key takeaway here is the longer the principal of the loan remains unpaid, the more interest expenses you will accrue and pay in the lifetime of the loan.

3. What are the Payoff Plans

Here are the major payment plans standard across most student loans. There are various options and customizations to these plans but these are core ones.

Standard Fixed Payment Plan: Payments are a fixed amount that ensures your loans are paid off within 10 years (within 10 to 30 years for Consolidation Loans).

Graduated Repayment Plan: Payments are lower at first and then increase, usually every two years, and are for an amount that will ensure your loans are paid off within 10 years (within 10 to 30 years for Consolidation Loans). This will be more expensive over the long run than the Standard Fixed Payment Plan

Pay As You Earn Plan: Your monthly payments will be 10 percent of discretionary income. Any outstanding balance on your loan will be forgiven if you haven’t repaid your loan in full after 20 years. You may have to pay income tax on any amount that is forgiven.

For the full list of repayment options see:

4. How Do Loans Get Paid Off

Regardless of which payment plan you choose, each month an amount is paid towards your loans. This amount goes towards paying off the interest you accrued during the previous month as well as the current balance (or principal).

If you have multiple loans issued by the same lender within a year of each other, then they are probably all grouped together as one and your monthly payment goes towards all of them. The payment is split across all loans weighted by their overall value. Each loan must be paid towards in each period (month) to avoid defaulting.

In my case, I had four loans on a standard fixed repayment plan. My monthly payment was $200 which means that each loan received $33. Out of those $33, interest would make up for $3-4 and the rest would go towards principal. Listed below is a rough breakdown of my first monthly payment.

Type Current Balance Interest Rate Accrued Period Interest Monthly Payment Payment Towards Interest Payment Towards Principal
Subsidized $8300 5.5% $38 (0.46%) $94.62 $38 $56.62
Subsidized $8300 5.5% $38 (0.46%) $94.62 $38 $56.62
Subsidized $8300 5.5% $38 (0.46%) $94.62 $38 $56.62
Unsubsidized $8300 6.5% $45 (0.54%) $94.62 $45 $49.62
Unsubsidized $8300 6.5% $45 (0.54%) $94.62  $45 $49.62
Unsubsidized $8300 6.5% $45 (0.54%) $94.62  $45 $49.62
TOTAL $50,000 $249 $567.74 $249 $318.74

The key takeaways here are that:

  • You are in a chase to constantly pay off interest. You will not stop paying interest until the loan has been completely paid off
  • You cannot pay completely towards principal and let interest accrue
  • A monthly payment (although large), split across multiple loans can lower the overall principal very slowly

What Was I Gaining VS What Was I Loosing

Each month I was losing money to interest. Since I was on a fixed payment plan, the payoff length of the loan was set to 10 years (which is pretty standard). Each month I was losing $249 to interest. Although my main principal was shrinking, interest payments would only drop by $1-2 dollars per month. Over the course of the entire loan payoff period, I was set to lose $18,128.78 if I followed the fixed payment plan.

The $249 per month translated to:

  • 15% of my rent
  • 100% of groceries budget
  • 100% of my three-month gas budget

On the other hand, I was gaining opportunity cost for not fully repaying off my loans. The money that I would use to pay off my loans could be invested into the stock market or other investment options to earn interest to offset the debt interest. If I was able to make anything beyond 6.5% I would be earning money for not repaying the loan. Anything lower and I would be loosing.

In the past few years, this has been a good option because the stock and equities markets have been yielding on average 10-20% returns. For those years I was able to benefit from having a fixed repayment plan where I could invest the opportunity cost money intended for the loan, invest it in the market, and earn enough to offset the interest I was losing.

However, this strategy only applied if I had the disposable income to spend on the stock market outside of my living expenses and the monthly payment for the loans. In some months I did, while in most months I did not. In addition, in some years like 2018 the average return was 3-5% which was below the rate of interest charged on the student loans. During these rates, I would actually still be losing money even after utilizing the opportunity cost to invest in the market.

I was also able to claim a tax deduction on my student loan payments from a 1098-E which allowed me to make a deduction on my AGI of a portion of the interest I paid for the year. In the span of a year, this was roughly $3000.

The Program

As mentioned above, I was losing around $249 to interest every month. Over the next 10 years, I was set to lose $18,128.78 if I followed the fixed payment plan.

I could not idly sit by as I just lost $18k to interest. I decided to do as much as I could to offset that interest loss. Any money I could save would be money that I could spend on myself or invest. As such, I read a number of financial advice books, watched views on debt and eventually came up with the following program.

This program allowed me to:

  1. Lower my monthly interest expense
  2. Lower my monthly payment
  3. Lower the total interest over the lifetime of the loan
  4. Increase my monthly payment towards the principal rather than interest
  5. Reduce the overall lifespan of the loan, getting me debt-free in a shorter period of time

The principles of this program do not only apply to student loans. They can apply to almost any loan.

Step 1: Debt Consolidation

The first step is to consolidate your loans into one entity and reduce the interest rate. There are banks, financial institutions, and companies that will provide this service. The way this works is that they will inherit all of your debt, pay off that debt and issue you a new loan (with new rates, terms of payment and length).

The consolidated terms issued have payment plans very similar to student loans (A monthly payment, fixed payment plans…etc). For example, at the time of writing this article, First Tech Credit Union (bank) is offering student loan consolidation with a Fixed Payment Plan at 3.10% and two other options with lower monthly payments and rates at 5%. If the economy is good, you might be able to find companies offering even better rates than this.

When my loans were issued, interest rates for the United States were high. As such, I received a loan at 5.5-6.5% interest. Unfortunately, I was stuck with this rate for the entirety of the loan. When interest rates for the country were low, I sought out a financial institution that could consolidate my loans and offer me a rate that was closer to 3%.

By consolidating my loans, almost immediately I was able to:

Cut my monthly interest expense by half. I went from $249 per month in interest expense to $125. This was an extra $125 in my pocket that I could put towards the loan or invest.

Decrease my monthly payment. I went from $567 per month in monthly payments to $482. This was an extra $85 in my pocket that I could put towards the loan or invest.

Increase the amount of my monthly payment that goes towards the principal. With the overall interest rate lowered, each month the interest amount accrued decreased by $125 but the monthly payment only decreased by $85. This means that each month an extra $40 (the difference) would go towards the principal, paying it down faster than the unconsolidated loan.

Lower the overall interest over the lifetime of the loan. With the overall interest rate lowered to 3% (more than half of my previous loan terms), the overall interest I would accrue over the lifetime of the loan shrank to $7,936.52 compared to $18,128.78 from before. That is a savings of $10,192.26!

Type Current Balance Interest Rate Accrued Period Interest Monthly Payment Payment Towards Interest Payment Towards Principal
TOTAL $50,000 5.5-6.5% $249 $567.74 $249 $318.74

Consolidated Loan First Payment Breakdown (below). Non-consolidated Loan First Payment (above).

Type Current Balance Interest Rate Accrued Period Interest Monthly Payment Payment Towards Interest Payment Towards Principal
TOTAL $50,000 3% $125 $482.80 $125 $357

Step 2: Double Back Payment Method

Once your loan has been consolidated to a lower rate you need to start paying off as much of the principal as possible. This will lower your monthly interest amount and save you the most amount of time in the long run.

Interest accrues every month from the payment date. As such, for most student loans, any monthly payment made always goes towards interest + principal, never straight to the principal.

The best way to make payments directly towards the principal is to use the double back method. The double back method is a trick to pay directly towards principal without going towards interest. Every month when the monthly amount is due, make that payment. Immediately after make next month’s payment in full. The first payment will go towards paying last month’s interest accrued and principal. However, the second payment will go 100% towards principal because no interest expense has been accrued. The window of opportunity for this is only on payment due dates. That is the only time when the interest expense is $0 because it has not accrued for the following month yet.

For example, in February I would pay $125 towards the principal + interest accrued in the month of January. I would also make another payment of $125 (or more), essentially for March, which would go directly towards the principal because there is no interest accrued for March yet.

The higher the frequency you implement the double back payment method, the faster you can pay off your loan. My frequency was every other month which reduced the lifespan of my loan by more than 25%.

Without the double back method, my loan length and total interest expenditure would have been: 10 years with $7,936.52 in interest.

With the double back method implemented every other month my loan length and total interest expenditure would be: 6.5 years with $6,933.48 in interest. That is a savings of 3.5 years and $1003.04.

In addition, whenever I would get money from my tax return (essentially free money that I did not expect to get back) I would put that amount towards the principal. For those times, my second payment in the double back would be twice or three times the typical monthly payment amount. This way I essentially paid for the next three months avoiding the interest expense.

Step 3: Invest And Payoff Cycles

The last step to this accelerated and cost-savings loan payment program is to utilize external investment options to offset as much of the interest expense as possible.

Despite using the double back method, there is a strong chance that you might not have the cash on hand to make two payments every single month. Nor would you want to. Sometimes it is wiser to save that money if it will yield you a return greater than the cost of interest (3.5% per year or 0.25% per month).

During the months or years when the stock market is doing well and producing returns above your rate of interest, you should be investing in the market, rather than implementing the double back method.

The opportunity cost can be capitalized on in the stock market to yield 6-10% above the cost of interest (during good years).

However, this works both ways. During slumps or bear markets when stock returns are below the rate of interest or negative, you should be implementing the double back method to pay off your loans rather than investing the money in the market.

During the bull markets of 2016 and 2017, I put my money in the stock market rather than implementing the double back method. The average return I saw was 10-12% relative to the 3% interest rate. This means I was profiting 7-9% by saving my money.

During the slow markets of 2014, 2015 and 2018, I used the double back technique to lighten the load of interest payments as much as possible.

The key takeaway is to look at the market and evaluate the returns. If the market is going up and it is in a boom cycle, you would be foolish to waste your money paying off a loan saving 3% when you could invest that money and earn 7-9+ %. However, on the other hand, when markets are bad, your primary concern should be paying off your loan because the opportunity cost would yield no profits.

My Actual VS Estimated Payoff

Implementing all of the parts of the program, I was able to:

  1. Lower my monthly interest expense
  2. Lower my monthly payment
  3. Lower the total interest over the lifetime of the loan
  4. Increase my monthly payment towards the principal rather than interest
  5. Reduce the overall lifespan of the loan, getting me debt-free in a shorter period of time

Illustrated below is what my original loan payment plan would have looked like if I stuck to it.

This was my reformed plan using the principals mentioned above in the program.

In summary, I ended up gaining:

  • 3.5 years
  • $11,195.30 saved in interest expense
  • $10,200 saved in reduced regular monthly payments (not including the double back amounts)

What I Gained By Paying Off My Student Loans Early

Beyond the money saved in interest and monthly payments from implementing the principles of the program, the most important thing I gained was my freedom. I was not free from the burden of debt and the institution that owned that debt. Now, every dollar I earned (minus taxes and expenses) was mine to spend, save or donate.

I like to consider my student loans as investments in myself. They enabled me to attend a good university and receive an excellent education. The return on investment for that education is no comparison to the price paid. It was the ultimate investment in myself and using a few simple techniques and tricks I was able to pay it off relatively close to the original amount. I count this as a success in my book!

What Are Your Best Debt Payoff Strategies?

What I’ve shared above are learnings from my own experiences. However, I am always in search of better or more effective ways to pay off debt. I would love to hear what lessons/techniques you have learned or if you have any corrections to my points. Feel free to comment below with some examples. Please share so we can all learn and grow.

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