In 1969, Elisabeth Kubler-Ross introduced the five stages of grievance in her book “On Death and Dying”: Denial, Anger, Bargaining, Depression, and Acceptance. If you have a large student loan balance, then you’ve probably experienced some “grievance” and you’re no stranger to the five stages. If you are in the “Acceptance” stage, this article is for you!
Being in the Acceptance stage is a good place to be. It means that: you have discovered that postponements and forbearances are not forever (denial stage) you have stopped blaming others for getting what you assumed was a “free ride” (anger stage) you have learned that he is able to discharge his loan through bankruptcy (negotiation stage), he has stopped drinking heavily and watching reruns of Gilmore Girls (depression stage), and he now accepts his financial responsibility and is prepared to do something about it. You will not find any “magic bullet” in this article, but you will find an effective strategy to pay off your loan in the shortest possible time.
Step 1 – Organize the loan in a spreadsheet
To best manage your student loan, you need to fully understand what you’re up against. Creating a spreadsheet will give you an idea of how your loan works and show you the positive results of making additional principal payments. To create a functional spreadsheet, you need to understand the terms of your loan and know how to organize this information in a spreadsheet. If you’re not a spreadsheet user, you’ll find learning the basics easy.
To start creating your spreadsheet, you’ll need the following information about your loan: current balance, interest rate, payment amount, and how interest is calculated. This will allow you to create an interactive spreadsheet that will calculate how much interest increases daily and provide you with a daily balance.
How interest is calculated may require some research. You will find this information by reviewing your loan documents, visiting the lender’s website, or calling your lender’s customer service number. The number of days used to calculate interest on a loan is known as the basis. For example, a mortgage is usually calculated using “30/360”, which means that a year is assumed to have 360 days and a month is assumed to have 30 days. Therefore, when you make a mortgage payment, your interest will be based on 30 days. Student loans typically use the actual number of days in the month and a year with 365 days (actual/365). Some loans may use a real deal/365.25; each loan is different. On a current/365 basis loan, you’ll pay less interest in a short month (one with fewer than 31 days) than you would in a month with 31 days.
Do you feel lost already? Don’t worry, because once we put it all together it will all make sense. I’ll also explain how to test your spreadsheet to make sure it’s working properly. The initial setup of a spreadsheet is the most challenging step.
At the top of your spreadsheet, insert key information about your loan, such as: opening balance, interest rate, monthly payment, payment due date, and interest rate factor. The interest rate factor is the interest rate divided by the number of days in the year. Again, each lender and loan type is different in terms of how many days of the year they are used. The information part of the spreadsheet is important because you want to clearly see the variables that affect your loan.
After entering the key information, you can begin building your interactive spreadsheet. Your goal is to create a spreadsheet that shows when each payment is recorded, how much of each payment is applied to principal and interest, and what the ending (or current) balance is. The names of the columns you will create are (from left to right): Payment Date, Principal, Interest, and New Balance. Here is a more detailed explanation of these columns:
• Payment Date – This is the date your payment is posted to your account. This is critical since your student loan interest will likely be based on the actual number of days between payments.
• Principal – This will be a formula that equals your payment amount minus the interest portion of your monthly payment. It is the part of your payment that will be applied to reduce your balance.
• Interest – You need to know how your lender calculates the interest on your loan. It is usually based on the actual number of days multiplied by the previous month’s balance multiplied by the interest rate factor. Your Excel formula will be: (current payment date minus previous payment date) x balance for the previous month x interest rate factor.
• New Balance: is equal to the previous month’s balance minus the principal portion of your current payment.
If your lender has a website that allows you to view information about your loan and/or make payments, set up online access immediately. Print your loan balance history and start building your spreadsheet using your first payment as a starting point. The balance history should show how much of each payment was applied to principal and interest. This is how you can test your spreadsheet to make sure it works correctly. Check if the results of your formula match the history on the website. If they don’t match, you’ll need to troubleshoot to find out why. It could be that the lender made a mistake, but most likely the error is in your spreadsheet. If you have a friend or family member who is an Excel user, see if they can help you. The web is also a great resource.
The real power of a spreadsheet is that you can easily simulate what-if scenarios. For example, let’s say you receive a large cash windfall. You can enter this figure into your spreadsheet and easily see what the results of such a large payment would be. You may learn that if you make this additional principal reduction payment, your loan will be paid off in ten years instead of 15. This can be very motivating for you. However, if you don’t have a tool like a spreadsheet to generate this type of information, then you may choose to do something else with your money.
Step 2) – Strategies to speed up payment
Congratulations on creating a spreadsheet where you can keep track of your student loan balances and payments. Tracking a loan in this way gives you control over the loan. Getting a statement in the mail every month and not really understanding why your balance moved so little is unmotivating and adds to a sense of hopelessness (and you really don’t want to go back to cheap beer and Gilmore Girls reruns). Here are some specific strategies to help you pay off your loan quickly:
Pay a little more each month – We’ve all heard this before, especially when it comes to mortgages. Well, the same applies to student loans. When you make a monthly payment, part of that payment is applied to interest and the rest to principal. My suggestion: Pay the amount of additional principal that will result in your loan balance having two trailing zeros. For example, if your balance will be $37,845.21 after you make your next payment, pay an additional $45.21 to bring your principal balance to $37,800. Getting your loan at a hundred dollar figure is a strategy to encourage you to repay. more each month.
To make this strategy easier, I suggest you pay your loan electronically. You have no control over when your payment is posted when you mail it in. When you make a payment online, you typically select the payment posting date. Also, there will probably be a section to enter the additional amount of principal you want to pay.
The benefit of paying more than your minimum payment is that when you make your next loan payment, a higher portion will be applied to the principal and less to the interest (compared to if you didn’t pay more the previous month). If you continue to pay more than the minimum due, this effect will worsen each month. The result is that you will pay off your loan significantly faster than if you just made the minimum payment. This is because as your balance decreases, the amount of interest you pay decreases. More of each payment will be applied to the principal reduction. This effect is easy to see when you track it in a spreadsheet, so doing so is an effective strategy.
Make a plan to pay “a lot more” on a regular basis: If you get a tax refund each year, apply it to your student loan balance. This will have a tremendous impact on how quickly your loan is paid off. If you receive a bonus each year, apply that too. Any windfall, or instance of “found money”, should be used to reduce your balance. It’s not uncommon for people to treat “found money” differently. “Found money” is often wasted on “splurge” items. Resist this urge! Use any extra money, no matter where or how you got it, to pay off your student loan balance!
In summary, the necessary steps to help you pay off your loan faster are:
1) Use a spreadsheet to track your loan so you can see how much of each payment goes toward principal and interest. Run what-if scenarios so you can see the impact of paying off your loan and formulate a strategy to do so.
2) Pay a little more each month. One strategy is to pay an additional amount so that your balance is an even $100 increment.
3) Commit to making large payments when you have a windfall of cash, such as an income tax refund or bonus. While this may not provide an immediate reward, the long-term consequences will be considerable. Time really flies, and what may seem like a huge balance can now be reduced to zero in much less time than you think, but only if you make it a priority and a goal.
Paying off a student loan can seem overwhelming. However, if you employ the strategies provided here, you will learn that you can be successful faster than you ever imagined. You can apply these same ideas to your mortgage and other loans. Getting control of your finances is empowering. And by the way, I started this article by referring to the five stages of grievance. If you die, keep in mind that in most cases, your loan will die with you, unless you consolidate it with a spouse. In that case, unfortunately, the loan will live on!
