I’ll never forget the spring of 2012 when I graduated seminary, started my first full-time job, and fully realized the extent of my student loan debt all in the span of two weeks. Up until that point, my student loan debt hadn’t seemed like much of a concern since it had been in deferment while I was in graduate school. But, the second I was done, my loans were there waiting for me — all of my debt from college and a small loan from graduate school, totaling about $35,000.
In the grand scheme of student loan debt, $35,000 isn’t too bad. And yet, for a person whose starting salary was $40,000, $35,000 felt like a fortune. How could I possibly make progress when so much of what I brought home just went to pay the bills? I wondered if I would ever be free from my debt. For the seven years of repayment, this monkey on my back weighed down my financial aspirations.
If you’re struggling with debt of any kind — whether it’s borrowing a few hundred dollars from a family member or a few thousand dollars in credit card debt — I understand how heavy it can feel. Any debt can be a “ball and chain” that can hinder any forward financial progress. But trust me: You can experience the relief and freedom of being debt-free. Let these steps get you moving in the right direction:
Stock Up on Emergency Savings: This may not be what you want to hear, but it’s vitally important that you have a solid short-term emergency fund in place before you focus on debt repayment. Curious how much you need to have stashed away? The general rule is $1,000. However, if you’re a single person living with minimal expenses, $500 may be enough. If you have two or more people in your household and you’re living off just one income, you’ll likely want more like $2,000.
Tip: Ready to get this show on the road? Check out this article for ideas on how to quickly save up that emergency fund.
Look Your Debt in the Eye: Especially if you’re managing a high amount of debt, you may be tempted to avoid looking at the remaining balance and interest rate. While I understand the impulse, I encourage you to summon your courage and get to know the details of your debt. What’s your interest rate, remaining balance, and current monthly payment?
Tip: If you are repaying student loans, it will also be good to take a look at what repayment plan you’re currently on. (Hint: If you haven’t made any changes, it’s likely the standard 10-year repayment plan.)
Evaluate All Options at Your Disposal: Track down every option out there to help you minimize your repayment process — even ones you don’t think you’ll use. Start with your interest rate: Are there ways to reduce it by making on-time monthly payments? Can you negotiate the rate down with your credit card company because of your loyalty? Could you consolidate the loan, refinance, or do a credit card balance transfer to lower the rate? Then, take a look at ways to reduce the balance and/or monthly payment: Are there interest-based repayment or loan forgiveness options out there? Write down all of your options.
Tip: If you’re repaying federal student loans, Federal Student Aid’s Loan Simulator can help you evaluate your various repayment options. You can also see if you qualify for loan forgiveness or cancellation. Remember, if you have federal student loans, it’s generally not a good idea to consolidate these loans into a private loan as you’ll lose many (if not all) of the forgiveness options and repayment flexibility.
Create a Rock Solid Budget: Even if you’re not normally a budgeting person, this is the best way to get a clear picture of your income and expenses so you know how much you’ll be able to contribute toward your repayment process. Begin by looking at what income you have coming in. Have an income that fluctuates each month? Use an average. Then, take a look at your expenses. Review a few months of bank and/or credit card statements to see how much you actually spend, and block out your spending into categories. This isn’t the time for estimations; use the real numbers. Do your best to refrain from judging your habits or making any promises for how you will change your ways. Remember: shame, guilt, and regret won’t contribute a penny toward getting your debt paid off! Once you’ve completed your budget, calculate how much you have leftover to put toward your debt. Let this number be the starting point for the next step: making a concrete plan together.
Tip: There are many good Excel and Google Doc templates to help you develop your budget. Personally, I prefer letting an app do much of the work for me. My favorite budgeting app is Mint, but there are many good ones out there.
These steps should give you a solid grasp on the task ahead of you. Next week I’ll unpack a few strategies for you to start tackling that debt.