What is the most effective way to pay down my student loans after graduation?

[jwill06413]

I have consolidated my loans, but am wondering how to pay down the loans faster and possibly avoid paying more in interest.

[MCK_23_L]

pay as much as possible

[Casey C]

There's a few ways to look at this. I'm assuming that as a recent graduate (congratulations by the way) you are not currently a homeowner. I'm going to give you a general plan based off of a few assumptions.

*** Non-home owner
*** Have extra cash available every month
*** Have a job that offers a 401k
*** Early to mid 20's
*** Single
*** Possibly other debt including car loan and credit cards.

1. First things first. You should put away 10% of every paycheck and save it. Most people recommend taking 6% of every paycheck and putting it into a 401k. This is great for 3 reasons. a.) more money goes in because they don't tax your paycheck before you contribute... gives you 33% more b.) most employers match 1 to 1 up to 3%... that's like a guaranteed 50% return c.) the rate of return on the invesment itself generally averages 9-12% if diversified properly.

the other 4% should be place in a savings account until you have enough money in it to cover 6 months worth of spending. Once the money is at that level, you need to put that 4% into some type of higher yielding, but less liquid money market or stock account. Lipperweb.com is a good example of a fund you could invest in.

2.) Once you have arranged your budget to take care of savings, you need to look at your debt portfolio. Many people will argue to do this first, but the laws of big numbers proves that my method makes more sense. Feel free to ask me for an example of this if you need more information. Okay, back to the debt portfolio. Make a list of every single debt, credit card, car loan, personal loan that you owe money on. next to that list, make note of the rate of interest you are paying on each debt. Next, I want you to go to your most recent paystub. Look at your GROSS income, then look at the amount of money that is taken out for federal, state, social security and medicare. Simply divide the withholding by your gross wages. That percentage (25% more than likely) will give you a rough idea of your tax bracket. Write this number down at the top of your page. All of your student loans will be tax deductible as long as your deductions exceed the standard deductions. Go through your list of debts and decrease all of your student loan rates by the number you came up with... (let's say 25%)... So 7% student loan is 5.25%.

Once you have made your list, rewrite the list by putting the highest interest rate at the top and the lowest at the bottom.

next, you need to make a budget and decided after paying all of your minimum payments, sending 10% towards savings, setting aside spending money for food and what not and paying household bills and rent, you need to see how much you have left over after every paycheck to send to your debt. This number could be as low as $50 or as high as $1000. It doesn't matter. The key is what you are about to do with that money.

people believe that you should pay all of your small bills first before moving to the big bills so you are sending less minimum payments to other creditors. This is wrong. Your mission is to put as much money towards principal every month. The way you do this is to reduce your average interest rate. Here's how this is done:

Make only the minimum payment on every loan of yours exept for the one at the top of your list. Send the extra money to that creditor until it is paid off. Why? because you have just lowered your average interest rate. Eventually you will knock creditor by creditor off until you have no debt. This will save you more time and interest than you can imagine. if you have quicken or microsoft money software, they can actually graph this for you to show you how this works.

3. Become a home owner: If you can find a place to live that costs 33% more than what you are paying for rent, you have an asset that grows in value, and after tax benefits costs exactly the same as renting. Eventually you can use your home to help build even more wealth.

4. finally, I want you to consider the fact that if all of your debt is at 8% or lower, it would actually make more sense to pay the minimum payment on all of your debt and take the extra money and invest it in your 401k or money market account. Why? If you have a 401k growing at 10% and being matched 1 to 1, it's like 120% rate of return vs. paying 8%... even though it may take 10 years or more to payoff the student loans, you shouldn't cut your savings short. The power of compounding interest will deliver you such a huge return that's worth the hassle of writing the minimum payment every month.

I laid this out in hopes that you'll print it out and take it step by step.

you can email me casey.x.casperson@chase.com or caseycasperson.com to see my website. I specialize in first time home buyers and pride myself on helping them realize their financial future.