We have been plagued by my Student Loan debt for just over 6 years now. An $85,000 hole that I put is in by making some fairly poor decisions in college (using loan money to fund my lifestyle being the main one). I know how demoralizing debt can be firsthand. It sucks having to bust your ass just to get back to zero.
But, you aren’t your past decisions and don’t need to be defined by them forever. You can put debt behind you and start building wealth.
As a reminder from the previous post on goal setting, we prioritize our debt when the interest rate is above 5%. Anything below that we focus on investing over debt paydown. That strategy may or may not be for you, but I just want to make sure everyone knows where I stand.
Debt Domination Strategies
Contrary to the many “1,000 ways to pay off debt FAST” articles that exist, there is really only 2 ways to do it.
- Lower the Interest Rate
- Pay the lender more money
That’s really it, there may be hundreds or thousands of strategies to save money that CAN be thrown at your debt, but they only work when your lender cashes the extra check.
I guess what I am trying to say is, sorry, there is no magic. It takes cash or effort……….and ideally you use both.
If you haven’t already, check out the first FI Action series post on debt: What is your debt costing you? Seeing how much money we were saving by increasing payments or reducing interest rates was a huge motivator for us.
Lowering Interest Rates
The closest thing to magic that I can come up with is finding a way to lower your interest rate. We have pulled this move a few times recently.
- Refinanced my Student Loans, dropping our rate from over 6% to 3.85% to 4.95% (variable rate)
- Refinanced our mortgage dropping our rate from 4.25% to 2.75%
We saved thousands by making these two moves. The Student Loan refinance was easy, took a few hours max to get everything approved and paid out. Refinancing our mortgage was a little more involved but was well worth the effort. Dropping our rate 1.5% on such a large balance is a huge win.
When I refinanced my Student Loans, the new payment was significantly lower than what we were used to paying already. Instead of taking the new lower payment, we decided to speed up our debt paydown and pay the same amount. Combined with the lower interest rate we are cutting a 5-year repayment term down to about 3 years.
Pay the Lender More Money
The least creative, but very effective solution – simply pay the lender more money.
Like I mentioned above there are thousands of ways to save a few bucks, and that money can be used to pay debt down faster. Here are two specific areas that we have used that can make a bigger impact.
We have used bonuses, tax returns, profits from sales of company stock and unexpected gifts from parents to speed up our debt pay down over the last 4 years. Big principal only payments kill debt. If you can throw in a few extra every year it makes a huge difference.
Increasing our income has had the biggest impact on our Financial Independence journey. Hands down. One day market returns will likely take it over, but right now, it is fueling our progress.
We have been automatically saving large percentages (most of the time 100%) of our raises for the last few years. If you automatically put the increase towards your debt, it will fall faster every year until it eventually disappears. The Automatic part is key, increase your automatic payment or move the money somewhere that you can apply it to your debt before you spend it.
For both of the above examples, I like to think of it this way:
If you were able to survive without the money the week before, you can afford to put it towards your debt without any lifestyle repercussions.
Definitely not a sexy use of extra cash, but it saves money and brings you one step closer to keeping that cash every month instead of burning it on interest payments.
Related posts on cutting spending that can be used to speed up your debt domination
- Common Money Mistakes You Can Correct in an Hour
- Top-Down Cost Cutting for the Average American
- Someone is stealing your money, Take it back today
High-Interest Credit Card Debt
I decided to break out a special section for high-interest credit card debt because it is destructive on a whole different level. With an average interest rate hovering around 15%, reducing the rate can have a huge benefit.
Outside of the above strategies (yes, I have heard of people successfully negotiating lower credit card rates, but they are still way too high), there are credit card companies that off 0% interest on balance transfers for a certain time period.
Glancing through the below Nerdwallet link, there are some that go as high as 21 months no interest. You may have to pay a balance transfer fee, but you could save a ton of money IF you can pay the balance down before the promotion period ends.
That is a big IF! This is on the more aggressive/risky side of the strategies, but I would have done it if we were in a deep credit card hole.
If you are new to this series please head over to my Financial Independence page and check out the rest of the content.