If you’ve followed my financial journey, you might recall that I owe $40,578 in student loans by the time I graduated in April, 2014. One of my major financial goals is to pay off these loans as fast as I can. So I came up with a repayment plan for how I was going to accomplish this and I was going to break it down in years.
If you’re interested, you can read about my Year 1 Repayment Plan. It’s a great read because this was when I made the shift between “I’m never going to be able to pay this off” to “how am I going to pay this off in under 5 years?”. 🙂
My Phase 1 Repayment Plan was to pay off my Federal loans in full – a total of $4,133 by December, 2015. The second part of this plan was to whittle down my Provincial loans to about $30,000.
How was I able to finish Phase 1 earlier than expected?
- I decreased my Provincial loan monthly payment to the minimum. I was originally paying $400/month towards my Provincial loans. I decided to bring this down to the minimum $370/month required by the lender so that I can funnel more money towards paying off my Federal loans.
- I paid an extra $57 every Friday towards my Federal loans (on top of the monthly minimum payment). This helped cut the interest accrued even further (as interest was compounded on a daily basis). I made this automatic too so I don’t even have to lift a finger to make this happen – I just watch my balance decrease every week!
- I always spent less than I made. So the extra money I didn’t spend at the end of the month went towards student loan repayments.
- I increased my income. On top of working full-time, I picked up overtime shifts at work and did some side hustles for extra cash. Some of these side hustles included setting up for weddings in Calgary, answering surveys online and shopping and booking travel via Ebates for extra cash back.
Other financial goals I was working on simultaneously
I had the following two other financial goals while working on Phase 1 of my Student Loan Repayment Plan. These were:
- Build an emergency fund. This was a must, simply because we didn’t have an emergency fund starting off. My partner and I managed to save 3 months’ worth of an emergency fund in case either or both of us are not able to work for whatever reason.
- Save up a down payment for our first house. My partner and I are choosing to buy a home instead of renting. We wanted to be in a house by now however with the economic decline of Alberta… oil not doing as great as it used to, we decided to hold off buying for another 6 months or so. We do have the money sitting there though, in case a house we both like comes around and we need to pull the trigger to buy as soon as possible.
So, I am moving on to Phase 2 of my Student Loan Repayment Plan!
Phase 2 involves paying off the remaining $31,745 in less than 3 years.
Here’s how I’m going to accomplish that:
|Loan||Daily Interest||Minimum monthly payment||+Extra weekly payments|
|Provincial Loans||2.70% Floating||$370/month||$147/week every Friday|
With this payment plan, I average about $955 every month towards the loan. This will be the minimum amount I pay every month. Also, this is all set-up automatically; through the lender pulling the $370 every month and through my bank putting in $147 every week in payments.
I will continue my strategies from above – increasing my income and applying extra payments towards this loan when I have the money.
If everything works out as planned, I will be debt free no later than September 30, 2018.
This is a very conservative plan for me, however, and I’m actually aiming to pay this loan off in less than three years. We’ll see how it goes!
Will I be Saving or Investing Money at the same time?
I’ve been back and forth on this question. I usually recommend having a laser focus on ONE goal at a time. However! That being said, my student loans are a special case for two reasons:
- My loan interest is very small, 2.7% (given it is a floating interest so there might be fluctuations over time)
- I can claim the interest accrued on my student loans against my taxes which will decrease the amount of taxes I would pay
As mentioned above, during Phase 1 of my Student Loan Repayment Plan, my partner and I were also working on two other goals. As a result of that, moving forward, we do have the following:
- Emergency Fund = $10,000
- RRSP (also for down payment) = $16,500
- Work RRSP = $2,500 – I save here only because my employer matches up to 2% of my contributions to my RRSP (free money??! I say yes to that!)
As far as investing goes, I will continue to add to my Work RRSP because it just makes sense. The free money is awesome and welcomed by myself!
My partner will continue to save $258 away towards our Emergency fund, boosting it a little bit more (we eventually want to have at least 1 year in Emergency fund).
We have a good chunk of money saved for a down payment. I will probably just leave this at that or pull out an RRSP loan next year to beef it up… I haven’t 100% decided yet.
How did I come up with a 3-year timeline?
The lender originally set-up my payment plan over 9.25 years. I knew I didn’t want to carry this loan for that long, even though the interest on this loan is low now. I’ve tested out different scenarios – 1 year, 3 year or 5 year repayment plans. When looking at the numbers, a 3 year plan made the most sense realistically. I want to set myself up for success and at the same time I do love a good challenge of paying it off sooner than the 3 year timeline.
I did a lot of thinking and weighing out costs versus opportunities of paying off my student loans. I certainly have thought about investing my money instead of putting it towards payments – there were many articles advocating for this route.
What helped me make my final decision however was my coffee date with Bridget from Money after Graduation. In speaking with her, she helped me see that now is not the best time to get into stocks (which was what I planned to do with my money if I don’t pay off my loans first) and that being strategic about when to enter the stock market will help me be more successful in it. She also helped me realize how much more beneficial it would be if I got rid of these loans… you know, clear some baggage.
Besides, I know 100% that I will have the GUARANTEED return from paying off debts – less money owed, less interest accrued and the mental ROI of being debt-free. That’s how I made my decision!