According to Statistics Canada, over half of Canadian students graduate from post secondary education with an outstanding government student loan. As you know, CF graduated with a large student loan, while I owed less to the government but more to my parents. On average, we had as much debt as everyone else. Not very appetizing for a couple who prides themselves on being different!
Photo Credit: Images_of_Money (http://www.flickr.com/photos/59937401@N07/5474168441/)
A plan is hatched
As soon as I graduated, paying down my student loans became a priority. With my combined provincial and federal loans totaling less than $20,000, I decided that I would pay off my loans within five years. Thanks to an academic bursary I received in my final term of study, my provincial loans totaled a mere $4,000 upon graduation. Compared to over $10,000 in federal loans, this seemed a logical place to start my debt snowball. Phase 1 – nuke the provincial loan.
Within the first four months at my new job, I successfully eliminated my provincial loan. To do this, I prioritized my the loan over my desire to own a car. Before saving anything to buy a car, I made sure that the loan was paid off first. Even before realizing I didn’t need a car, I had my priorities straight!
Phase 2 – Increase minimum payments
Getting down to just one federal loan was great – but I still owed roughly $10,000. By making the minimum $125 monthly payments, I would be rid of the loan in 8.4 years. Not good enough.
Since I was used to saving over $500 per month towards my loans, I decided to increase my payments to $200 . This allowed me to spend money on my car, accelerate my payment schedule and not cramp my style! In a true testament to compound interest, increasing my payments by 37% resulted in a reduction of over 50% on my original term. If I continued paying $200 per month, my loan would be gone in just 4 years.
Phase 3 – A new opportunity
This past October, I started a new job. Starting a new job is always exciting because it represents a chance to re-do my budget from scratch. There are two times that I reassess my financial goals and budget: at the start of a new year and when I start a new job. Even though my pay was not going to significantly increase, I realized that I was spreading myself too thin. In making equal payments on my federal loan and my family loan, I was making little headway on either.
In October, I had $6,000 left on my loan. Thanks to my stellar math skills, I deduced that if I increased my payments back to $500, my loan would be gone before the end of 2011, although I would need to halt payments on my family loan. I approached my parents with my plan, and they graciously agreed to allow me to suspend payments interest free until my student loan is gone.
***
With just over $3,000 left on my student loan, I am on track to pay it off by November 2011. I truly believe that paying the loan off now is worth the short term “sacrifices”. Contributing over 20% of your paycheque to a single debt may seem extreme to some, but I only need to look at CF’s $1,000 back to school budget to know I have nothing to complain about. When I do finally pay off the federal loan, I do not plan on increasing my spending but rather re-distributing it to my family loan and my investments. All part of the Master Plan!
